Edition 24: The State of Investing in Sports Betting
Following the flow of funds and investment trends in gaming
Happy Monday to all of our readers, we hope you had a great football-filled Thanksgiving weekend (sorry, Cowboys fans).
This edition on the state of investing in sports betting is presented by Wagers.com, go check out the breadth of high-level content on the Wagers site and integrate their other newsletters and articles into your weekly reading! Let’s dive in.
Investment Vehicles
While the state of investing in sports betting has never been more robust, in understanding the landscape it’s important to acknowledge the different vehicles for which the investing takes place. These range from Individual Investors to Venture Capital to Private Equity to SPACs.
Individual Investors
The individual investors arrive at publicly traded companies. Securities that you or I could trade on Robinhood or E-Trade.
Think of $PENN or $WYNN or $MGM.
These companies all have physical assets (casinos) but have begun investing more and more capital into their mobile sports betting infrastructure. Every time an individual or retail investor buys a share in the equity, it is a form of investing. Among the many uses of this capital are Mergers & Acquisitions. Given the recent growth in the industry, these companies among others have been aggressive in eliminating smaller competition while growing their platforms through consolidation to compete amongst themselves. For example, we can briefly look at $PENN or Penn National Gaming. In January 2020, they purchased 36% of sports media platform Barstool Sports for $163 million in cash and stock. They have since had Portnoy, Big Cat, and the other personalities push their product through all their enterprises while also creating the Barstool Sportsbook to lure stoolies into using their gambling platform. They have also come up with elaborate promotions which Barstool has promoted and helped Barstool grow into a brand which is now sponsoring its own bowl game. Similarly, in August 2021 they announced the acquisition of Score Media and Gaming for $2 billion in stock and cash. Penn CEO, Jay Snowden raved about Score’s in-house gaming technology which will help Penn develop industry leading margins by terminating the need for third party contracts.
Another company that has taken a unique spin on public markets is Roundhill Investments. They have formed numerous Exchange Traded Funds (ETF) around this space. An ETF is traded the same way as a normal equity, but instead of tracking one company it tracks an industry, sector, or index. Some of their ETFs include $NERD(ESPORTS), $BETZ(SPORTS BETTING), and $MVP(PRO SPORTS).
Venture Capital
The second vehicle we will examine is Venture Capital Firms funding into sports gaming. Venture Capital provides funding for early stage, startup, and emerging companies. The hope is the companies have large growth potential, and thus getting involved early can push them through the early years and provide immense returns. Given the sports gambling industry is still in its preliminary stages, it’s only fitting that VC and sports gambling go hand in hand. Some of the top sports gaming VC firms we examined were, Bettor Capital, Sharp Alpha Advisors, KB Partners, EKG Ventures, Raine Capital, ThirtyFive Ventures, SeventySix Capital, and ACME Capital. This influx of funding has made it possible for lots of companies to grow and develop. For example, last month (October 2021) Sharp Alpha Advisors raised $10 million to invest in sports gambling. Previously, they have invested in GridRival, Prophet, and PickUP. Similarly, in September 2021 SeventySix Capital formed a $50 million fund focused on sports betting. It was their second fund, with their first raising roughly $40 million. They have drawn famed CEO’s and athletes such as Arthur Blank, Brian Westbrook, DeMarco Murray and Emmanuel Sanders.
Private Equity
The next means of investment, although far less prevalent, is Private Equity. This is away from public markets, and usually involves the private equity company buying and restructuring the company. Because this usually takes place on proven, established companies, it has not been as popular around sports gaming and betting. It is a relatively new industry, so many companies are much more inclined to turn to VC money than PE. Instead, we see PE more involved in the professional sports industry through firms such as Arctos, Redbird, Galatioto and Inner Circle. A few weeks ago, we wrote about Blackstone Growth and the firm’s involvement in GeoComply. As the market matures we can expect more PE and institutional investor involvement in the space.
