The unraveling
DraftKings could lose more than it gains from surcharge, says analysis
Market share losses would offset DraftKings surcharge gains, says HoldCrunch.
In +More: Wexler replaced as PrizePicks CEO, moves to chair role.
Startup month: why an IPO could be a better option than private finance.
GeoComply’s David Briggs discusses his Challenger Series.
We The Bookie’s Malcolm Wilkinson on the pains of scaling up.
Every now and then, I get a little bit nervous.
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Broken model
Not so super charge: DraftKings is set to lose up to 25% of its market share by handle even if it introduces surcharges at 0.4% on pre-game and 0.8% for in-play, while the net GGR decline across the three high-tax states could range between ~11.5% and 20%, according to HoldCrunch analysis.
The net outcome would worsen if higher surcharge levels were instituted.
Note, the example cited by DraftKings last week was indeed higher than HoldCrunch’s modeling, with a suggested 1.6% charge on the payout.
High and dry: The decline as detailed by HoldCrunch’s price elasticity model would depend on major competitors, notably FanDuel, not following DraftKings’ lead. That outcome appears more likely after Rush Street Interactive announced yesterday it would not be copying DraftKings on the surcharge.
“As we put our customers first, it was an easy decision for us,” said CEO Richard Schwartz in a press release confirming Rush Street has “no plans” to levy an extra charge on customers.
Eyes now turn to what Penn Entertainment says on Thursday this week and Flutter next Tuesday in their respective Q2 earnings calls.
Meanwhile, a report on investor opinions about the move from the analysts at Jefferies suggested widespread fears that FanDuel could “market against it and gain more share from new customers irrespective of whether it leads to more EBITDA.”
“The best case is you offset the tax increase in part, the worst case is you lose more share than you expect and have to reverse the strategy,” the team said.
Marginal gain: HoldCrunch suggested that to “make the numbers work” for DraftKings, the fall in handle would need to be limited to ~5% while the surcharge would need to be raised to 1.2% pre-game and 2.2% in-play, which, assuming a 60/40 split, equates to the company’s own 1.6% example.
That would then equate to a GGR increase of 3.7% in New York, Illinois and Pennsylvania.
But as Tom Johnson, CEO at HoldCrunch, added, there is another factor “worth noting that makes the surcharge implementation hard, and modeling difficult as well.”
“Not all markets are equal, and we’re not talking simply pre-game and in-game,” he said.
Even a small change pre-game MLB on the moneyline market “might be enough to send a customer elsewhere because it’s more important than for example pre-game totals.”
To apply the charge efficiently to combat price elasticity, it would “ideally be a more complex variable charge.”
“It won’t be of course because that would baffle customers.”
Oh, and one more thing: Another looming question is whether the surcharge would be taxable. The issue was raised on LinkedIn by Regulus Partners’ Paul Leyland whose comment that there is “no way” the states would treat the revenue raised as non-taxable found support from a supervisor for the Maryland regulator.
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+More
PrizePicks: Adam Wexler has announced he is to step down as CEO at the company he founded in 2017 and move to the role of executive chair. He will be replaced by Mike Ybarra, who until recently was a president at Blizzard Entertainment.
The move comes after it was confirmed in late July that the company has appointed Moelis to look into its strategic options.
Wexler said he was particularly proud at the role his company played in disrupting the DFS space and pioneering a “new path.”
He added that Ybarra was the “perfect person to lead our team as we build this rocketship into a sports and culture entertainment brand which can outlast our lifetimes.”
Genius Sports has renewed its live betting data deal with the major English and Scottish soccer leagues. The new agreement with Football DataCo starts with the 2025-26 season and extends through 2028-29.
Earnings in brief
Playstudios: The CEO of the social casino operator Andrew Pascal said that “despite persistent weakness” within the sector brought about by the changes instigated by Google and Apple to their data privacy and advertising practice, the company was “stronger, bigger, more diversified and more profitable” than when it floated in 2021.
Revenue was down 6% to $72.6m while adj. EBITDA fell by 13% to $14.1m.
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Why IPO?
Hello London: While US investors won’t take you seriously unless your company has an enterprise value in excess of $1bn, companies with an enterprise value of over £100m can attract institutional investors in the UK, says Peel Hunt head of research Charles Hall.
Peel Hunt acted as nominated advisor and broker for US medical tech company AOTI in its £35.2m IPO on London’s Alternative Investment Market (AIM) in June.
“This is a business with a market cap of just £145m,” says Hall. “For US-domiciled companies the key thing is ‘can you float?’ You have to give people a reason to invest. You need a well thought-through investment case and a very creditable management team.”
Hall points out that UK investors will not give US companies an easy ride. They have seen too many companies that could not get listed in the US try their hand in the UK, but their investment case did not stack up.
SPAC backlash: The US markets have almost been closed to US betting and gaming companies since the SPAC-led boom that saw listings by the likes of DraftKings, Genius Sports, Golden Nugget Online Gaming, Inspired Entertainment and Super Group.
The Games Global IPO was seen as an interesting bellwether, initially indicating a re-opening of the door for gaming companies. But that deal was scuppered, seemingly due to a lack of interest from institutions beyond the hedge funds that dominate the stateside gaming market.
“Gaming is very much, for better or for worse, a hedge fund-dominated industry. Those are the types of investors that are going to care about your story,” says XST Capital Group CEO Joel Simkins.
