The Startup Month #5
Gambling regtech’s investment moment, Investor focus – Drive by DraftKings, Inside the raise – Dabble, November’s fundraisings +More
Welcome to edition #5 of the startup month, sent to Earnings+More subscribers every first Tuesday.
On the agenda this month:
In regtech we trust: investors warm to compliance solutions startups.
The month in fundraisings.
An interview with Meredith McPherron, CEO at Drive by DraftKings.
Aussie startup Dabble is our Inside the Raise feature.
Growth company newslines.
In regtech we trust
Investment in companies providing regulatory and compliance solutions has been a running theme this year, with significant raises being completed by Odds On Compliance, Xpoint (twice), OneComply, U.S. Integrity, Kinectify and, most recently, Department of Trust.
Problem-solving: Investor interest in companies providing regtech solutions into the gambling sector is on the increase. AML, geolocation, affordability solutions and sports integrity are the areas represented by the largely undisclosed cash raises this year.
“Investors are attracted to opportunities that allow them to capitalize on secular growth trends without regard for which specific brand is successful,” says Lloyd Danzig, CEO at Sharp Alpha.
Regtech providers can produce “more reliable cash flows and maintain a competitive moat”, Danzig adds, due to the required specialization and the “entrenched nature” of B2B relationships in the real-money gaming space.
Truth or consequences: “Investors are particularly enthusiastic about regtech opportunities for two simple reasons: it’s needed and it’s not a well-developed area yet,” says Eric Frank, CEO and co-founder at Odds On Compliance.
“Some regulations in iGaming cannot be broken without risk of operational and reputational ruin, such as geolocation, KYC and responsible gaming.”
A failure in any of these areas “not only risks regulatory discipline and a fine, but it also risks the regulator shutting down the entire operation of a company that fails to meet these requirements”, Frank adds.
“There is a major need for technological solutions that maintain the integrity and safety of the industry,” says Danzig.
Blank slate: Peter Heneghan, senior associate at Bettor Capital, which includes Xpoint and Compliable among its portfolio of investments, says there is an opportunity for startups in the gambling sector to address “pain points” specifically related to the online realm.
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Vacant lot
Fixing a hole: Joseph Martin, CEO at AML provider Kinectify, points out that the historically small US gaming sector did not previously offer up enough in terms of potential opportunity for software-based regtech companies to invest in the necessary sophisticated tech.
Throw in gaming unattractiveness and this “left a void” that was previously filled by gaming suppliers who could make their existing products stickier to help support their clients.
“These gaming manufacturers are not modern tech companies and certainly not regtech companies,” he adds.
Heneghan agrees, suggesting many software solutions available to online gaming operators were developed for other sectors, particularly land-based gaming and banking.
But with online gaming growth comes additional opportunities for gambling-focused regtech companies to “enter the market and address customer needs”.
Danzig adds: “This need represents an opportunity for many startups that are leveraging technology to build sustainable gaming practices into the fabric of user experiences.”
AML-zapoppin: Martin says AML has been an “underserved vertical” in gaming and is “ripe for innovation and modernization”. Noting this extends “beyond meeting simple regulatory requirements”, he suggests it is following a similar path to banking post-9/11.
When larger banks de-risked at the time, credit unions and community banks soon entered the space left behind but without the staff or adequate AML programs in place.
The products from existing banking software providers were “lacking and outdated”.
Specialized AML providers soon emerged, including Verafin and Banker’s Toolbox, quickly establishing a significant market presence.
“We see a similar evolution occurring in gaming today,” says Martin.
Future-proofing: As for areas of interest to investors, responsible gambling is the one that catches the attention. Frank says it is the “primary current gap” in the regtech space.
“What has been missing to date is a high-tech solution to help iGaming companies meet responsible gaming regulations and expectations from the public, politicians and media relating to responsible gaming.”
Danzig agrees and suggests using artificial intelligence to “detect deviations from responsible gaming and reinforce positive play in real time” could be a focus.
Particularly given the evolution of regulations in the UK, there will be a “significant increase in demand for software that more fluidly facilitates affordability checks”, he adds.
The fundraising month
Affordability solution provider Dept. of Trust raised $3m in a round led by Tekkorp and including former PartyGaming CEO Jim Ryan, Jaymin Patel and Jonathan Rosham, co-founder of Cygnet Capital.
White-label in-gaming sports-betting provider Kero Gaming – previously Rush Sports – has completed its first public funding round, raising $1m from investors including Acies Investments, Sharp Alpha Fund, iGaming Ideas and other strategic stakeholders such as Benjie Cherniak of Avenue H Capital and Scott Secord of Cardinal Sports Capital.
iGaming operator to affiliate provider Glitnor has launched an early-stage investment arm, Glitnor Ventures, to invest in pre-Seed to Seed projects.
Investor focus – Drive by DraftKings
Meredith McPherron says the ‘sense of escape’ brought by sports and sports-betting entertainment will see it survive any downturn.
Backgrounder: Led by CEO and managing partner Meredith McPherron, who has 25 years of experience investing in startups and growth companies, Drive by DraftKings is a multi-stage VC firm that invests in the sports technology and related entertainment field.
In October 2021, it raised $60m for its first fund. It’s backed by DraftKings and industry-leading investors include the Kraft Group (the Patriots), the Jones family (the Cowboys), MSG Sports, Arctos Sports Partners and Todd Boehly (LA Dodgers and Chelsea).
