Opportunities in Digital Gambling

For those who don’t know, I co-founded the company that became Betfair, and have a keen interest in the space of online gambling.

I continue to wonder how opportunities are going to develop for startups in this space in the US.  Outside the US, most of the companies that have been built have pretty much been an online representation of what takes place offline.  (Betfair being one of few exceptions).  Consequently, most of the spoils have gone to pre-existing (pre-internet) companies who leverage their brand and presence to build an audience.  If all everyone does is put blackjack online, it boils down to a game of  customer acquisition and those with big brands have an unfair advantage.

Which bring me to the question of: what, if any, is the opportunity for startups in the USA if gambling gets legalized?

First, an aside for entrepreneurs looking at this space: I failed to appreciate the tax on productivity, earnings, and multiples that working in a highly regulated sector would exert on my startup.  I seriously think this is a 50-75% haircut on the value of your work, or said differently, you need a 2x-4x better business to yield the same result in gaming.  So enter only with caution (or passion).

Now, to the notion: where is the opportunity?

I think Peter Thiel captured an insight well when he said (I’m paraphrasing) great business exist in the intersection set of “sounds like a really bad idea” and “is a really good idea”.

That’s my general problem with the opportunity in legalization of gambling in the USA: it’s lost on no one.  When the gates are unlocked, you will see all the major gambling players (Wynn, Harrah’s, MGM), the Indian Casinos, plus big gaming players (Zynga most notably) investing heavily in product and customer acquisition.  There’s no way for a startup to sneak up on this, and that’s usually how startups succeed.

The big gaming houses are terrible at tech and web, but I don’t believe building a business that licenses games to them is a big opportunity.  Ultimately the own the customers and that’s where the value is.

It is also a bad idea, by the way, to do a startup predicated on legalization before it occurs.  Startups can’t wait around for the government to act, and even though you may think that legalization is inevitable, it is harder than you’d think to predict timing or account for surprising twists and turns in the process.

The type of opportunities I think are interesting, and I would consider investing in, are novel ideas that couldn’t exist in an analog world, and that are somehow inherently protectable.  Betfair is like this: an exchange for betting needed the internet to connect consumers directly, and the marketplace dynamics have let them continue to hold onto a high market share.

Of these, there hasn’t been much, or much that has worked.  Certainly in the USA, where the laws are still not set.  Nigel Eccles (who started out on my team) has built an interesting and fun take on daily fantasy gaming (Fanduel), which may be legal due to the exceptions laid out for fantasy gaming — that is one of the few I’ve seen in this area.

Anybody have other gaming innovations that can only exist in a digital world?

Another area I’ve considered would be the picks and shovels of online gaming — maybe payments, KYC (know your customer) checks, age verification, fraud control, geographic control.  Most of those feel like smaller, cash-flow businesses to me, but fragmented across markets and hard to get escape velocity and build really big businesses — but I’d be open to being surprised here.



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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.
  • http://twitter.com/GamblinoApp Gamblino

    We think the opportunity lies in delivering the betting experience–by creating real incentives for performance–under the current laws.  The US market is massive, and anxiously awaiting the change, so giving players a platform that’s nearly as engaging as the real thing will allow a startup to gain users and traction before the land-grab even begins.  Furthermore, with companies like Betable entering the mix conversion to real money gaming may be more accessible than in the past, giving flexible startups the ability to deliver a better experience than the establish land based casinos can. We’re building a business that’s doing just that, and we are positioning it to be profitable even if the laws dont change or take longer than expected.  Would love to tell you more about what we’re doing! frank@gamblino.com

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