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  • A message to start-up founders: Don’t tie personal identity to company valuation

Gambling start-ups face a major challenge when aligning their expectations with those of their investors.

The iGaming industry has experienced significant fluctuations in valuations and investor sentiment over the past year.

However, this market correction is widely recognised as necessary for ensuring the overall health and longevity of the industry.

This key takeaway emerged from a panel discussion at iGaming NEXT Valletta 23, which shed light on the evolving landscape of iGaming investments and its implications for start-ups.

“The peak for valuations was about mid-2021 and those multiples have declined significantly as the whole world rotated out of growth assets and into value, especially through 2022,” said Lloyd Danzig, founder and managing partner at Sharp Alpha Advisors.

He said anticipation of inflation and potential interest rate relief, coupled with demonstrated profitability by iGaming operators in the US, have allowed valuations and multiples to rise again in 2023.

While Danzig believes those multiples may not reach the heights of 2021, he emphasised that absolute valuations are still expanding due to the growing TAM and improving hold rates and margins.

Misaligned expectations

Danzig also pointed to challenges arising from misaligned expectations between investors and founders.

“Founders who dedicate their life to their business tend to tie their personal identity to the valuation of their company. It can make negotiations quite unpleasant,” he explained.

“Investors, who are more immersed in financial markets compared to founders who are primarily focused on building their companies, have adjusted their exit expectations.

“We also made corresponding downward revisions to the entry valuations that meet our return criteria,” he said.

However, founders haven’t always made similar expectation adjustments, according to Danzig.

The complexity of capital deployment

Discussing the complexities of capital deployment, Danzig acknowledged the aversion to down rounds among venture capitalists.

A down round is where a private company offers additional shares at a lower price than during the previous funding round.

“There also is a reality, whether it’s justified or it’s groupthink, but VCs do not like down rounds, as they seem to convey a lack of progress,” he said.

He highlighted the consequences, noting: “No one wants to participate in a down round. It takes more work and more justification.”

Market consolidation

Danzig pointed out the industry is currently experiencing a survival of the fittest scenario, “where the start-ups that survived this period are perhaps the strongest”.

He further expressed his belief that this correction was healthy and necessary for “the longevity of the whole business”.  

He added: “We’re about at the point where valuations are probably bottoming, and we’re seeing investor friendliness at all-time highs, not just in terms of valuation but investor negotiating leverage, liquidation preferences and anti-dilution rights.”

Investor cooperation

Investors still have dry powder to invest, according to Danzig, who also noticed a “flight to quality”.

Although the majority of start-ups are struggling to raise money, there are a select few high-quality assets that stand out.

They are commanding even higher valuations and can enjoy stronger negotiating leverage, said Danzig.

This has also resulted in a greater level of cooperation between investors.

He said that in today’s market, instead of multiple investment firms each choosing a different company pursuing the same business model, we are witnessing a convergence where multiple investors come together and rally behind the same company.

“Founders who dedicate their life to their business tend to tie their personal identity to the valuation of their company. It can make negotiations quite unpleasant.”
Sharp Alpha Advisors founder Lloyd Danzig

Moderator Julian Buhagiar, co-founder of RB Capital, echoed Danzig’s sentiments.

He highlighted the changing dynamics in the venture capital landscape, stating: “Three years ago, VCs were very secretive about their investments. Nowadays, we have open Telegram and WhatsApp channels where information is shared.”

Buhagiar emphasised that knowledge sharing is not inherently negative.

“Sharing knowledge actually helps us move forward. Let’s be honest about it, especially in the context of early-stage businesses, because we have all been burnt over the last few years,” he said.

However, Buhagiar also raised concerns about the long-term implications of all investors converging on the same product, with potential issues likely to arise in the future.