Sports betting is a form of gambling after all, and all forms of gambling involve risk. But surprising or not, it’s important to be aware that betting on sports comes with the risk of losing. In fact, most sports bettors DO lose. This is the harsh reality of sports betting. The last reason why this type of betting has proven to be extremely profitable is the fact that there are so many different games you can wager on. Every day, all around the world, hundreds of games are being played, and you can choose any of those matches to wager on.
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.
Why Is Sports Betting So Harder
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.
Not only is the current regulatory landscape highly fractured, but its future is utterly uncertain. It is extremely difficult to predict with confidence: $100 no deposit bonus codes.
- The rate at which future states will legalize sports betting
- The nature of legalization within each state (e.g., New York allows land-based sports wagering only, while Tennessee only offers mobile wagering)
- The regulatory burden of procuring a license in each state (e.g., It costs $10,000,000 to obtain a license in Pennsylvania, compared to $45,000 in Iowa)
- The effective tax rate in each state (e.g., Pennsylvania established an effective tax rate of 36% while Iowa levies a tax of only 6.75% on revenue)
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 arecent Medium article, but the challenge boils down to the following:
- Terms like gross gaming revenue (GGR) and handle foreign to many investors. Furthermore, the procedures for calculating non-GAAP metrics as “hold-adjusted EBITDA” or moving from GGR to net gaming revenue (NGR) are convoluted and not entirely intuitive.
- While long-time sports fans and bettors might understand that a company like DraftKings generally makes money by paying out less than their customers’ deposit, very few are aware of the role of technology platforms, data/odds providers, affiliate marketers, or KYC/AML purveyors.
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.
Why Is Sports Betting So Hardest
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.