The importance of venture capital in iGaming cannot be denied. With countless funds either involved in the sector or focused on it exclusively, VC funding can be seen as a lifeline for start-ups and emerging businesses looking to shake things up.

But as with all things, accepting VC funding has drawbacks as well as its benefits, and founders must carefully consider whether it represents the right path for them.

This begs the question, when is VC funding the right option, and when should founders focus instead on bootstrapping their businesses and building up independently?


A numbers game

Of course, VC firms spread their capital across a variety of businesses and sectors with a view to hedging their bets and making major returns from a few breakout winners.

While the goal of a fund should be to turn a profit on all of its investments, in the choppy waters of iGaming, the reality is that many start-ups, whether VC funded or not, are destined to fail.

Indeed, while statistics on the matter vary, plenty of sources – including Harvard Business School senior lecturer Shikhar Ghosh – suggest that as many as 75% of VC-backed start-ups fail to return any cash to their investors.

Jon Nordmark

Jon Nordmark is a serial entrepreneur, who co-founded online retail business eBags in 1998 before it was acquired by luggage giant Samsonite for a cool $105m in 2017.

Today, he is co-founder and CEO of technology company Iterate.ai, and something of an evangelist when it comes to bootstrapping businesses.

For him, VC funds and their successes are comparable with the batting averages of professional baseball players.

“Usually, a batter will hit the ball three times out of 10, and get put out on the other seven,” he told iGaming NEXT

“And even out of the three times they hit it, less than one of those becomes a home run – the others barely get to first or second base. The start-up funding game is very much like that.”

That reality creates huge risks for founders, he explains, as contracts are set out so that when companies don’t make the grade, any money which is returned (often via a “fire sale” of any remaining assets) will go back to the VC investors as a priority.

“So in seven out of 10 cases, the entrepreneur loses everything,” Nordmark explains. “The VC may get some of their money back on a few of those, and only in the other three out of 10 cases does anybody make any real money. 

“But the ones making a lot are usually only those outliers on the very end of the spectrum.”

That spells trouble for the companies that fail to rank among the very top performers.

Go hard or go home 

Not only do VCs want to find high-growth, breakout businesses, but they also want that growth to come quickly.

In light of that, Nordmark suggests: “When you take on venture funding from a traditional fund, you’d better be going for a billion dollar company fast, because that’s the only way to return their money.

“And if you’re not on that path, they’d just as soon get rid of you. I’ve seen it so many times – it’s all friendly until you’re not that breakout company.”

Lloyd Danzig

Lloyd Danzig, managing partner of online gambling-focused VC investment fund Sharp Alpha Advisors, agrees that for most companies, going down the VC route is the wrong choice.

He told iGaming NEXT: “We pass on 99% of the deals that come across our desk, and my colleagues at other firms do the same. This suggests that even venture investors agree: most companies are not well-suited for venture capital.”

However, Peter Heneghan, senior associate of gambling-focused VC fund Bettor Capital, suggests that VC capital should be used to help founders push the accelerator pedal on rapid growth, especially in tech-driven industries such as iGaming.

“Many technology businesses have a significant gap from initial ideation to product launch and revenue, so raising outside capital will likely help accelerate this process and capitalise on the market opportunity,” he says.

Those cash injections, which are often used to pour fuel on the fire of an emerging business, can make all the difference between a start-up becoming a hit or a total flop.

“We pass on 99% of the deals that come across our desk, and my colleagues at other firms do the same.”

– Lloyd Danzig

“Early-stage businesses often don’t have the benefit of time to slowly grow – another start-up or an established business with greater resources may launch a similar product that makes the market more competitive,” Heneghan suggests, acknowledging that in many cases, speed to market can make or break new companies on the scene.

Think VC (Very Carefully)

Because of the inherent risks of accepting VC capital, Nordmark believes start-ups should – wherever possible – aim to bootstrap their businesses and “work really hard to get product/market fit with the lowest amount of money possible.”

