The magic formula: can start-ups on both sides of the Atlantic ignite innovation in the industry?

A statistic bandied around Silicon Valley and other tech hubs claims that 50% of all fledgling businesses fail within the first five years. It’s just the dose of cold reality to strike fear into even the most seasoned entrepreneurs and almost anyone pondering packing in the day job and turning their kernel of an idea or prototype product into a reality in the hope of disrupting an industry. But throw in a global pandemic, surging unemployment and the worst economic downturn in history to the mix – leaving many start-ups in dire financial straits – and it must make launching a tech business after the dotcom bubble burst or the 2008 financial crash seem like opening a lemonade stall in comparison.

While the European online gambling industry has largely been insulated, and in some cases even managed to benefit from people being cooped up in their homes in Q2, across the pond public and private equity continues to pour into the sector. Start-ups, too, aren’t exactly short of investment. Indeed, when New York-based Simplebet.io – a B2B solution that uses machine learning and automation to generate odds for in-play micro-markets – announced in August that it had raised $35m to date, including $11m in a Series B round in March, brows were duly cocked.

“If this gets you $35m, then I’ve just ‘invented’ a machine that turns walnuts into diamonds,” Harry Lang of Brand Architects tweeted sarcastically.

Yet Julian Buhagiar, an angel investor and co-founder of RB Capital, isn’t taken aback by the amount Simplebet has raised thus far. “I said last year that data start-ups would get much more funding because the US loves data and numbers, [so] data companies always have much bigger valuations stateside than anywhere else. If you look at acquisitions outside of gaming in the last 20 years since IBM’s foray into intelligence, a lot of high-valuation businesses have either been started in the US or have received funding from private equity. The US knows how to monetise data and, from a venture capitalist perspective, knows how to package and sell data. That is quite good for valuations, so I wasn’t surprised about the Simplebet raise.”

Ever since PASPA’s repeal in May 2018, there has been a continuous flow of start-ups formed as investors and entrepreneurs ride the regulated sports betting wave and try to disrupt the nascent US industry. For instance, products like Sporttrade, Fanvest and BallStreet Trading follow a trend of blurring the lines between peer-to-peer sports betting and financial trading while tapping into the popularity of retail investing apps like a previous darling of the fintech scene: Robinhood.

Evan Hoff, founder of Velo Partners, which invests in Series A and early-stage rounds, says: “We are seeing some very smart people in the States who were maybe in financial trading, or computer scientists with a love of sports betting, coming in with interesting things.

“We meet them, and these are not your run-of-the-mill class; they are impressive people – very ambitious and very impressive at presenting,” he tells EGR Intel via Zoom. “There’s lots of early stage money in the US, so we haven’t seen people really struggling to get seed money.” Unlike Europe, Hoff says the US also doesn’t lack the “ecosystem of Series A investors” to scale and take start-ups to the next level.

“For real scaling there is virtually unlimited money. We are astonished at how much money is available for late stage. And public markets are very strong.” A prime example is US giant and previous unicorn DraftKings, which raised more than $900m during funding rounds and is now worth $13bn following its April float. “It’s definitely more frothy in the US, there is no question,” Hoff insists.

Sowing seeds

Back in Europe, there have been hundreds of small gambling-related businesses that have wound up languishing in the start-up graveyard down the years. Some were just ill-conceived ideas or bad products that were destined to fail. However, there are a multitude of reasons why new firms go under – from running out of cash or not having the right tech skills to founder syndrome or losing interest – and the egaming industry is no different. The labyrinthine regulatory compliance, along with integrating RG and KYC protocols and systems into your tech stack, only complicates matters further. Even a seemingly simple task of opening a bank account is a common and frustrating problem faced by gambling start-ups.

In addition, the whole mindset of gamblers can be difficult to second guess, suggests Jonny Robb, founder of Gambling Startup Ventures. “You’ve got the additional challenge of user behaviour – it’s a very, very different type of consumer to any other industry, so they are not as easy to design for or to predict as with other e-commerce businesses.”

