The state of VC in sports betting

The opening up of the US market (theoretically) represents a step-change opportunity for early stage investors seeking to benefit from this incipient bull market.

As a London-based VC focused on global opportunities in the games and gambling sector, we have been asked here to paint a broad picture of the state of VC and offer some views as to whether there is money to be made, and if so, what advice we would offer to entrepreneurs.

It is not the first cheque that counts

As with the European scene, there are a wide number of high net worth investors prepared to make smallish bets on early stage companies. The European market benefits from the wealth created in many of the Swedish and UK IPOs, some of which is recycled back into the ecosystem.

What we have seen so far is that US startups are managing to find the first 400 and 500k of seed money, but not without kissing a lot of frogs first. The networks of gambling investors, investment clubs and wealthy founders are not yet as organised in the US as they are in Europe.

As for the VCs, the situation is similar on both sides of the pond – larger VCs are often precluded from investing in the sector by many of them own LP mandates or are not interested in the scale of the niche opportunities. As we always say, “it is not the first cheque that counts”, it is the Series A and B which allow businesses to take substantial risk and scale.

Without a network of larger investors in the sector, startups risk being buried in the graveyard of failed Series A. As an investor we have had to get used to the idea that there will be times we need to go beyond Seed and Series A to support our portfolio.

To B2C or not to B2C?

In the early days in the European sector, competition was less intense, margins were higher and operators benefitted from a wide array of grey markets to support their regulated market cashflows.

The environment for US market entrants is obviously vastly different. The requirement to partner in most cases with incumbent land-based licensees, coupled with a well-funded landgrab on the go, makes it unlikely any small or niche B2C entrant will come into the market.

In Europe we saw niche operators with product differentiation, for example in gamification, managing to thrive, but we would not easily consider a similar investment in the US.

Affiliate opportunities might be the exception, where licensing and scale are less crucial and where a landgrab creates a tailwind for the sector. We are seeing extremely sophisticated startups in this segment; where in Europe a lot of the early affiliate activity was SEO or huge numbers of similar content sites spread across a wide range of domain names.

In the US we are seeing data-driven offerings providing real value for the player from the outset, and thus the prospects of value creation.

Trend is your friend

So, the question we are asked most frequently is what are we looking for and what is getting funded?  Apart from what I’ve mentioned already about data-driven affiliates – the way we usually answer this is by mapping out what we think the sector will look like when it tends towards maturity and thinking about the businesses that will form part of the infrastructure and plumbing.

This could be casino content – an area of ongoing investment for our start-up accelerator, the RNG Foundry –

• Regtech solutions that solve issues like KYC and responsible gambling;
• Analytics plays that help with player lifetime and player journeys,
• Data providers that provide smarter solutions for pricing, especially in underserved sports,
• And tangential content like skill games and free-to-play prediction games, especially those that drive the acquisition funnel.

The year ahead

Given the sector momentum, we inevitably believe 2020 will see an uptick in deal volume. While we do not expect to see frothy valuations, especially at Seed and Series A, that one might associate with bull markets such as AI start-ups in 2019 or even say AR/VR in 2017, we remain upbeat about expanding our presence in the US market.

[Bio] Evan Hoff is the founder of Velo Capital Partners, a venture capitalist focused on investing in the games and gambling industry. Hoff started his career as a chartered accountant with PwC in audit and corporate finance, before leaving to set up his first venture in the online gaming sector. Velo is focused on early stage, seed and series A investing.