For him, the product/market fit is the key to success. 

Without it, companies should not be seeking VC funding, he argues. Nordmark also describes VC funding as a “start-over” event, with a whole new set of goals. 

“Those goals become mandatory, because they’re no longer your goals – they’re the goals of whoever invested in you,” he adds. 

If investors sink cash into a business and leave it there for 10 years, they expect returns of at least 2.5x-3x over that period. 

“The problem is that a lot of times, funds are investing more in the people or in ideas that aren’t fully baked.”

– Jon Nordmark

That pressure means VC-backed companies have to act fast, in an all-or-nothing attempt to turn their dreams into reality.

“When you raise money, they’re usually paying for you to hire a bunch of people who can then turn on the growth engine,” says Nordmark. “You go get marketing people, sales people, smart developers, and you’re betting that those people can pull it off.

“But the problem is that a lot of times, funds are investing more in the people or in ideas that aren’t fully baked. And because the product/market fit isn’t there yet, founders try to use the money to find it. And in about 75% of those cases, that doesn’t work.”

The clock ticks louder during this period, because VC contracts are often set out over maximum 10-year time periods.

“That time horizon creates tremendous pressure for founders,” Nordmark suggests, “and that pressure flows into the start-up.”

What do VCs offer besides cash?

While accepting funding undoubtedly puts additional pressure on founders’ shoulders, Danzig believes there are a slew of advantages VCs can offer beyond the simple injection of capital.

“VC firms can be valuable partners that provide significant capital and are incentivised to leverage their networks and capabilities to help portfolio companies succeed,” he says. 

Peter Heneghan

“Good venture funds help companies with recruiting, corporate finance, public relations, negotiating commercial agreements, go-to-market strategies, and regulatory needs.”

However, he also recognises that venture firms have their own return thresholds, exit ambitions, and governance requirements, as well as dilution to founders over financing rounds.

While many founders will rightly be reluctant to dilute ownership in exchange for cash, Bettor Capital’s Heneghan suggests that additional benefits can more than make up for the cost.

“A primary focus area of Bettor Capital’s investment strategy is not just being a ‘source of capital,’ but also a strategic partner for the companies that we invest in,” he explains. 

“We believe an investor partner should offer portfolio companies something other than money – whether this is support in business development, strategy, operations or financial planning. 

“A founder is trading some near-term dilution for capital and greater long-term upside, and a VC investor should be bringing something to the table that helps achieve this outcome.”

In that way, when done right, VCs and their investments can aim to build a symbiotic relationship where everybody wins.

Does slow and steady win the race?

Nordmark suggests that instead of shooting for the moon as quickly as possible (and using other people’s money to try and get there) that most founders should focus on opportunities to create an attractive business with relatively low costs.

“Capital is no longer the barrier to starting a business,” he says. “It’s brains.

“The first business I started in 1998 [eBags] required millions of dollars – all the code had to be written from scratch, and you had to buy servers at $50,000 apiece.

“Whereas now, you’ve got Google Cloud and Amazon Cloud, services that don’t require you to buy hardware, plus code libraries that you can implement – none of that existed back in the old days.”

“Capital is no longer the barrier to starting a business. It’s brains.

– Jon Nordmark

Those technologies have helped make the world of business “more democratic,” he argues, because online service providers don’t require you to be technical and you no longer need to buy servers. 

“People all over the world can start companies,” he adds. 

Danzig agrees, insisting that a bootstrapped beginning can put founders in a position of strength before stepping up to the negotiating table should they need additional capital. 

If a company can prove its strength independently, it becomes a much more compelling investment case.

“The most attractive investments are often the companies that don’t need investment to sustain operations,” Danzig concludes.

Don’t forget to enjoy the ride

According to Nordmark, the process of slowly building something from the ground up also allows entrepreneurs to enjoy the process.

“A lot of the best entrepreneurs don’t really get in it for the money. It’s all about the build, the creation, and the money is just a side product. 

