The investment comes just ahead of the NFL season, the most important few months of the year for DraftKings and the rest of the DFS industry because of revenue from daily fantasy football.
Revolution revealed the round on its website, saying the money came from the recently announced $525 million Revolution Growth III fund.
“Online fantasy sports are just one of the many ways technology has disrupted the sports industry in recent years,” said Revolution partner Steve Murray, who will join the DraftKings board, in the release. “Building a business is never easy, especially one that is leading the creation of a new marketplace, but Revolution has the expertise to help entrepreneurs execute on their ideas, especially where sports and policy intersect.”
The newest round appears to take investment in DraftKings past three-quarters of a billion dollars, although that figure includes a lightly reported and not publicly acknowledged round of $200 million reported by the Boston Globe.
Without direct visibility into DraftKings’ financials, it’s difficult to say how necessary or important the round was. Does the new round just allow DraftKings to cover current costs and obligations on the books, or will it help the company grow and aid customer acquisition in the short term?
The company, like all DFS operators in the current environment, is not yet profitable. We do know costs in 2015 far outstripped revenue, even in a more friendly legal and regulatory environment.
The end of 2015 and this year have resulted in a number of costs that were not a part of the equation previously, such as:
All of that is in addition to DraftKings’ current obligations, which include marketing deals with a variety of pro sports franchises.
The new round was not accompanied by a publicly acknowledged valuation. Adam Krejcik, of the research firm Eilers & Krejcik Gaming, said the new valuation would be far short of the $2 billion DraftKings was once valued at.
“We estimate the fundraising round was done at a post-money valuation of approximately $1 billion,” Krejcik said. “We note this would imply a similar capitalization ratio to prior fundraising rounds and is also consistent with recent commentary that DraftKings is still valued at ‘north of $1 billion.’ ”
FanDuel has been expected to raise another round for much of 2016, chatter with which Krejcik agrees.
“We expect FanDuel will announce a similar fundraising round in the weeks ahead,” Krejcik said. “This should come as no surprise to industry observers as historically both companies have mirrored each other’s moves, and we’ve highlighted for the past six months that both companies were in need of additional capital ahead of this year’s NFL season.”
The newest DraftKings round also makes a merger between FanDuel and DraftKings unlikely in the short term, Krejcik said.
A major investment in DraftKings is certainly a good sign for the DFS industry. But, like any investment, it’s betting on the future of the DFS industry, with the possibility that things don’t turn out like investors hope.
“A lot has been said about the overall health of the DFS industry in recent weeks by both media professionals and industry observers,” Krejcik said, alluding to a recent ESPN piece on the industry and ensuing chatter. “Our view is that the industry stands at a crossroads and it’s very difficult to predict or make a decisive call one way or the other.
“Certainly the ability to raise a substantial amount of capital from institutional investors is encouraging, but we would also caution not to read too much into this as both DraftKings and FanDuel will at some point need to formulate a viable exit plan,” Krejcik continues. “When and how that plan is executed remains a mystery to us.”
Like many in the DFS industry and its investors have done for years, Revolution is eyeing the larger fantasy sports market. From its DraftKings announcement:
In just a few years daily fantasy has become a multi-billion-dollar segment and continues to grow rapidly. In 2015, four million players in North America participated in daily fantasy sports out of the estimated 57 million total fantasy sports participants, representing less than 10 percent penetration in the segment.
The total annual spend in the North American fantasy sports market was estimated at $26 billion in 2015, which demonstrates tremendous potential for future daily fantasy growth.
The fact that DFS has still only penetrated a small percentage of that 57 million figure is part of what keeps investors coming back.
Of course, hundreds of millions of dollars were spent by both DraftKings and FanDuel last year to acquire customers in 2015 — including massive amounts of TV spend. And while user numbers have grown in DFS, the penetration into the larger fantasy player and sports fan populations has not sky-rocketed.
Among Revolution Growth’s co-founders is Ted Leonsis, the majority owner in the Washington Wizards of the NBA and the Washington Capitals of the NHL. The NBA has equity in DraftKings competitor FanDuel, while the NHL has a stake in DraftKings.
Leonsis joins a pair of NFL owners — the Dallas Cowboys’ Jerry Jones and the New England Patriots’ Robert Kraft — who are also involved in DraftKings via investment arms.
Interestingly, Revolution led a $44 million investment in the sports data and analytics company Sportradar just last year.
Sportradar has a partnership with FanDuel to provide data to the site, signed last year. The sports data company has also recently signed a deal with the NHL for its sports betting monitoring and game-integrity services. It’s also been reported to be working on a deal with the NBA.