Jonny Robb, Gambling Startup Ventures

Despite all this, some new entrants looked at the time of their arrival like they had the ingredients to succeed, but ultimately didn’t for whatever reason. For example, Bookee with its Tinder-like swipe controls to select or reject suggested bets drew plaudits for its simplistic but smooth UX, while Betcade, an app store for RMG Android apps, seemed an obvious workaround to mobile gambling products not being able to gain entry to Google’s Play Store. This doesn’t seem to have deterred others from trying though.

One start-up blending those aforementioned stock trading elements with sports betting and fantasy sports is SportStack. Founded by former Goldman Sachs FX traders Nick Bertram Smith (CEO) and Kristian Brauten-Smith (COO), along with ex-BetVictor software engineer Trajan Przybylski (CTO), SportStack lets users buy and sell ‘shares’ and speculate on players’ performances during live football matches.

Athletes’ stock rises and falls depending on their Opta-tracked actions on the pitch. With a vision for a UI modelled on the “clean and sexy” design of trading apps, Bertram Smith says they raised £250,000 from friends and family, obtained a Gambling Commission licence and built this complex and data-heavy product from scratch, often working 12-hour days.

Then, about a month before launch last December, the founders secured just over $2m from a few high-net-worth individuals. “We basically took the view that we [initially] raised a very small amount of money to prove we could build it, then build a team, get regulated and hit the ground running,” the CEO explains. “We were able to raise a fairly substantial seed round from investors. We didn’t take any money from institutional investors or venture capital firms but, ironically, we had a lot more interest from US than UK investors.”

One reason for this is that a large number of UK VCs don’t, or can’t, put their money to work in gambling as it’s considered a ‘vice’ industry much like tobacco and pornography. This is somewhat ironic when VCs inherently take a gamble at long odds that any start-up will buck the trend and take off.

Robb himself has first-hand experience of the travails of start-ups after co-founding Bet Blocks (rebranded Crew.bet) – best described in its ‘elevator pitch’ as the WhatsApp of betting that uses AI to detect betting-related words and link to relevant odds on oddschecker – in 2017 with ex-colleague Nilesh Mistry.

“We saw younger guys using WhatsApp to exchange bets with each other and our idea was that we would try to build something which would rival that experience but make it better because it was actually connected to bookmakers.”

The 36-year-old uses the past tense because, as you may have surmised already, Crew.bet has been shelved. “Crew is a beautiful product that nobody needs,” he concedes philosophically with a chuckle.

“That’s not to say it couldn’t work but we’ve decided to put our energy into other ideas,” he explains. “It sounds harsh saying that, but we’ve learned the hard way and it’s simply part and parcel of entrepreneurship. People are sometimes shocked that I can be upbeat about it but what they don’t realise is how much that journey enriched us.”

The other idea he refers to was ostensibly to focus on Bettor Faster, an egaming UX design consultancy he co-founded in 2016, again with Mistry, after 10 years spent in mobile- and social-focused product design for gambling companies and the fintech space. “We’ve drawn a line under Crew now to focus on other things.”

Fusing betting with social aspects like Crew.bet did has hitherto proven to be a tough nut to crack. Bodugi, Bragbet, WantMyBet and Betfect are a few of the more prominent social betting start-ups to throw in the towel over the past 10 years. Even the major operators have failed to gain much traction; Paddy Power’s ill-fated social betting game BetDash (withdrawn in 2014 after two years) is a notable example and a cautionary tale for others. In 2018, Sky Bet launched Group Betting, allowing friends to each pick selections for accumulators, while Colossus Bets has enjoyed some success with its crowd-sourced Syndicates feature whereby players purchase shares in a ticket.

