DFS Companies FanDuel and DraftKings Chasing Investors and Profitability
In 2011 the entire Daily Fantasy Sports industry generated $1.28 million in revenue. four short years later and we have not one but two DFS companies aiming for Unicorn status – a valuation of $1 billion.
Make no mistake about it: DFS is hot in the streets.
In February, FanDuel, the largest DFS company in existence (and it’s not even close) announced they would be doing another round of investment fundraising, and now DraftKings (FanDuel’s #1 competitor) has announced the same, as they push for another round of investment funding of their own, in an attempt to push the valuation of the company past $1 billion.
The rise of DraftKings (the company was founded in Boston, Massachusetts in 2012), and their legitimate challenge to FanDuel’s market supremacy, may be what is fueling these fundraising efforts.
FanDuel Continues To Court Investors
According to Fortune Magazine, FanDuel would like to raise another $100 million, but Fortune prefaced this by saying the board of directors has yet to approve the release of more stock shares.
Last year FanDuel raised $70 million in investment funding (bringing their total fundraising to $88 million), which they used to take their marketing to another level, including signing several high-profile sponsorships with a number of professional teams as well as the NBA.
So where will FanDuel’s funding come from? Previous investors include Comcast Ventures and NBC Sports Ventures, as well as handing the NBA equity in the company as part of their partnership deal.
DraftKings Is Talking To Disney
Not to be outdone, DraftKings is now rumored to be in talks with Disney (a historically anti-gambling company, although ESPN, which is owned by Disney, has been rumored to be eyeing the DFS space in the past) that would give DraftKings a new round of venture capital fundraising that would push their valuation into Unicorn territory according to Fortune Magazine.
Fortune stated, both companies declined to comment on the rumor.
Thus far DraftKings has raised around $80 million, which it has used in a similar manner as Fanduel. DraftKings has inked partnership deals with both the NHL and MLB, as well as three major NFL teams, the Pittsburgh Steelers, the New England Patriots, and the Denver Broncos.
DraftKings DFS has also taken a more comprehensive approach to their marketing, moving beyond traditional sports and sponsoring poker tournaments (the World Series of Poker and the World Poker Tour), the Breeders Cup, and the Ultimate Fighting Championship.
Neither DFS Company Has Turned A Profit (Yet)
According to Fortune, DraftKings might consider an IPO in 2016. Similar rumors surround FanDuel DFS.
Interestingly, despite the industry’s growth ($1.28 million in revenue in 2011 and over $90 million in 2014) and the investment capital raised, neither company nor any DFS website to my knowledge, has operated in the black up to this point.
DFS guru Adam Krejcik of Eilers Research believes part of the industry’s problem is the high player acquisition cost – although it should be noted DFS executives disagree, and feel player acquisition costs have been decreasing.
Another problem is the predetermined nature of DFS contests. In order to comply with the Fantasy Sports exemption in UIGEA, DFS contest prize-pool’s musty be determined in advance. Much like the restaurant owner in Goodfellas: Server went down which prevented hundreds of people from registering? F-you, pay me! You took a chance and guaranteed $5,000,000 and only collected $3,000,000 in entry fees? F-you, pay me!
In real terms, on November 2, 2014, DraftKings guaranteed $1,000,000 in its big NFL contest and had to eat a $220,000 loss to make up the difference between the actual prize-pool and the guaranteed prize-pool.
And this isn’t a one-off situation:
Are DFS Companies Being Overvalued?
Considering neither company has turned a profit, and revenue for the entire DFS industry was under $100 million in 2014, a valuation of over $1 billion seems somewhat inflated, particularly for Draft Kings, which has a market share of 20-33% depending on who you ask.
Not to mention how quickly the landscape could change from a regulatory perspective, or should NBC Sports, ESPN, another large multimedia company, or perhaps large land based casino corporations such as MGM or Caesars decide to launch their own DFS products.
In a DFS white paper report for Eilers, Krejcik estimated the industry could grow into a $1.2 billion (bearish forecast) to $2.6 billion (bullish forecast) industry by 2020, which would mean FanDuel’s current 80% market share (the high estimate) would put their gross revenue at a hefty $960 million to $2 billion annually. The question is, can they figure out a way to keep marketing costs manageable and still entice new players, and at the same time do so without ceding market share to competitors?
Steve Ruddock is the content director for BettingUSA and the Editor-in-Chief of Gaming Law Review.
Steve has covered the legal and legislative developments in the US gambling sector for more than a decade for online and print publications.
