Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,847% through to 30 November 2022.
In collaboration with iGaming NEXT, the December edition of Waterhouse VC takes a deep dive into the “highly cash generative” world of professional betting:
Winning at wagering
In the first century, Pliny the Elder wrote: “We are so much at the mercy of chance that chance is our god.”
Before the Renaissance, chance was associated with religion and fate rather than being a well studied area of science. During the Renaissance, mathematicians developed the field of probability, the foundation of risk management used by bookmakers and professional bettors.
Whilst professional betting is a rarely discussed and underinvested part of the wagering industry, it is hugely important and highly cash generative.
The world’s largest betting syndicates wager billions of dollars each year by exploiting a unique ‘edge’ across sports and horse racing. Based on publicly available information, some of the largest professional bettors are detailed below:
Tony Bloom (Starlizard)
Starlizard bets on many sports, with particular expertise in football/soccer. Bloom is the owner and chairman of Premier League football club, Brighton & Hove Albion, and is a majority owner of Belgian First Division A team, Royale Union Saint-Gilloise.
Matthew Benham (Smartodds)
Smartodds bets on many sports, whilst also selling statistical research and sports modelling to other professional bettors. Benham is the owner of English Premier League club, Brentford FC, and Denmark’s FC Midtjylland.
David Walsh and Zeljko Ranogajec
Walsh and Ranogajec developed a betting system focused on horse racing and other sports. Zeljko resides in the world’s most expensive apartment complex – One Hyde Park, London. Walsh spent $75 million to re-open the Museum of Old and New Art (MONA).
Walsh was made an Officer of the Order of Australia (AO) for “distinguished service to the visual arts through the establishment of MONA, and as a supporter of cultural, charitable, sporting and education groups.”
Billy Walters
Walters is widely regarded as among the most successful sports bettors in Las Vegas. Walters had just one losing year over a period of 39 years. He is a well-known philanthropist and has donated to Opportunity Village, a Las Vegas nonprofit for people with intellectual disabilities.
Alan Woods
Woods focused on blackjack and horse racing and also worked with Zeljko for a period. With Bill Benter, he pioneered quantitative analysis in betting on horse racing in Hong Kong.
Bill Benter
With a degree in Physics, Bill started off as a professional blackjack player in Las Vegas before meeting Alan Woods and building a large Hong Kong horse racing betting operation. Benter is known for his philanthropic activities and contributions to several political and charity groups.
Game, set, match
Most professional betting syndicates are relatively mature and are closed to external investment. Due to the natural compounding of betting capital, the only opportunity to invest in betting syndicates is generally towards their beginning.
However, there are several emerging syndicates across both sports and horse racing. One such racing-focused syndicate is led by Dominic Catsaras and another syndicate focused on tennis is led by Tom Dry.
Tom Dry has been professionally betting on tennis since January 2020. He has prior experience working for Tony Bloom (Starlizard), both as a football analyst and as a data scientist.
Through his experience working for Tony Bloom, Tom developed both the analytical and operational skills required to build a professional betting business.
Tom grew up in Portsmouth, UK, and is 28 years old. As a child he played, studied and followed almost every sport: football, cricket, tennis, athletics, F1, snooker, darts, etc.
This obsessive, historical, and first-hand knowledge of sport has given Tom a rare understanding of the ‘deep nature’ of different sports, which has subsequently proven to be highly lucrative.
Tom is a completely self-taught coder and statistician. Whilst at Starlizard, he built a snooker model in his spare time.
Tom sourced and modelled ever more predictive proprietary data, culminating in a computer vision model which could extract the coordinates of the balls on the table and evaluate the difficulty of the position for the player.
Tom’s major focus at the moment is tennis, where he has developed a highly profitable model.
In the grand slams, and latter stages of the biggest tennis tournaments, where there is the greatest liquidity, Tom can bet much larger volume than he does currently, with minimal effect on price/return. By finding more high-level betting partners, he will be able to increase volumes across the board, from Grand Slams down to Challengers.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,851% through to 31 October 2022.
In collaboration with iGaming NEXT, the November edition of Waterhouse VC takes a deep dive into US market leader FanDuel:
Don’t count FanDuel out of iGaming
In October, the total iGaming revenue in North America was a record $446m (+26% year-on-year and +10% month-on-month).
iGaming is a significant growth opportunity for FanDuel. The company currently has 18% market share in iGaming, lagging third behind BetMGM and DraftKings, which have 29.8% and 22.8% market share respectively.
While FanDuel’s sportsbook is their primary customer acquisition channel, around 41% of sportsbook customers are cross-sold into iGaming within 30 days.
FanDuel is committed to improving its range of iGaming product offerings and developing effective promotion tools to retain and monetise players.
