Money matters: why the igaming industry is ripe for investment

The global online gambling industry has always been a hotbed for start-up companies, whether operators, suppliers or affiliates, and even today we see plenty of new organisations enter the fray. But with competition rising and regulations tightening, it is tough to succeed.

Capital has always been important for a business to thrive in this arena, but now more than ever it is critical for companies, and in particular operators, to get the foothold they need to drive growth. This is certainly true for regulated markets where a minimum capital balance is now often required.

This is not a problem for large, established organisations that have plenty of cash in the bank, but it can be problematic for smaller, innovative companies looking to enter regulated markets and compete with, and take share away from, the incumbents.

Not only do these organisations have to secure the required investment and capital, but funds must be received from investors that meet the often-stringent requirements of the regulator and in particular when it comes to providing transparency around source of funds.

Without this investment, smaller operators simply cannot meet the minimum capital requirements needed to secure a licence in most regulated markets, let alone develop the technologies, build out the infrastructure, onboard the team and deploy the marketing campaigns to succeed.

How operators can secure investment

 While securing investment is a challenge, it can be overcome. SportingWin is in the final stages of obtaining a licence in Bulgaria and as part of that we have had to meet a minimum capital requirement of €1m used by the regulator as a guarantee.

Not only that, but funding had to be done locally and with full transparency. To help with this, we appointed a dedicated Bulgaria CEO and also onboarded several local experts who were key in connecting us with the right investors and institutions required to secure the capital.

This was an important step for us because having met these transparency requirements at a local level it will make it easier to secure further investment in the future as we are already meeting these high standards.

These local experts also proved invaluable when it came to meeting the strict due diligence criteria and also the administrative obstacles that need to be navigated. Of course, recruiting the best talent comes at a price but one that is worth paying.

Investors remain hungry for igaming opportunities

Despite the current climate, we have found that there is plenty of appetite among the investment community when it comes to opportunities within the online gambling sector. Of course, there are a lot of companies to invest in which is why start-up operators must have a few key things in place.

The first is a management team that has a track record of success within the industry. Perhaps they have worked for one of the larger operators before, or have already established, grown and sold a business within the sector – this is the level of experience that reassures investors.

The second key thing is to provide an attractive cash on cash return on investment. Investors are not excited by merely doubling their money, they are looking for opportunities that promises a x10 return as an absolute minimum. Of course, you must be able to deliver on that promise.

Without both of these, securing seed funding is incredibly difficult. Even if the operator can secure the funding, the quality and calibre of the investor might not be so high which in turn may limit progress and growth as the business matures.

The biggest stumbling block

Another challenge when it comes to securing investment is the valuation of the business. Operators will always want to have the largest valuation, while investors will always say the valuation is too high. To overcome this, we have taken the SAFE approach.

Our Simple Agreement for Future Equity (SAFE) does not determine a specific price per share at the time of the initial investment, rather the price is set after a year and it is directly linked with tangible goals set for the business.

If we do not achieve these goals, the price per share is much lower and so taking this approach acts as a warrant for the investor’s capital. It has worked really well with the funding rounds we have undertaken and is ideal for start-ups and smaller operators.

Now is a good time for investors to back igaming companies

Over the past 12 months the online gambling industry has proved that it is now both recession proof and pandemic proof. The sector generally delivers above 10% AGR and in some cases and markets that number can be as high as 20%.

M&A is continuing across the sector as larger operators swallow up their smaller rivals and drive synergies across the business to unlock even greater value. For investors, these smaller operators present a huge opportunity to leverage the unrivalled potential the industry has to offer.

Mark Chakravarti, SportingWin

Mark Chakravarti, head of investment and board director at SportingWin, joined the business following a progressive 10-year career in investment management. Bringing entrepreneurship, commercial acumen and creativity to the board, he has previously assisted in the scaling-up of Canary Wharf Group entrepreneurs, as well as working with Bupa and the Royal Academy of Arts.