First, carefully read the TopGolf case. Then, fully answer all questions presented in the case. Make sure to use competitive an

CASE: SPM-57 DATE: 02/28/20

TOPGOLF: BUILDING A GLOBAL SPORTS ENTERTAINMENT COMMUNITY

Topgolf hopes to be like Starbucks, except for the golf industry. —Quote from Golf Inc. magazine (November/December 2018)

INTRODUCTION

Erik Anderson, Executive Chairman of Topgolf, appeared at No. 3 for the second year in a row on Golf Inc. magazine’s November/ December 2019 list of “Most Powerful People in Golf—the list of individuals who wield the most clout in the golf industry.” At No. 3, Anderson was only behind such traditional long-term industry figures as the CEO of Troon Golf and the CEO of Club Corp., and ahead of the CEO of the PGA Tour at No. 4 and Tiger Woods at No. 7. He had not been on the 30-person list at all until 2015, when he made his debut at No. 21.01 (See Exhibits 1 and 2.)

The meteoric rise of Anderson and Topgolf in an industry that was widely considered to be in decline was remarkable. Between 2003 and 2017 the number of traditional “on course” golf course participants had declined by 22 percent, and between 2003 and 2018 the number of traditional golf courses by 10 percent.2,3 (See Exhibit 3.) In contrast, under Erik Anderson’s leadership, Topgolf had grown from an obscure enhanced driving range entity with three venues in the U.K. and three in the United States at the end of 2010 to be characterized in 2018 as the “savior” of golf,4 and embraced by the PGA and LPGA tours as “a strategic partner to grow golf.”5

By February 2020 Topgolf was the story of 24 years of dogged entrepreneurship. In 1996 Topgolf demonstrated first mover application of emerging technology to a niche problem as well as solving such mundane problems as “product-market fit.” The growth phase started with the

Cor van der Wal, DDS, MS (1994) and Professor George Foster prepared this case solely as the basis for class discussion. Stanford GSB cases are not intended to serve as endorsements, sources of primary data, or illustrations of either effective or ineffective handling of an administrative situation. Funding for this case was provided by the Stanford Graduate School of Business. This case was reviewed and approved before publication by a company designate.

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 2

recognition of an intellectual property opportunity “up for grabs” and expansion of the enterprise far beyond its traditional industry boundaries. Subsequent innovation through off-balance sheet financing that was novel for the industry, “model thinking,” and broad product offering expansion later created a worldwide audience of 100 million and resulted in “hockey stick” enterprise growth. By January 2020 the financial press speculated about a Topgolf IPO with a value as high as $4 billion.6

ERA 1 – IDEATION, TECHNICAL DEVELOPMENT AND PROTOTYPE (1996 – OCTOBER 2000)

Twins Steven and David Jolliffe, born in the U.K. in 1955, decided at grammar school that they wanted to go into business together. In 1996 Steven and his friend Geoffrey Emmerson—both avid golfers and dedicated enough to regularly go to driving ranges to practice their shots—said to each other that “hitting a sub-standard ball from an old mat” was frustrating.7 Given Steve’s philosophy on business, i.e., “find something that frustrates you, improve it, and start a business on the back of it,” it took only a day of discussions for Steve, Dave, and Geoff to come up with an idea to address their frustration with driving ranges specifically (“joyless mud fields”) and golf in general (“an expensive and time consuming exercise in frustration if one is not good at it.”)7

The concept seemed simple enough. Turning it into reality would not be. The founders spent four years and £10 million to apply an emerging technology—microchips—to create what they believed would be a “new” sport. They experimented with implanting a chip in a golf ball, perfecting the “ID ball” so that it was robust enough to withstand repeated pounding as well as the manufacturing process and yet had the “look and feel” and flight characteristics of a regulation golf ball (They made their patent application in 2000.)8 They developed a modified radar system to determine the “start” and “end” locations of the new ball and invented a new patentable game based on the concept that “players would hit golf balls toward a range of targets; points would be given based on accuracy; targets would reflect challenges on a regulation golf course and particularly good shots would acquire extra points; the score would be automatically relayed to a TV screen in the golfer’s bay; and groups of players would compete with each other for the highest total (patent application in 2000.)”9

Steve Jolliffe summarized Topgolf U.K.’s goal as follows: “We wanted to create a compelling and addictive game that would make even a child who chips a ball into a front target more excited than a seasoned golfer hitting a hole-in-one in a back target.” 7

To demonstrate the merits of their concept, the founders opened Topgolf Watford, approximately 20 miles northwest of central London in Hertfordshire, U.K. in October 2000, at the site of the four-year-old Jack Nicklaus Golden Bear driving range.10 As a traditional driving range, the site had revenues of approximately £300,000 a year and a few hundred customers a week who each spent an average of less than £5.7 A large Topgolf team of 30 had worked on the redesign and new operation of the new facility.