Taking a large slice of a large pie
There are many views on the potential revenue of US online sports betting at maturity. BetMGM and DraftKings estimate it to be $14.1bn and $22bn respectively (Legal Sports Report), while FanDuel estimates it to be $22.6bn (Flutter Entertainment).
At the moment, FanDuel has 42% market share and expects to generate around $2bn of sportsbook revenue this year. If the potential revenue opportunity is $19.5bn (taking the average of the three operators’ estimates) and FanDuel’s market share falls to 30%, FanDuel’s implied online sports betting revenue at maturity is $5.9bn, which is around 3x higher than this year.
If FanDuel’s market share remains at 42%, revenue would be around 4x higher.
Flutter’s Australian brand Sportsbet has an EBITDA margin of 34%. Flutter aims for FanDuel to achieve long-term EBITDA margins comparable to their other divisions (including Sportsbet).
If FanDuel achieves a mature EBITDA margin of 25%, the sportsbook business alone could generate higher EBITDA than Flutter’s entire business generated in 2021. This excludes any contribution from iGaming.
Waterhouse VC has been invested in Flutter since September 2019. While its initial investment has appreciated 70% over the past three years, it remains particularly optimistic about the growth profile of the company’s US operations.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has posted a 19.4x return through to 30 September 2022.
In collaboration with iGaming NEXT, the October edition of Waterhouse VC explores the exponential rise of social betting in both Australia and the US:
One way that bookmakers can appeal to a younger, digital-native generation of bettors, is by promoting the social aspect of betting.
Bettors have always discussed their top picks with their friends, but this was not previously embedded within bookmaker apps.
By bringing together social media and wagering, bookmakers hope to improve customer retention and lifetime value.
Social betting also plays into the growth of influencers, with respected bettors able to build large followers who can copy their bets.
On social betting sites, the number of copy bets are comparable to “likes” on Facebook, Instagram and Twitter.
Betting influencers can gain particularly high followings if they are successful with multi-bets (known as parlay bets in the US), which have a large pay-out if won.
In May 2021, Flutter Entertainment-owned Sportsbet launched its ‘Bet With Mates’ product, which allows bettors to pool their bets into one group and invite friends to share in the bet.
Previously, the organiser of a group bet had to manually calculate each participant’s buy-in and bet on behalf of the group.
Through ‘Bet With Mates’, activity and performance can now be tracked on each group’s homepage, with the ability to use emoji reactions to create an immersive social betting experience.
In September in Australia, total wagering app downloads numbered 272,000 (Taylor Collison). Social betting apps fall under the category of ‘Other’ and have increased from 0% market share of wagering app downloads to 10% in just over a year.
Furthermore, within the ‘Other’ category, Dabble’s market share is dominant at 76%. Dabble CEO Tom Rundle describes Dabble as a “social media app for people who like to bet … rather than being a betting app with a social (function)” (The Weekend Australian).
In October, Dabble secured a A$33m investment from Tabcorp, a 20% stake which values the company at A$165m.
We’ve been following Dabble for a while now and highly respect one of their early investors, Yolo Investments (yolo.io), another venture capital fund with whom we regularly co-invest.
Dabble’s valuation is now around double that of BlueBet (ASX:BBT) and a third of PointsBet (ASX:PBH).
Dabble already records annual revenue of A$47m, with 150,000 users (80% aged from 18-35) signed up in under 18 months (The Weekend Australian).
When a user opens the Dabble app, they immediately see an activity feed reminiscent of Instagram, with the most popular shared bets and commentary front and centre.
The user can follow prominent bettors such as ‘GorrillaBetz’, who has over 50,000 followers. There are also a multitude of celebrity bettors on the platform, such as retired rugby league player Robbie Farah, who also has over 50,000 followers.
Recently, 88 people copied one of Farah’s multi-bets with odds of 27.82 (a $1 bet generated a gain of $26.82).
Dabble CEO Tom Rundle was recently quoted in The Weekend Australian: “We see some of them as content creators, the same way as Twitter or more so YouTube or TikTok – once someone creates a lot of content and they are very influential we have a closer relationship with them and sometimes we might pay them to maintain their activity.
“We didn’t create them, they have come to us, built their own profiles just like an Instagram influencer would,” he added.
The Waterhouse family is the largest investor in the strategy and has been involved in wagering and related industries for more than a century.
The strategy is focused on technology suppliers to the gaming and wagering industries. Waterhouse VC remains open, with limited capacity.
iGaming NEXT editor Conor Mulheir sits down with betting industry royalty Tom Waterhouse, chief investment officer of Waterhouse VC, to discuss all things investment in 2022.
As I approach Mayfair, an uncommon quiet hangs in the district. While London bakes in the middle of a summer heatwave, throngs of businesspeople have fled the area to take a break from the oppressive heat.
