Why It’s So Hard To Be A US Sports Betting Startup In 2020


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US sports betting

There’s no doubting the investment interest in the US sports betting industry.

We’ve seen a flurry of major deals in recent months between the likes of Penn National Gaming and Barstool Sports, Spotify and The Ringer, and William Hill and CBS Sports.

However, that interest does not currently extend to the smaller players.

Since the repeal of PASPA in 2018, several brilliant, motivated entrepreneurs have been trying to capitalize on this opportunity. One would think that a flood of talented entrepreneurs who are insanely passionate about their work would be attracting a nearly unlimited amount of investment interest.

Many people I speak with seem to be under the impression that there is more money trying to get into the sports gaming and tech industry than can currently be placed. However, this is simply not the case.

Only sure thing is uncertainty in US sports betting

One look at the legal sports betting landscape in the US reveals instant insight into its fragmented nature and a starting point for the discussion as to why startups in the space are facing such challenges. 

Source: American Gaming Association

Not only is the current regulatory landscape highly fractured, but its future is utterly uncertain. It is extremely difficult to predict with confidence:

Two of the most important components of any business plan’s financial projections are the size of the Total Addressable Market (TAM), from which the company hopes to gain market share and the tax rate that will be paid on expected revenues.

If neither of these figures can be predicted with a reasonable amount of certainty, how is a prospective investor expected to weigh the potential return against the perceived risk?

A steep learning curve

Even with more clarity as to the future of regulation, the uniquely nuanced nature of the sports betting ecosystem represents a large barrier to investment. I have discussed the matter in more detail in a recent Medium article, but the challenge boils down to the following:

Imagine attempting to raise money for a new biotech company from investors who did not understand the relationships between health insurers, physicians, hospitals, and patients.

Then imagine that legislators were considering placing a cap on how much can be charged for medical procedures, limiting the number of locations in which medicine can be practiced, and requiring that doctors in different states undergo variably-burdensome and expensive licensing procedures.

It would surprise no one if you had a bit of trouble reaching a valuation and raising capital for such a venture.

The uncertainty of novelty

Uncertainty is one of the greatest enemies of investment, and the early, nascent status of the US industry only serves to compound the unpredictability of returns.

The market was virtually non-existent pre-2018. And, though sports betting has been legal in Nevada for many years, it has historically been a land-based business.

As such, there are no comparable companies to point to when pitching or evaluating a startup that uses digital functionalities to execute on its value proposition. There are no standard multiples to apply to revenue or EBITDA, few legal precedents to help quell fears of regulatory risk, and a paucity of homegrown intellectual capital to help navigate uncertain waters.

Lack of demonstrated growth

Not only is the industry new but, practically by definition, most of the startups seeking to raise capital and do business are new as well.

Demonstrable growth in Daily Active Users (DAU) and Monthly Recurring Revenue (MRR) are often the easiest ways to assuage investor concerns.

But the opportunity to establish such patterns has existed for a shorter period of time than the horizon over which investors typically view these metrics.

Fear of going first

There is also a fear of being the first money in, a phenomenon we see in virtually every industry. No one wants to be seen as having made a “bad” investment, and it is much harder for an investor to be seen as such if they were simply investing alongside an established player or institution.

Entrepreneurs in the space are often offered investment only in conjunction with an angel syndicate or boutique VC fund.

For example, Jordan Pascasio is the co-founder of TRNDS Sports, a Sportradar-powered mobile backtesting tool for betting strategies, currently available on iOS. His platform not only provides real value to sports bettors and on-air personalities, but could enable operators to dramatically decrease their cost of customer acquisition, at a time when doing so is absolutely critical. 

Nonetheless, even he has not been immune to such challenges and recently told me that many colleagues and industry friends are reporting an underestimation of the need for customer education leading to difficulties in product design.

The time is right to invest in betting

For the limited population of private investors and funds with both the risk appetite and domain expertise needed to deploy capital in the space, everything discussed above actually represents an incredibly advantage and opportunity.

They have been able to obtain equity allocations at incomprehensibly low valuations, especially when compared to the potential upside.

For those readers who have a means and interest in investing – the time is now.

Editor’s note: this is a guest column representing the views of the author and not necessarily those of Legal Sports Report.

 



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