Topgolf Watford was marketed as a “gamified driving range” and had 48 bays (44 covered, 4 outside) over two floors, 11 targets in an all-weather (artificial turf) field, 3 games (TopGolf, TopChip, and TopPressure), 11 TVs, 18,492 square feet of building space, a patio, and miniature golf.11 It had cost £3.5 million to convert the facility12 for a total investment in the Topgolf

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 3

Watford facility of £7.1 million. The facility expected to have 300,000 visits per year.13 (See Image 1.)

To differentiate itself from conventional driving ranges, Topgolf Watford sold time slots rather than buckets of balls, used variable pricing based on time of day and day of the week, provided free clubs, and had a 150-seat café bar. Steve Jolliffe wanted to “borrow equity from other brands” and thus had negotiated partnerships with Compaq computers for the information systems, Imabay Compass Group for catering, American Golf Discount for the 3,000-square-foot retail store, and David Leadbetter Academy for lessons.12

Steve Jolliffe soon knew he had a major problem with the new facility: “It confused everyone…you had to explain what it was, and you couldn’t, really ‘it was…like golf…but not.’ This didn’t sit well with golfers. Golf companies…like Titleist wanted no part of it.”10 But, within months, their first proof of concept facility started to get traction after lots of basic marketing including leaflets and local newspaper ads.14

ERA 2 – ROLLOUTS IN U.K. (NOVEMBER 2000 – JULY 2005)

After Topgolf Watford started to outperform the Jack Nicklaus Driving Range, its predecessor in the same location, the founders quickly gained confidence. Not short of lofty aspirations, they planned for 42 more facilities in the U.K. and 200 globally.12 Topgolf’s site location targets in the U.K. were areas with 1 million in population within a 30-minute drive.13 Topgolf made a deal with global sports, events, and talent management giant IMG (originally International Management Group) to market and license Topgolf franchises worldwide.16 A typical franchise would cost £1 million plus an ongoing franchise fee of 15 percent of revenue.16

The euphoria did not last long. In 2002, World Golf Systems, Ltd (WGS), the Topgolf U.K. holding company, booked a net loss of £1.75 million, was looking for additional funding, and had not opened any more facilities. A glimmer of hope occurred in 2003, when American Richard Grogan, a Bain & Company Inc. veteran since 1981 and experienced in ventures in both Europe and the United States, showed interest in Topgolf.12 But after getting the facts he was unimpressed by Topgolf’s 5 percent return on investment. By the end of 2003, Topgolf had had contact with hundreds of potential investors without significant results.

Despite these setbacks, the founders opened what they then marketed as an “entertainment complex with driving range.” Topgolf Chigwell was approximately 20 miles northeast of central London in Essex and 30 miles due east of Watford. It had 55 bays over two floors, 10 TVs, 38,686 square feet of building space, and a patio.17

In a surprise, even though Richard Grogan was not initially impressed by Topgolf as a viable enterprise, by 2004 he had come up with an idea to improve its value proposition: “a visit to TopGolf needed to be an experience—a place with great food, parties and other ways to make money beyond the game itself.”10 After visiting Topgolf Watford in person Grogan bought the license for Topgolf in the United States.10 He incorporated Topgolf USA, Inc in Dallas, Texas as a vehicle for the license purchase.18 Flush with confidence at having sold their first license, the

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 4

U.K. founders opened a third U.K. facility in Addlestone, Surrey, approximately 25 miles southwest from central London in April 2004.20

After his site visit to Topgolf Watford, Grogan contacted a former Goldman Sachs colleague from 1982-1991, Erik Anderson, and persuaded him and his venture capital group, WestRiver Group (WRG), to become the lead investor in TopGolf USA in 2005 with an initial investment of $2.5 million.19 Anderson’s confidence in the investment was based on unbundling the various elements of a Topgolf operation into its constituent components (e.g., driving range, food, drink, meeting venue) and then redesigning and repackaging them to optimize the value of each element for the customer and to execute so as to maximize the substantial profit margins that were available in each area of the business and thus maximize total value of the enterprise.20 (See Exhibit 4.)

ERA 3 – 1ST ROLLOUTS IN US AND 1ST REORGANIZATION (AUGUST 2005 – APRIL 2011)

A year and a half after obtaining the U.S. license, Richard Grogan and Erik Anderson opened the first Topgolf in the United States on August 5, 2005, right next to Washington, D.C., in Alexandria, Virginia, on the site of a former driving range. It was TopGolf USA design version 1.0 with 76 bays over two floors, 2 miniature golf courses, 3 TVs, 22,300 square feet of building space, and a patio.22 (See Image 2.) The expected government employees seeking a place to entertain over a golf driving range experience did not materialize in the expected numbers.14

TopGolf USA had no brand name in 2005. But Callaway Golf—then valued at approximately $1 billion23 and a major golf industry entity—did, and an association with it had the potential to provide a reputational “halo effect” for TopGolf USA. Grogan and Anderson strategically convinced them to invest in TopGolf USA in 2006 by buying a 20 percent interest for $50 million,20 suggesting that Calloway valued TopGolf USA at approximately $250 million post- money.