“Because it’s so risky along the way, and so many businesses fail, you’ve really got to enjoy the journey.”

For many founders, that journey will include external investment, and there could be great successes at the end of that particular path.

For others – Nordmark included – going slow and steady almost certainly wins the race. 

And even if it doesn’t, it at least makes for a more enjoyable ride. 

During the investNEXT conference at iGaming NEXT Valletta in September, venture capitalists and industry experts shared their views on the fundamental qualities they look for when investing in start-ups.

During a panel discussion entitled ‘The investor debate: How do investors value companies and make investment decisions?’, RB Capital co-founder and session moderator Julian Buhagiar posed the following question to investors.

“What is the fundamental wishlist that you look for in a start-up?”

Rule #1: No dickheads

For Buhagiar, there is one blunt rule which he said has helped guide his decision making throughout his career.

“For me, it used to be just one rule only; it was something called the ‘no dickheads’ policy,” he told the panel. “And you’ve all been through this consciously or subconsciously, you know what I’m talking about.

“When you jump on a call with somebody, and then somebody goes: ‘you’re disrespecting me, you’re wasting my time. I need to be on a thousand other calls with a thousand other investors’.

“And it could be the next Elon Musk, but you’d be like: ‘Bye. Sayonara.’ I don’t want people who are high maintenance, high baggage, or even worse, think they are the next big thing. What you want are really humble people with great ideas, but keeping it low-key.”

The principal reason behind Buhagiar’s matter-of-fact statement is that investors and start-up founders should work closely together, and VCs do not need the headache of working with people who believe they already have it all worked out.

Instead, he argued, investors – and the companies they buy into – should work together in an ego-free, positive dialogue-led environment to help drive the business forward.

Rule #2: Look for clarity

Sharp Alpha Advisors managing partner Lloyd Danzig suggested that many VCs are looking for the same qualities in company founders, but that two specific traits should be held in particularly high regard.

“I think a lot of us look for, in some ways, a lot of the same things: a compelling team with relevant background experience, with an incredible solution to an important problem, that is highly monetisable at scale,” he explained.

“My favourite, or at least one of my favourite features of founders, is robust thoughtfulness and clarity of their vision. To use a Paul Graham phrase, I love founders that are ‘relentlessly resourceful’.”

These qualities help to create founders worthy of investment, Danzig argued, before revealing that one key question allows him to separate one business from the next.

RB Capital co-founder Julian Buhagiar: “I don’t want people who are high maintenance, high baggage, or even worse, think they are the next big thing.”

“If I had to choose sort of one rule or one heuristic, I like to ask myself: is this a founder in whom I would want to own a share of their future earnings, regardless of what they were building? And are they someone that inspires me so much that I almost want to quit what I’m doing as an investor and go work for them instead?”

Without a leader who possesses such vision and the ability to inspire others – be it their own employees, future investors, customers or even regulators – he said, it can be difficult to separate the next big thing from a complete flop.

“I find those to be really helpful questions to ask myself to distill a lot of the more complex quantitative and qualitative aspects of a deal,” Danzig concluded.

Rule #3: Know the problem you’re solving

Peter Heneghan, a senior associate at gambling industry-focused VC firm Bettor Capital, might take a more ‘brass tacks’ approach to investing, with his most desired quality in a potential investment being the ability to solve industry-specific problems.

“I think that a start-up first of all needs to have a reason for existing, and especially since we’re focused on B2B suppliers, they have to be solving a problem for operators,” he said.

“I think that especially last year, and while sports betting has been legal in the US, you see people coming in, and they’re inventing some reason for a start-up to exist with some idea that a lot of people in this room would probably say, ‘well, maybe that’s cool, but is that really a business?’

“People who have a clear vision of the problem they’re solving and the reason for solving that problem, and that it’s a big enough problem that people are going to pay for it, is at the highest level, one of the more qualitative things that you’re looking for.”