SPACs
Lastly, the sports betting/gaming industry has used Special Purpose Acquisition Companies (SPACS) to raise capital and go public. SPACS are essentially a blank check shell company, meant to acquire a private company and make it public without dealing with the strenuous traditional process of an IPO. The most prominent example of this was DraftKings, which went public in December 2019 via a SPAC. DraftKings combined with Diamond Eagle Acquisition Corp (a SPAC) and SBTech, a betting and sports gaming company. DraftKings CEO Jason Robins described the situation as, “the company was looking to acquire SBTech and then go public, or to go public first and make the acquisition later, but this structure allowed the two to be done in one step.” Overall, funding is essential for this industry to continue to grow and expand. With pending legalizations in certain states on the way, many of these companies will become widely accepted providing lots of opportunities for both the companies, and the investors to walk away with a more than sufficient pay day.
Investment Trends
B2B Software
The current landscape of operator tech stacks includes certain sportsbooks like PointsBet & Caesars using in-house, proprietary tech stacks whereas other operators like FanDuel & Circa utilize the same back-end to set lines for their operation.
Companies such as GeoComply (we profiled GC a few weeks back), IGT, and Kambi currently dominate the pricing and risk engines of the sports betting industry with a wide moat and barrier against the threat of new entry. These companies have leveraged data from providing companies such as Genius Sports and Sportradar to allow sportsbooks to not worry as much about their infrastructure for product offerings and fraud protection.
As sportsbooks are looking to unlock upside potential, the competitive advantage of owning the tech stack and operating in-house has been seemingly more important for investors. DraftKings has migrated majority of their states operations onto its SBTech platform, FanDuel is running fully on its own platform under Flutter, and Penn National has acquired theScore which operates its tech in-house (As a brief aside, one of us recently tried out theScore’s app in New Jersey and Barstool will have some disappointed customers if they roll that out). Now, acquiring smaller operators with their own tech stack doesn’t always make the most sense given the high price point of a lot of these acquisitions.
Vertical integration through acquisition and investment on the risk and pricing facets of the business have been increasing significantly and is a trend The Handle team is keeping an eye on. We expect investment in the B2B infrastructure powering the digitization of sports betting to continue to rise in the coming months.
Content
Over recent months, the line between sports betting operator and media company has thinned dramatically with mainstream media personalities being hired left and right but sports betting brands. Traditional operators are investing in content and the ability to get their promotions in front of as many eyeballs as possible, with content creator brand loyalty and fanbase serving as a key cog in the media machine. For example, Caesars has partnered with the Manning Family, Trey Wingo, Kenny Mayne, and are reportedly in the market to pursue ESPN’s Adam Schefter. Other content partnerships on the brand side include Fanduel with The Ringer and Bleacher Report, DraftKings with Meadowlark Media and VSiN, and many more across all operators and respective media brands. Check out our Edition 01 of The Handle, Content Is King, to see our thoughts on sports betting operators’ investment in content back in June.
Since the Summer, media personalities and brand partnerships with operators have expanded greatly with strong efforts to attract and retain viewership. Only time will tell whether the validity of this investment thesis holds up, but we don’t expect this trend to slow anytime soon. We’re looking forward to seeing the public reaction to the first big scoops fish (Shams, Woj, Schefter, Passan, etc.) moving from a traditional media platform to a sportsbook.
Financial Productization (from Lloyd Danzig)
In the next year, multiple sports betting exchanges operating similarly to existing financial markets are launching in New Jersey, including Prophet (undisclosed funding from Sharp Alpha Advisors, IeAD Sports), Sporttrade (raised $36M over two funding rounds), and decentralized sports betting protocol BetDEX ($21M seed round). Investment in the exchange model developing in the U.S. is rising with the prominence of mainstream commodity and crypto exchange trading, and sports bettings’ next reasonable transgression is to follow suit. The influx of more market-based companies in the ecosystem will require significant educational and onboarding hurdles as well as a difficulty achieving a critical mass with the Wire Act in-place. Nonetheless, hopefully traditional operators will be pushed to innovate their user experience and product offerings to cater a friendlier user experience going forward to compete with financialized products better equipped to offer no-vig and a superior user experience.