The second Topgolf facility in the United States opened in Chicago in 2007. It was built there based on the premise that people would flock to a facility where they could hit golf balls even in bad weather.14 It was a version 1 design with miniature golf, 36 TVs, 44,000 square feet of building space, a patio, and a rooftop terrace.24 Like the public response in Alexandria, the public response in Chicago was also suboptimal.14 (See Image 3.)

The third U.S Topgolf facility was opened in Dallas, Texas, in September 2007 based on the assessment that the warm climate, the general popularity of sports and culture, and the presence of many Fortune 500 company headquarters would provide a welcome environment for the new game.14 It replaced the Hank Haney Golf Range and was also a version 1.0 venue with 3 miniature golf courses, 9 batting cages, 48,500 square feet of building space, and a patio.22 (See Image 4.) The site initially sat largely empty.14

A “build it and they will come” philosophy underpinned the first 6 Topgolf venues (3 U.K. and 3 U.S.) was not getting the traction desired. The Jolliffe brothers as well as Grogan and Anderson agreed on the source of the problem: “people didn’t understand what Topgolf was.”14 Brainstorming with staff led to low-tech solutions: sandwich boards on the streets and leaflets

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 5

handed to cars. After six months, people started coming and telling their friends. Soon there were waiting lines outside Topgolf Dallas to hit balls and people from out of town and out of the country were “chatting” about Topgolf and coming not only to Topgolf Dallas but to other Topgolf sites as well. Finally, there was a crack in the messaging mystery of TopGolf.14 The “before” and “after” comparison of the financial performance data of the Dallas site confirmed it. (See Exhibit 5.)

By 2008 Anderson was convinced of the potential of Topgolf. As a result, TopGolf USA incorporated as TopGolf International and Anderson articulated a vision for the company that called for aggressive expansion in terms of size of facilities, number of facilities, and scope of offerings at the facilities. Topgolf started to make radical changes in the design for its next facility.21 It purchased the intellectual property rights for the TopGolf game from World Golf Systems, the British company founded by the Jolliffe brothers that had developed the high-tech software for the game in July 2009.26

To communicate the basis for the changes at Topgolf, in the 2008-2011 period Erik Anderson had formalized his communication of what he termed “model thinking” as applied to Topgolf. His approach to assessing value in business had its roots in the basic business model as taught by Peter Drucker at Anderson’s alma mater, Claremont McKenna College:

Source: created by authors to summarize discussions with Erik Anderson21

To address the specific pivotal question, “what are the sources of company value?” Anderson articulated the following model:21

Source: created by authors to summarize discussions with Erik Anderson21

One of the major conclusions Erik Anderson had come to as he considered how value is captured in the golf industry was that “the intellectual property that is golf is essentially free.” Anderson recognized that although the term “golf” was globally recognizable and ubiquitous, it was not patented. This realization enabled Topgolf to gain recognition with millions of people without having to pay royalties for use of brand or image. To Anderson “football = NFL” and “baseball = MLB.” “Golf does not equal the PGA.” He set out to create the image that “golf=Topgolf.”21

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 6

ERA 4 – 2ND SET OF ROLLOUTS IN U.S. AND MAJOR STRATEGIC INSIGHTS (MAY 2011 – DECEMBER 2015)

In May 2011, Topgolf Allen, Texas, opened as the first of the new “bigger and better” Topgolf facilities (version 1.5) for which planning had started in 2008. This facility had 94 bays on 3 floors, 225 TVs, 64,000 square feet of building space, a rooftop terrace, and 230 employees.28,29 (See Image 5.)

Using Anderson’s “execution value” vs. option value” decision model described above, Topgolf leadership decided that the company needed to expand beyond driving ranges and commensurate planning commenced.21 Given Anderson’s basic investment philosophy of “firing bullets before firing cannonballs” he proceeded to vet his ideas for expansion with long-time friend Jim Sinegal, co-founder of Costco (originally Price Club), by addressing three basic questions: 1. “do the economics work?”; 2. “can the model be repeated in different locations?”; and, 3. if the answer to the first two is a resounding ‘yes’, then why not build as many venues as fast as possible?”21

To make the leap to aggressive expansion Anderson felt that Topgolf needed to hire the right people, find an optimal way to finance expansion, and to own the brand and the intellectual property. An aggressive goal was set—open 10 venues a year.