While Heneghan demands real-world use cases for the products his firm invests in, he admits that businesses do not need to be long-established in order to generate value.

“Quantitatively the main thing that we’re focused on as B2B investors at the early stage, is that we’re not looking for companies that are profitable today – because otherwise they would be less interested in taking our money – but companies that are structurally profitable. 

“In a company where the unit economics make sense and the reason that you’re burning money is to grow faster, I think over time, that math is going to work in your favour,” he said, before echoing Danzig’s comments on the importance of working with inspiring and uplifting founders.

Rule #4: Understand where the money is coming from

For Tekkorp Capital president Robin Chhabra, investors should never lose sight of their ultimate goal: generating a return on their initial investment. He believes that it is crucial to understand exactly how a start-up intends to make money, without relying on an imagined future.

He said: “I think typically the first page [of an investment deck] is ‘this is the problem we need to solve,’ and actually in most instances, it’s kind of obvious how you solve it like two or three years out. What I’d like to see is what are the first two or three steps.

“Because quite often they can’t answer that. They know in generic terms what the solution is, but then lots of people can figure that out if you spend long enough in an industry.”

Indeed, Chhabra explained, it is the determination and vision to create a truly profitable business that separates the wheat from the chaff in the gambling investment world.

While some will seek investment for pie-in-the-sky ideas, it is crucial to pinpoint the businesses with a clear path to success.

Tekkorp Capital president Robin Chhabra: “What is the value they’re going to create for their customer, and what share of that value can they take for themselves? These are quite obvious questions, but very few people I meet can answer them really crisply.”

“The other thing is the number of pitches I’ve received where it’s been difficult to figure out how the start-up actually makes money,” he explained. “What is their business model? Who are their customers? And it can be quite complex sometimes, quite layered.

“And then how are they going to incentivise a customer to use their product, what is the value they’re going to create for their customer, and what share of that value can they take for themselves?

“These are quite obvious questions, but very few people I meet can answer them really crisply.”

According to Chhabra, then, start-ups seeking investment should go back to basics by ensuring they have the fundamentals before flying too close to the sun. Simply having a strong concept or product is not enough to ensure success, he explained. 

“Some people just think about the product, and they think: build it and they will come. In some instances that’s the case, but not usually.”

Rule #5: Embrace failure

Adam Rosenberg, senior adviser for the gaming and leisure sector at Blackstone, offered up a different perspective when faced with Buhagiar’s question.

“This may sound counterintuitive, but I like to hear about stories of failure,” he said.

“If somebody hasn’t faced failure, they haven’t learned some very important lessons on how to deal with difficulty.

“And when you’re dealing with start-up capital and the VC world, I think it’s important to make sure the person has been fire-tested in certain ways.”

The panellists agreed that the experience gained through previous failures is invaluable in business, providing not only practical lessons, but also in providing motivation for future success.

He clarified that he does not look for founders engaging in “recklessness, but testing boundaries, testing limits that get you to a place where you realise you’ve gone too far.”

This, he argued, helps businesses and founders find their true place within the market, by pushing the limits of what they seek to do.

Rosenberg’s fellow panellist Danzig agreed, adding that investors like to see a little chutzpah from the firms that come across their desks.

Danzig added: “On top of that, and I think maybe this is maybe a bit of an American notion, but it’s that if you’re not failing or have not failed, you must not be ambitious enough or trying something that is hard enough and audacious enough to really cause an outsized outcome.”

Perhaps the biggest predictor of future success in a business is, somewhat surprisingly, past failures.

The macroeconomic climate is making venture capitalists in the iGaming space more cautious about investing in start-ups.

While capital is still being deployed, VC firms told iGaming NEXT that the bar is much higher due to a worsening economic outlook and a correction in public company valuations, which is affecting VC investing.

Lloyd Danzig, founder and managing partner of US sports betting VC fund Sharp Alpha Advisors, said: “Early-stage deal velocity has slowed as investors require more conviction to enter new positions and seek to bolster the balance sheets of existing portfolio companies.