iCasino
Operators love the iCasino, and so far in New Jersey, bettors seem to be showing that same love. Last month (Oct 2021), revenues from internet gaming were actually higher than revenues from sports gambling, at around $127M for iGaming and around $84M for sports wagering. Slot machines have the highest hold percent online and on land, and operators are never going to forget that, even if iGaming is off to a far less robust nationwide rollout than sports betting. In fact, Morgan Stanley estimated just the U.S. online casino market could reach $3.5B by 2025. iGaming is a bit less accepted than sports gambling in the general population for starters, it doesn’t have the same societal acceptance that years of Super Bowl betting and March Madness have brought sports gambling. Second, a lot of states have agreements with Native American tribes for gambling rights. Although this has been a bit hazy for sports betting as well, casino gaming is the bread and butter for these tribes and there is a legitimate worry that iGaming could cannibalize this action. Now, let’s dive into some of the major players.
The behemoth in the casino industry is International Game Technology, or IGT. They are listed on the NYSE and have a market capitalization of slightly less than $6B. They focus primarily on land based slot machines but have evolved their offerings to also include online services like video slots. IGT announced a multi-year partnership with FanDuel in August, 2020.
Evolution Gaming is another company that should not be overlooked in the iGaming space. They have had partnerships with William Hill, Caesars, and UniBet among others. They provide online casino services and are known for an exceptionally robust live online product. Of course, Rush Street Interactive is another publicly traded behemoth with serious partnerships in the online casino space, namely with books such as Sugarhouse and BetRivers.
Unfortunately, this space hasn’t seen quite as much innovation as the sports gambling space. Entering the Direct-To-Consumer market requires serious money for licenses, in the states where it is legal in the first place. On the other hand, in the B2B market, the existing products are pretty good and seem to be getting the job done in New Jersey. With that in mind, we are hoping to see some innovation, even if we aren’t the biggest fans of the iCasino ourselves. As it stands today, only West Virginia, Michigan, New Jersey, Pennsylvania, Connecticut, and Delaware allow iGaming but we imagine that market growing quite rapidly in the years to come bringing out further innovation and investment.
On The Horizon
In the next 18 months, there are a multitude of investment focus areas where we expect funds to continue to flow and varying measures of growth, failure, and stagnation. As institutional capital continues to flow into the space, we expect and are looking forward to product innovation pushing the boundaries of what’s possible for an improved bettor experience and operator ecosystem.
It may not all be pretty as the landscape continues to develop. If other states follow New York’s lead on a 51% tax proposal, that will put serious pressure on operator bottom lines. Additionally, profitability pressures will continue to increase as the market begins to mature in more states. There are clearly diminishing marginal returns to product development in the space, and many companies have received serious funding that we do not think will necessarily expand the wallet of the bettor. Like all investments, there will be winners and there will be losers. The years ahead should be exciting.
Miscellaneous Content Consumption
Press
Kevin Durant’s ThirtyFive Ventures and Chris Paul joined the $6M Series A investment round in Betsperts led by HBSE Ventures. Check out the press release here.
Genius Sports stock was depleted following Q3 results on Tuesday, down 30% on Tuesday as well as more than 60% from its highs earlier this year. Brad Allen has more with Legal Sports Report on the selloff here.
FansUnite acquired American Affiliate, parent company of our partner Wagers.com, for $58.2M to accelerate their entry into the U.S. Gaming Market. Yahoo Finance has more here.
A federal court put a stop to legal sports betting in Florida due to an overstock by the Seminole Tribe. Gov. Ron Desantis put out the following statement on the court ruling.
While this situation unravels, we’re following updates closely and recommend checking out John Brennan’s piece for U.S. Bets on the ever changing situation in FL here.
Twitter
Check out this super interesting thread from Bettor Capital founder Dave VanEgmond on the synergies of media companies and sportsbook operators.
Pods
Below is Nigel Eccles, founder of decentralized sports betting exchange, BetDEX, on the Lucky Trader Podcast with Preston Johnson. This was a great episode and definitely worth checking out!