New FanDuel Fundraising Round: Could Signal Future IPO

According to Fortune Magazine, Daily Fantasy Sports supersite FanDuel is getting ready for another round of investment capital fundraising that could push the company’s value over the $1 Billion mark. According to Fortune, FanDuel’s valuation was around $400 Million following their most recent round of investments.

Not too shabby for a company that has yet to turn a profit.

Investment groups have been keen on DFS companies in recent years, with FanDuel raising a reported $87.5 million in investment capital since 2009 (most coming in September of 2014 when the company raised $70 million) and their chief rival DraftKings raising a reported $76.4 million since 2012.

Most of this money has been spent on player acquisition (marketing) and forming partnerships with professional sports teams, leagues, and players. This marketing has not only produced massive revenue growth, it has raised brand awareness to a whole new level for these companies. DFS is hot in the streets right now.

As Adam Krejcik of Eilers Research has noted, Despite generating $93 million in revenue in 2014, neither site has shown a profit to date, mostly because of the marketing push and the companies involved in the space feeling revenue growth is a better long term strategy than profit. For instance, Eilers estimated that FanDuel and DraftKings spent at least $20 million on TV ads alone in 2014 – more than 20% of the total revenue they took in.

Eilers also speculated these fundraising efforts and marketing efforts could be a sign that FanDuel (or perhaps DraftKings) is contemplating going public with a FanDuel IPO in the not so distant future.

The next sliced bread and seedless watermelon

With online gaming floundering in legalized markets and further expansion stalled in the U.S., DFS has garnered a lot more headlines than they would have otherwise, and investors ranging from Shamrock Capital Advisors, to NBC Sports Ventures, to Comcast Ventures have jumped on the DFS bandwagon, seeing an opportunity. As have the NBA and NHL, both taking an equity share in FanDuel and DraftKings respectively in exchange for “official” partner status.

That being said, in the grand scheme of things these investments are small potatoes. The DFS industry saw revenue skyrocket 337% from 2013 to 2014, but the $91.3 million in revenue the industry generated was still 25% less than New Jersey’s much vilified online gaming industry pulled in.

DFS has a lot of potential, and considering its YOY growth this next round of fundraising should be quite successful. The question is, should investors start expecting to see these companies prove their profitability, and will continued growth be enough for FanDuel (or someone else) to achieve the Holy Grail of startups, and go public with an IPO?

According to Eilers, DFS could be generating $447 Million to $2.6 Billion by 2020, so it’s not surprising major companies would be willing to take a 9- or 10-figure flyer on one of these companies.

If the DFS industry can use their next round of investments to put together another year where revenue growth doubles or more than triples in 2015, I would be shocked if an IPO wasn’t announced:

• DFS 2011: $1.28 million
• DFS 2012: $6.12 million (+384%)
• DFS 2013: $21.9 million (+259%)
• DFS 2014(E): $91.3 million (+337%)

Competition coming for DFS?

The industry is certainly growing, but it’s still relatively small, and more importantly, under the current business model, unprofitable.

What’s more, DFS is currently operating in a very noncompetitive space. As one of the few legal forms of online gaming, most of their current online gambling competition comes from  black market overseas sports books and online poker and online casino sites. This is a situation that is likely to change in the coming years as legalization spreads across the U.S.

In the coming years DFS sites will not only have to contend with the likely spread of online poker and online casino games in multiple states, but also the rise of social casinos, skill-based gaming, and what is looking more and more likely, legalized sports betting.

The situation becomes even more complicated when we factor how quickly online gaming has and continues to evolve. In two years Social Gaming could be THE way people “gamble” online, or perhaps skill-based gaming will take root. Or, much like DFS, someone could unveil the next big thing in online gaming at any moment.

The DFS industry is currently in a goldilocks zone, and the people at the helm of the larger DFS companies, DraftKings and FanDuel, seem to realize this. They are not hoping for slow steady growth, instead they are looking to capitalize on the current opportunity and strike while the iron is hot.

In the end, DFS will either be just another way to wager online, or, if companies like FanDuel have their way, it could revolutionize online gaming.

Related: Flutter Mulling IPO For “Small Shareholding” Of FanDuel