“Time spent in diligence has increased, as has overall negotiating leverage on behalf of venture capital investors. Valuations and multiples have receded as well, although many founders are still navigating their way through the price discovery process.

“The lowest quality deals are simply not getting done at all,” he added.

Sharp Alpha Advisors founder Lloyd Danzig: “Rising interest rates and inflation concerns have made the cost of capital in 2022 significantly greater than during 2021.”

Meanwhile, Eilers & Krejcik Gaming, a research firm focused in the gaming industry and merged with Fantini Research, mentioned in their US sports betting market monitor for July 2022 that the “private market for online sports betting start-ups is turning cutthroat”.

“We’ve heard multiple reports of investors pulling out of signed deals or demanding more favourable terms,” said E&KG. “One Vegas land-based operator agreed a strategic investment in a start-up, filling the round and bumping other investors, only to later pull out of the deal entirely.”

Elsewhere, Y Combinator, the start-up incubator that gave rise to the likes of Airbnb, Dropbox and Stripe, and recently welcomed US sports betting exchange start-up Novig, told founders in an email in May to “understand that the poor public market performance of tech companies significantly impacts VC investing”.

On this topic, Danzig added: “The macroeconomic climate and correction in public company valuations has caused private market investors to adjust their expectations regarding potential exit sizes and then make corresponding adjustments to the entry points that satisfy return criteria.

“Rising interest rates and inflation concerns have made the cost of capital in 2022 significantly greater than during 2021.”

Gambling is considered a fairly resilient sector in times of economic crisis. But this begs the question, what sort of start-ups will not only survive, but thrive, in current market conditions?

Eilers & Krejcik Gaming note that venture capitalists “did not point to one type of company but said the more speculative deals were off the table”.

However, there is understandably widespread agreement that investor interest remains high in companies that have already validated their products.

Danzig points out there is still a huge opportunity for iGaming start-ups since the largest operators are keen to acquire innovative technologies by way of M&A, rather than in-house development, which is often costly and takes time.

“Great teams solving big problems with demonstrated traction and attractive growth rates are absolutely getting funded,” reiterated Danzig. “VCs have record levels of dry powder waiting to be deployed and investors are congregating around the most coveted deals.”

Peter Heneghan of Bettor Capital: “We remain bullish on the industry’s prospects, regardless of broader public market conditions.”

This is particularly true in the US online sports betting and iGaming industry, which still presents one of the sector’s greatest opportunities as the market is still maturing.

“In virtually any conceivable macro environment, [US] industry revenues will grow at a 30-50% CAGR for at least five to 10 years,” said Danzig. “There are tens of billions of dollars in annual revenue up for grabs.

“Other geographies, like Latam, are benefiting from similar growth patterns attributable to changing regulation,” he added.

One gambling-focused VC firm, Bettor Capital, which last week led a multi-million funding round for AI specialist Future Anthem, remains equally “bullish on the industry’s prospects, regardless of broader public market conditions”.

Senior associate Peter Heneghan told iGaming NEXT the firm would continue to “actively invest in the sector”.

He said: “Unlike many other sectors, the iGaming industry will continue to benefit from the tailwinds of legalisation in additional jurisdictions, especially in the US and Canada.

“We’ve also seen continued strong growth numbers in more established states, and are excited to continue investing into a high growth market,” he said.

Bettor Capital forecast continued deal activity for the second half of the year and into 2023.

However, Heneghan agrees that quality trumps quantity, and that financing will primarily focus on “best-in-class businesses that are demonstrating continued growth and clear paths to future profitability”.

According to Heneghan, Bettor Capital is adamant there will be “significant opportunities for B2B providers to drive sales momentum in the space as operators look for ways to optimise user acquisition costs and increase focus on customer retention, user experience and product”.

So in conclusion, all hope is not lost for start-ups looking to enter the online gambling space right now – as long as they can prove their product is the real deal.