Most Daily Fantasy Sports Sites Will Fail, Says Early Industry Investor

Written by:
Aaron Goldstein
Published on:
Jul/16/2015
Most Daily Fantasy Sports Sites Will Fail, Says Early Industry Investor

One of the earliest investors on the Daily Fantasy Sports scene - a man who pumped money into what would eventually become the 3rd largest DFS site DraftDay - says he’s been approached by no fewer than two dozen would be Daily Fantasy site operators.

“It’s my opinion that they will all fail,” says Ezra Galton, Senior Associate at Chicago Ventures.

Why?

Galton writes on his blog:

Because nearly every entrepreneur I’ve spoken to in the space gravely underestimates the liquidity advantage of existing incumbents. In betting markets, liquidity is simply everything.

Much like traditional marketplaces, where suppliers need to see real economic returns to justify becoming power users, betting markets are a VIP driven business where the sharks need to be able to earn a living to drive volume on the platform.

And Fanduel and DraftKings simply have this market locked up.

Gambling911.com sister site DFS911.com planned to debut its regularly updated Daily Fantasy Sports Site Reviews for Investors, which seeks to track each company’s position in the sector, private equity and venture capitalist firm interest and how money is being spent.

“What we see as the common denominator among nearly all of these sites is that, despite millions being pumped into sites that are not DraftKings or FanDuel, hardly any of that money appears to be going towards any type of marketing efforts,” notes Payton O’Brien, Senior Editor of both the Gambling911.com and DFS911.com websites.  “You are seeing sites that just received a s***load of money from venture capitalists and they hardly have any presence on social media sites like Twitter or Facebook.  How can that be?”

Advertising, whether it be a full fledge multi-media spend or active social media presence, is a necessary first step in capturing market share.  That’s only the beginning, however.  Even sites like the two giants – DraftKings and FanDuel – remain unprofitable.

Galton believes the Daily Fantasy Sports space will mirror that of online poker.

He writes:

As long as the DFS industry continues to grow (unlike poker, which is now contracting globally) customer acquisition cost grows accordingly. So while it may have theoretically cost FanDuel $5M to attract 100,000 real money customers in 2012, it might (for example) cost $25M to attract the same 100,000 customers in 2015. That provides a strong moat around these already liquid markets.

Like with online poker, sharks (professional players) present a huge threat to the fish (recreational players), ultimately causing harm to the DFS ecosystem.

When you compete on price, you attract the sharks. The sharks will give the platform liquidity, temporarily. But even if a new platform is able to begin attracting recreational players (via advertising/marketing), the pro:amateur ratio remains highly imbalanced, causing the fish to lose at an accelerated pace. They won’t re-deposit or tell their friends and the sharks will soon leave.

As for the peer-to-peer formats cropping up of late, Galton remains skeptical.

While they provide for cheaper, accelerated customer acquisition (just sync your contacts list, for example), it violates the cardinal rule of online gaming: that high volume sharks will drive power-law style revenue, because it negates the theoretically infinite pool of players that tournament style apps offer. It is also exceedingly harder to scale a 1:1 betting game than a 1:many, and harder to create large, recurring prize pools. Even in the hyped run-up to Zynga’s 2013 $10 billion IPO, Words With Friends was only acquired for $50M while Draw Something saw a $210M exit. Neither became platforms.

Galton admits he could have it all wrong, and that’s what existing and would be operators are counting on.

The stage of the DFS market might simply far more nascent than I estimate it to be. If that were the case, it might only take $20-25M to attract a sufficient number of players to an entirely new platform. But I wouldn’t bet on that scenario.

- Aaron Goldstein, Gambling911.com

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