The few who remain are heading out for lunch with their collars unbuttoned and sleeves rolled high. One man, however, eschews the informal approach and emerges with a broad smile while dressed in his signature full suit and tie.
As CIO of the VC fund he founded in 2019, Australian-born Tom Waterhouse is used to keeping his cool – both in the extreme Antipodean weather, and in the often-turbulent world of finance.
Waterhouse sat down with iGaming NEXT to discuss the reality of navigating a VC fund through a volatile macroeconomic environment.
Conor Mulheir: There is a lot of talk around the current macroeconomic environment and doom and gloom for the economy. What has changed over the last few years, and how has this impacted gaming investments?
Tom Waterhouse: Well, up until October last year, you had a whole bunch of tailwinds for the gaming industry. You had the US opening up with the repeal of PASPA in 2018, and then you had each state opening up for sports betting, and sometimes for iGaming.
You had that, coupled with the fact that money was effectively free, with interest rates around 0% globally. Basically, people were trying to find a home for the cash, and one of the fastest growing areas was US sports betting and anything linked to that.
Then, everything changed. There were signals that there was going to be a significant tightening and inflation was no longer deemed to be transitory. This was magnified by the supply pressures caused by the war in Ukraine. As a result, interest rates have been hiked globally and quantitative easing has been curbed – money is simply far more expensive today than just six months ago.
This increased cost of money has negatively impacted business valuations, particularly for high growth businesses, which are more sensitive to changes in the cost of money. The valuations of some operators have fallen 70% to 80% from their highs. Considering the current lower valuations of high growth operators, raising more money today would be highly dilutive for existing shareholders.
Multiple operators have also rapidly reduced their marketing activities, with a stronger focus on profitability.
CM: What impact has the economic downturn had on VC funds?
TW: For us as a VC, even though we focus on B2B and not B2C, we’ve seen a very similar change in valuations – from over 10x multiples of revenue – to now seeing a lot of businesses valued at 1x or even sub-1x revenue.
That’s because the ability to raise money in this market is much, much harder, and they obviously need cash to survive. Most people are saying that now is the time to be very wary because of things like a possible recession, increasing interest rates and inflation. People want to conserve cash.
It’s a very interesting and exciting time for us as a fund, because we’re still seeing businesses that we thought were terrific businesses with huge upside, but we’re able to go into them at a fraction of the valuation compared to six months ago. We feel fortunate for the timing that we’re able to find and see these opportunities in the market.
CM: What kind of businesses does Waterhouse VC typically look to invest in?
TW: Our focus is on technology primarily because of my past experience as an operator and CEO of William Hill Australia. I have realised that there are hundreds of technology services in the product pipeline for B2C operators. We want to invest in businesses that are good enough to get onto that product pipeline and provide them with the capital required to get integrated.
For example, maybe three years from now in the US, everyone will be making voice bets, or text bets, or doing it through their Twitter account or their Instagram account. That is very interesting, because it would completely disrupt the game. Unique pieces of technology are critical to the success of operators, and hopefully we are able to leverage our expertise to find those unique pieces and invest in them early enough.
CM: What specific areas of technology are you focused on at the moment?
TW: In terms of the customer experience, we want to be looking at voice and text companies, similar to Siri and Alexa, but applied to the betting industry. You’ve seen Google shift from drop down to voice and text – and we cannot see why this wouldn’t happen in the betting industry.
We also want to focus on the affiliate and marketing side, because we see that cost-per-acquisition is so high. We also want to focus on areas that supply extra product, such as horse racing, into the US market – because NFL, NBA and baseball are low margin products, and have gaps in between seasons.
Whether it’s iGaming, fixed-odds horse racing or esports, we want to be across those areas. We also see a gap in the market with exchange betting – there’s still no clear winner in US exchange betting, so we’re focused on exchange providers.
CM: When businesses come across your desk for consideration, how do you decide where best to allocate your capital?
TW: First, we have to be going in at an attractive initial valuation, such as the same valuation as the last money raised. They also have to be generating revenue – we tend to avoid pre-revenue opportunities because we like to see a strong proof of concept and some indication of unit economics. However, we actually spend most of our time assessing the underlying technology of the business through our in-house technology team.
We speak to other businesses in the space to assess the entire competitive landscape and ask: Who else is doing what they’re doing? What are they like? Why are they not better than this other company? What is unique about this company?
We then speak to the customers they supply their service to and ask questions like: How are they going? What’s the uptime like? How easy is it to integrate? How quick is it for them to respond?
We meet the team and ask: What do they uniquely build? What’s the skill set of the team? Why have they got a unique insight to this piece of technology? What contracts have they got that can’t be replaced?
If, after all those questions are sufficiently answered and we think there’s a need for the product from the operators, then we look to proceed with an investment.