While no product has taken social betting by storm, friend-to-friend betting platform Wager has arguably executed the idea the most successfully so far. Created by Oxford graduates Leo Barnes and Elliott Robinson, the duo raised an impressive £500,000 in Series A funding from London-based VC Forward Partners and built Wager fully in-house in 2018.

Less than two years later, the business was snapped up by social betting community BetBull for an undisclosed fee. “They [Wager] have managed to crack a form of social betting but the interesting thing is that idea had already been done and failed maybe three or four times before,” says Robb.

It is almost inevitable that despite the past failings in Europe with social betting that US start-ups will attempt to tap into Americans’ love of sports and their consumption of social media. For instance, yet-to-launch Bookit Sports bills itself as a social media platform connecting the sports betting community with users able to share betting-related videos and bet slips as well as follow picks and compete in leader boards for the best betting record.

And there’s Betsperts, touted as a crowd-sourced sports gambling advice platform. “It feels like we are seeing a lot of those fundamental ideas that have been and gone, or failed, in Europe being retried in the US,” Robb remarks. “But they [Bookit] might be in the right place at the right time with the right technology, backed by more capital and could make a success of it.”

Give us a B…

With the US sports betting gold rush in full swing, the attention has tended to fall on crafting B2C products where the margins are healthy, and you can potentially hit the jackpot if the product takes off. However, CPAs in a state like New Jersey are $500 and upwards. Also, backers need to plough significant capital into marketing and brand awareness, and even that might only scratch the surface. Instead, taking the B2B route could be the smarter play in 2020 by building tools and solutions for operators to help with UA, grow their revenue and margins, as well as differentiate from the competition.

For example, SportCaller has been particularly successful with its bespoke free-to-play predictor games for bookmakers, while B2B has proven to be a “much safer route”, says Buhagiar, for start-up slots studios compared with B2C and associated costs and rigours of regulation. Start-ups are also springing up targeting the ever-more stringent area of compliance, KYC and RG. BeBettor, which was founded by Irish tech entrepreneur Harry Cott, is an automated customer affordability checking tool for the gambling industry, while the former head of Kindred Futures, Will Mace, has just released EQ-Connect, a cross-operator data science player-protection platform.

The B2B path doesn’t come without its challenges, though; just getting a foot in the door with operators and persuading management to believe in your product can be a protracted journey. “There are long lead times and the difficulty of getting integrated,” says Hoff of Velo Partners. “With B2C you’re not beholden to getting integrated into William Hill, which might take the better part of nine months.” Robb concurs: “For the B2B companies we speak to, their number one issue is the time it takes to form a relationship and do a deal when you are burning through money that maybe you don’t have.”

Savvas Fellas chose instead to go down the B2C route when he took on the task of building challenger online casino brand MrQ.com after a career spent mainly in affiliate marketing. Speaking to EGR Intel on the second anniversary of the site’s launch, he highlights how his naivety around tech actually worked to his advantage. “You trivialise it when you don’t have a good understanding of technology or how tech stacks, architecture and databases work. I didn’t know PHP from Java. If you did know all of the stuff that goes into it, it’s too overwhelming and you’d probably jump ship.”

Savvas Fellas

He also underestimated the costs involved. “One developer said we’d need £6m. Other people said it was just too big [of a project].” Eventually, a developer was found who was up for the challenge of building an online casino. Despite MrQ scooping the Rising Star title at the EGR Operator Awards in 2019, Fellas freely admits he wouldn’t have created MrQ if he knew then what he knows now, especially with the regulatory landscape shifting in the UK and the Gambling Commission developing a “thirst for blood”, as he puts it.

He adds: “We’ve come in as a single brand in the UK, we’ve had to do three audits in the space of two years, the tax has gone from 15% on GGR to 21% and meanwhile we’re managing to somehow and, don’t ask me how, grow and outperform our competitors when it comes to the tech side. I don’t believe many will out-tech us and now we are hiring data scientists from Gamesys and very seasoned developers from the gaming industry. So somehow we have made it work but it would have been beautiful to not have those extra [compliance] costs.”