In early 2011 Topgolf leadership consisted of only a small team and Erik Anderson was involved only part-time. To execute on the aggressive plans, Erik Anderson replaced Richard Grogan as executive chair of Topgolf International, Inc (TI), Thomas Dundon, formerly CEO of Santander Consumer USA30 became a major investor in TI, the Jolliffe brothers sold all their Topgolf- related assets for $28 million to the major investors in TI at that time—WestRiver Group, Callaway Golf, and Thomas Dundon.27 In addition, in May 2013 Anderson replaced previous retail industry executive hires with Tom Leverton, previously a private equity consultant and CEO of Omniflight becoming CEO of Topgolf International, Inc31; and Ken May, formerly CEO of Krispy Kreme Doughnuts, becoming COO.32

TI’s expansion plans would be capital intensive. Each venue required 12-15 acres of land (with land value typically varying between $250,000 to $1 million per acre depending on location) and building costs for building, equipment, and improvements were expected to average approximately $15 million per venue.21 (See Exhibit 6.) To finance multiples of such numbers with equity would be expensive—and burdensome on the TI balance sheet.

Anderson recognized that he could now demonstrate that TI had enough economic viability to warrant a lower cost of capital from investors than was available by issuing equity. He had heard of property investors that specialized “in select enduring experiential properties in the real estate industry.” In particular, Entertainment Properties Trust (EPR), a leading experiential real estate investment trust, was a good fit for TI as its stated focus was “on real estate venues which create value by facilitating out of home leisure and recreation experiences where consumers choose to spend their discretionary time and money. These are properties which make up the social infrastructure of society.”33

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Topgolf: Building a Global Sports Entertainment Community SPM-57 p. 7

On March 12, 2012, EPR announced signed commitments for investment spending totaling $150 million, including a $20 million sale-leaseback for two Topgolf locations.34 This initial specialty REIT financing approach was so successful that it became the main financing vehicle for TopGolf venue expansion and over time five additional REITS participated.21 By 2019, a REIT typically would buy the land of a venue and lease it back to Topgolf (often for 20-50 years) and the REIT owned the building and leased it to Topgolf. TI itself typically participated by financing 15-20 percent of each venue itself.21

By 2011 Anderson realized that the mobile phone market was exploding and that smartphone users could be a potential audience for the company’s offerings. (See Exhibit 7.) TopGolf’s initial effort to get “in on the wave” was to roll out free download iPhone and Android apps to access menus and bay control at Topgolf venues, allow smartphone and tablet users to view personal scores and the site’s leaderboards, purchase VIP Priority Passes to jump to the top of the wait list, buy a Topgolf membership, and obtain news and information regarding each Topgolf location and all the Topgolf games.21,35 At the time electronic gaming was also exploding and Anderson wanted to be part of it. In 2015 TI bought World Golf Tour (WGT), an online multiplayer golf game, which created the world’s largest digital golf audience.36,37

Anderson was a big believer in “walking the factory floor.” By visiting the various venues he observed that guests loved to take and send images of themselves to their friends with their cell phones. By installing screens everywhere at Topgolf venues and posting guest-made images on those screens he encouraged guests to have a two-way interaction with the brand and created the opportunity for TI to monetize advertising on those screens, much like baseball used screens of fans at baseball games.21

To further spread the Topgolf brand, Anderson used the doors opened by the company’s association with Calloway Golf for an introduction to the Golf Channel. In 2015 only 50 percent of those in the golf industry thought of Topgolf as a positive force in golf. The Golf Channel was in that camp and a partnership was formed. In a reflection of Anderson’s view that “collaboration is a more positive force than competition,” he later forged a strategic alliance with the PGA and LPGA.21

By 2014 it was possible to take measure of how well Anderson and Topgolf had performed on its goal to “expand dramatically beyond a driving range experience with food and drink.”14 The three venues that opened in 2013 were venue version 2.0 with 3 stories, 102 bays, 65,000 square feet of building space, roof top terraces with fire pits (and one with a stage), sports bars, and over 500 parking spots. Topgolf published data on its 2013 operations at 10 venues. (See Exhibit 8.) Total sales for Topgolf in 2013 were $163.5 million.38 The company reported that in 2013 2,281,893 visitors played Topgolf, that there were 2.7 million visits to TI venues, and that 136 million balls were hit.38

With the adoption of version 2.0 venues, TI marketing strategy also changed. Starting with the opening in May 2013 of TopGolf Austin, the company marketed itself as “the premier entertainment destination in ‘fill in the blank city.’ And by entertainment destination, we’re talking about a place where you can come for birthday parties, bachelor or bachelorette parties, corporate events, date nights, or just a night out with friends, and everyone will have a great time. No matter the occasion or who you share it with, we believe that every great time starts

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