“I also think right now, we are living through a sort of aftermath of the SPAC stock bubble,” he continues.
“We can all see how those deals performed and, largely, it’s not great. There are definitely some diamonds in the rough, some very strong companies, but even they are still struggling with relatively limited analyst coverage and a mixed receptivity from the investment community.”
Challenging conditions: The UK market might be “challenged,” in the words of Hall, but for those that are prepared, and have clean and audited accounts, there are multiple benefits to listing rather than a second or third private capital raise.
“Raising money is quite a lot more efficient in the public market,” Jon Prideaux, the former CEO of US-domiciled payments company Boku recently told Hall in a Peel Hunt podcast.
“You do a lot of the due diligence up front. You can meet a lot of investors in two weeks, compared to months of presentations and negotiations with each investor,” said Prideaux.
Looks kinda fishy: The IPO process is still a huge compliance challenge that is not for the weak-hearted but there are initiatives to make it quicker, cheaper and easier.
The London Stock Exchange is developing the Private Intermittent Securities and Capital Exchange System (Pisces), which would enable private companies to issue a certain amount of shares publicly.
Progress on Pisces is expected during the second half of 2024.
The knowledge gap
Brigging up baby: The next edition of GeoComply’s Challenger Series event is set to take place in Las Vegas during G2E week, so E+M had a chat with GeoComply co-founder and now chair David Briggs to talk about why he thought of producing an event such as this.
The lonely road: One of the realities of being a startup founder is that for many they will have had zero previous experience of raising money, drawing up shareholder agreements, deal structuring, stock option plans and the rest of the nuts and bolts of putting a company together.
Unequal fight: But as Briggs points out, when it comes to those on the other side of the table – the investment side, the bankers, lawyers and advisors working in the venture capital and private equity spheres, it is a very different matter.
“They have decades of experience of dealing in exactly these kinds of areas,” he says.
“So there's a knowledge arbitrage imbalance between the founders who might know everything there is about their market, their product, their technology but nothing about the world of finance, which they are going to have to navigate as they grow and scale their company.”
“It means that new founders can make entirely new mistakes rather than repeat the ones that we made.”
Briggs has helped matters via the crucial element of making the event free to attend and not having any sponsors, meaning the content is founder-led. It can lead to some very honest discussion.
“You end up with some really feisty and honest debates, not just with the panelists but also with the audience as they get involved too,” says Briggs of previous editions of the event, which have been staged in both Las Vegas and New York.
“That has made the event a bit different and helped to generate more of a sense of community among the founders.”
Quality time: What also stands out about the Challenger Series is the quality of participants and the time they dedicate to the event and towards preparing for their appearances. “One of the things that I have really enjoyed through hosting Challenger is getting the chance to meet and listen to the next generation of founders,” says Briggs.
“Some of these folks in US iGaming 2.0 are incredibly talented, driven and amazingly smart,” he added.
“These guys are moving so fast that they are scorching the grass underneath their feet.”
One piece of advice: Never trust investors. “They are in it for themselves and you as a founder are just a means to an end. Keep control of your company, never expect goodwill from your investors and keep the relationship transactional,” says Briggs.
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Growing pains
Mountain to climb: In June, We The Bookies’ founder Malcom Wilkinson opened up to Earnings+More about the difficulties of getting a startup off the ground. But as he tells E+M this month, the going gets no easier when it comes to gaining scale.
Starting with fundraising. “It’s just inherently challenging,” he says. “Investors know how difficult it is to break into that market, and how much marketing capital can be burned trying.”
He says the company can point to some “very positive retention metrics” on its model of handing back 20%-40% of winnings to losing customers.
“However, we have never had sufficient funding to support a marketing budget,” he adds.
“As a result, our traction remains low, and we have yet to demonstrate how our customer acquisition costs compare favorably with industry norms.”
Traction engines: Discussions with potential investors have often revealed the lack of traction overshadows the other positive attributes. “Investors either find us too small for their profile or interpret our low early traction as a sign that our model might not resonate well with the betting public,” Wilkinson says.
“We have outperformed the assumptions that underpin our internal projections. But unfortunately, no investor has yet delved into our financials or projections to see this potential.”
“Investors have a filtering process, and we’re getting filtered out due to our current traction,” he adds.
“This prevents us from progressing far enough in discussions to explain the reasons behind our low traction and why it isn’t necessarily a reliable indicator of future customer acquisition.”
Keep on keeping on: He says that despite numerous rejections from potential investors, he will persist with the project. “I’m slaving away in the kitchen, trying to get the porridge just the right consistency and temperature,” he adds.
The month in focuses
Affiliate provider bwise Media.
Programmatic media provider Soundwave.
Games provider Playbook Fusion.
Gaming analytics provider Blask.
Venture capital firm Yolo Investments manages in excess of €500m in capital across 100 exciting fintech, gaming and blockchain companies. The Yolo Investments' Gaming fund, regulated by the Guernsey Financial Services Commission, has taken positions in fast-growth suppliers and operators, including Dabble and Enteractive. Yolo Investments (yolo.io) wants to hear from readers of this newsletter. Get in touch with your pitch, or for a chat about innovative products which can plug into our investment ecosystem.
Calendar
Aug 6: Wynn Resorts, Genius Sports, Full House
Aug 7: Super Group, Light & Wonder
Aug 8: Entain, Bragg, Penn, Golden Entertainment
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