Innovation or iteration?

One criticism often levelled at the online gambling industry is that it lacks innovation. You’d have to go back 20 years to find a truly ground-breaking product with the introduction of betting exchanges. Since then, the rise of live betting and the development of cash-out are probably as close as it comes to innovative developments. The explosion in the popularity of user-generated ‘request-a-bets’ (25% of tournament gross win for William Hill at the last World Cup) and their automated brethren, bet builders, have been a boon for bookmakers, but could they be deemed as truly innovative? Perhaps. Overall, sports betting is largely homogenised – both on product and price – while gamification features sprinkled into online casino are about as ground-breaking as it gets.

“There’s always room for innovation in every industry, but certainly in the gambling industry there’s not that many overwhelmingly tangible examples of steps forward,” Bertram Smith suggests. The driving force behind future steps forward seems likely to come from the US, whether that be the large operators or start-ups as it is where most of the attention and capital is focused right now.

“I’ve got no doubt that if anyone’s going to meaningfully innovate in the industry it’s going to be the US,” Bertram Smith adds. “The incentive to innovate is now provided by this gold rush; the prize for winning the US market is so large that it’s going to naturally encourage and incentivise people to find a way to win.”

Online’s share of the global gambling industry is pegged at less than 15%, therefore the opportunity for growth and disruption is clear as markets like the US, India and Latam open up. “I 100% think that the industry is ripe for disruption,” says Robb. “However, I’ve said that for many years and the disruption hasn’t arrived yet. But the opportunity is there as the industry and the product offering is homogenous and productised.”

The other side of the argument is this criticism of the industry’s inability to truly innovate is repeated ad nauseum and, quite frankly, does it even matter? Gambling industry maven and product manager at Sportradar Matthew Trenhaile said this recently on a podcast when discussing the perceived lack of innovation: “No one’s f***ing thought to redefine f***ing chocolate cake. It’s a great and a brilliant product – you don’t need to reinvent it,” he blasted.

Although Trenhaile argues that the industry doesn’t need to reinvent the wheel, leading publicly listed online operators have spoken about how lockdown and a dearth of sport in the spring gave their tech teams a chance to evaluate and iterate products. For new start-ups generally though, it’s been potentially a far more challenging and precarious period. Research by Beauhurst, a leading database for fast-growth firms, found that during the first full month after the UK entered lockdown start-ups raised £663m, up 34% year-on-year. However, the number of deals, which is a more accurate barometer of investor confidence, fell by 39% to 114.

On top of this, the UK is officially in recession for the first time in 11 years as the economy contracted by 20.4% quarter-on-quarter between April and June. Likewise, the US in recession and worst of the economic maelstrom is probably yet to come. As for what any recovery looks like – whether it mirrors a ‘V’, an elongated ‘U’ or a ‘K-shaped’ pattern whereby parts of the economy get stronger and other parts get weaker – is the subject of fierce debate.

“Generally speaking, no one’s ever going to say a recession is a good time for capital markets and for raising money,” says Bertram Smith. “People are going to place incrementally more scrutiny and ask more questions before committing capital on any kind of investment when you’re in a recessionary environment.” But he adds: “There is still a lot of capital out there that needs to be put to work though. People are still looking to invest in great concepts and exciting industries and opportunities.”

And you could argue gambling will benefit from the so-called new normal. People are spending more time at home which means looking for entertaining products and games. Plus, they have become more digitally native than they were last year. “I would be hopeful that the Covid situation spurs innovation,” Robb says. “When you look at the financial crash of 2008, a lot of the massive tech giants and companies we know today were born in that recession. Recessions are devastating but they create unique opportunities for innovation and for answering difficult problems.”
Answering those difficult problems amid these challenging and unprecedented times will take a special type of entrepreneur, that’s for sure.