Jason Robins, DraftKings’ CEO, also sits on their strategic advisory board.
Among its portfolio are StreamLayer, which raised money from investors in May, Tappp, a marketing and payments technology company in sports betting and media, and FanPower, a fan engagement engine for sports team, league and media outlets.
Be careful out there: McPherron says that while she remains confident going into 2023, the five consecutive interest rate hikes and the worsening economic backdrop are hard to ignore. “In our space, in sports tech and entertainment, we continue to be bullish, but advise our companies to manage cash carefully,” she says.
“We are making sure people pay attention to their balance sheet because the funding environment is difficult,” she adds.
“There is capital out there, but valuations are coming down and multiples have become compressed.”
“For us that represents an opportunity to invest in companies at more reasonable valuation points. We continue to see significant and high-quality deal flow.”
Working within Jason: DraftKings anchors the fund and also shares insights and access. “We see the DraftKings name as a big plus,” says McPherron. “They can help accelerate companies, whether as a potential customer, channel partner or through connections they are willing to make for our portfolio."
“Having DraftKings and other big partners in our space helps us add value to our portfolio companies,” she says.
Raise: The DraftKings name also helps when it comes to raising cash, and McPherron notes that last year’s fund raise was 20% oversubscribed. Drive by Draftkings has “seen a thousand deals since we started”, she says.
“As we consider the evolution in the business of sports, there is no doubt that technology is accelerating the fan experience in meaningful ways,” she suggests.
"In sports betting, gaming, media and fitness tech, data is certainly the underlying fuel powering the entire sector, creating a more personalized and interactive experience.”
And then there’s the blockchain. “There is a real blurring of the lines, extending the fan experience from the physical world into the metaverse.”
Parting shot: “We see tons of tailwinds and growth. We’ll continue to invest. We don't have a big strategy shift in mind with regard to the macro environment. We’ll stick to the strategy of identifying great founders and great vision.”
Inside the raise – Dabble
In early October, the Australian sports-betting-social-media startup Dabble announced a A$33m investment from Tabcorp that values the company at $165m.
Quick move: Dabble co-founder and CSO Jon Robin says discussions about a growth raise started in March with the group “mostly talking to existing shareholders and early-stage VCs”, with Tabcorp entering the scene in June. “They came relatively late in the process, but we were very impressed with how quickly they moved once they were interested,” he says.
“80% under 35”: Robin says Tabcorp was attracted to Dabble because the “product and experience are unique” and provide Tabcorp with exposure to a younger customer base, with 80% of Dabble's customers being under 35.
Tabcorp CSO Angus Tiet adds that the strategy is now all about digital share growth, “which ultimately means we will be going after the foreign bookies” that currently dominate the market.
Capital reluctance: Access to capital is difficult currently and Robin admits the group was talking to VCs at the same time the market was falling. “There was a sense of reluctance from even the most interested investors,” he notes, suggesting the raise was “a lot harder than if we were running it 12 months prior”.
Sticking with the wheel: Robin says Dabble is “all-in” on social betting but the company hasn’t attempted to create a new peer-to-peer betting niche. “Every user has a profile and everywhere you can bet, you can do something social. We haven't tried to change the betting journey, we've just added a social layer on top of it.”
“It's still betting, it's just that the experience is surrounded by social interactions. You can put the same bets on at Dabble that you would at Ladbrokes or bet365.”
But he notes that established operators are trying to adapt traditional betting experiences and legacy tech to appeal to younger customers.
“We have an advantage in that sense, Dabble didn't exist before TikTok did. Our competitors existed before smartphones.”
Growth company gazette
Geolocation provider Xpoint has gone live with its Verify product with Mojo in New Jersey.
Betr has reached a market access agreement for Indiana via a deal with Caesars Southern Indiana and the Eastern Band of Cherokee Indians’ gaming entity, EBCI Holdings.
The B2B sports-betting and iGaming software supplier startup PlayEngine has appointed former PlayUp boss Laila Mintas as CEO.
Sightline Payments has launched its mobile loyalty platform Mobile+ at the Talking Stick Resort and Casino Arizona venues in Scottsdale.
U.S. Integrity has announced a comprehensive partnership with BetSkybox, a sports-betting kiosk operation set to launch in January in Ohio.
Flows has announced an agreement with the Italian gaming service supplier Microgame for the provision of its no-code innovation platform.
Colorcast, the Austin-based fan engagement company, has launched a sports-betting platform and has officially rebranded as Outlier.
Chalkline has partnered with the CRM provider Optimove to develop conversion and retention metrics for free-play sports games.
Recent startup focuses
Data+Sports is introducing Web3 to “the next 100 million-plus next-gen sports fans”, says founder Mike Caprio.
“AI data scouting is more reliable and consistent,” says OSAI CEO and founder Roman Garin. “It makes data capture 52% faster and is 70% cheaper than humans.”
Brisbane-based same-game parlay provider ZeroFlucs founder Steve Gray says the company is “gunning for a world without pop-up bet builders”.
“We add value to the content, data, gaming and marketing departments,” says Dan Healy, co-founder at Brooklyn-based and Drive by DraftKings-backed FanPower.
“We want to redefine the sports-betting experience,” says Dean Sisun from recently-launched-in-New Jersey betting exchange Prophet.
Contact
Scott Longley scott@clearconcisemedia.com
Jake Pollard jake@openmediaservices.com