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 1,891% through to 30 June 2023.
In collaboration with iGaming NEXT, the August edition of Waterhouse VC takes a deep dive into the battle between Twitch and Kick for streaming supremacy.
Twitching into gear
Streaming involves transmitting media content, whether it’s live or pre-recorded, through the internet for immediate playback on computers and mobile devices.
Streaming allows audiences to connect with content creators across gaming, art, music, sport and several other categories.
A viewer can engage directly with the streamer through chat functionality and can pay them if they enjoy the stream, effectively monetising streaming for the content creator.
The rise of pro gamers and dedicated fan bases has boosted user numbers on streaming platforms like Twitch, which Amazon bought in 2014 for $970m, just three years after its 2011 launch.
The opportunity in streaming is vast, with just a handful of platforms dominating the $3.8bn industry.
Audiences converge to take part in gameplay, tutorials, and social chat rooms, hosted by their favourite gamers.
Most platforms are free-of-charge for both streamers and their audiences. The platforms monetise their audiences through advertising and by taking a portion of premium subscription revenue and merchandise sales.
For example, there are three tiers for Twitch users who want to subscribe to a streamer: $4.99, $9.99 and $24.99 per month.
In the case of Twitch, subscription revenue was split 50/50 between the platform and the streamer until June 2023 when the split was adjusted to 70/30 in favour of the streamer (details here).
Twitch also has ‘Bits’, which is the platform’s internal currency used by viewers to support/tip the streamer.
Revenue generated through Bits is split between the streamer and the platform according to several factors, such as the streamer’s popularity and their location.
See more statistics about Twitch at this TwitchTracker.
There are several reasons why Twitch adjusted the subscription revenue split with streamers, one being that the vast majority of streamers believe that they are underpaid for their work.
A 2021 leak revealed that only 0.01% of streamers make more than minimum wage. Another reason for Twitch’s new revenue split is increasing competition from burgeoning new platforms.
Kicking streaming on its head
Kick was launched in January 2023 and is gaining significant momentum among both streamers and viewers.
The platform is offering extraordinarily lucrative terms to streamers with a 95/5 split in favour of the streamers and also allows the streamers to keep all tips.
One of Kick’s key differentiators from Twitch is the platform’s positive attitude towards gambling.
In September 2022, a Twitch streamer admitted that he had borrowed money from popular creators under false pretences to fund gambling.
This event, combined with an existing negative perception of gambling streaming, resulted in Twitch banning most gambling streaming (excluding sports betting and poker), effective as of 18 October 2022.
The company said: “We’ll be making a policy update on 18 October to prohibit streaming of gambling sites that include slots, roulette, or dice games that aren’t licensed either in the US or other jurisdictions that provide sufficient consumer protection.”
In contrast, Kick’s gambling content is among the most popular content on the platform, which has successfully attracted some of the most popular streamers away from Twitch.
For example, ‘Trainwreckstv’ switched to Kick.com when Stake was banned from Twitch and in June 2023, ‘xQc’ inked a $70 million two-year deal with Kick.
There is a huge global demand for viewing gambling streams and Kick caters to this demand. As we have seen with the gambling industry itself, when bans arise, consumers still often find a way to gamble and the industry remains resilient.
The concept of watching gambling as entertainment is a nascent industry segment, and as with any new industry, regulation develops swiftly.
Easygo Entertainment Pty Ltd (Easygo) is “the Australian powerhouse behind some of the world’s fastest growing online brands including Kick and Stake” (Easygo.io).
Kick’s registered legal entity is Kick Streaming Pty Ltd and its only shareholder is Easygo, which was established in 2016 by Ed Craven and Bijan Tehrani.
Consequently, we can be confident that Kick will not ban gambling streaming. We have discussed Stake and the extraordinary growth of crypto wagering in several previous newsletters, such as May 2023.
Kick continues to attract fresh streamers, with its alluring 95/5 revenue split supporting the platform’s growth from 9,000 active channels in January to 67,000 active channels in April.
Over the same period, the platform quadrupled its monthly number of hours viewed, from 12.8 million to 51.8 million (Streams Charts).
This annualises to 620 million hours, which is just 2.8% of Twitch’s size. However, with such strong growth and a positive attitude towards gambling streaming, Kick poses a formidable challenge to Twitch’s dominance.
As the first episode of Investor Vibe Check by BettingStartups.com is released, iGaming NEXT gives a rundown of five hot takes offered up by the podcast’s guests.
Starring in this episode were Acies Investments co-founding partner Chris Grove, Discerning Capital managing partner Davis Catlin, and SeventySix Capital managing partner Wayne Kimmel.
Below are the five key takeaways from this debut episode.
1. Reg tech in pole position for investment
One area of particular interest for all of the podcast’s guests is reg tech, as companies in this space help operators to manage regulatory compliance and responsible gambling.
“I think that reg tech is an area that continues to grow month-by-month to grow in importance, and I think that’s to do with the sustainability of the industry, and it’s also an attractive model,” explained Catlin, suggesting the growing importance of such solutions in an increasingly strict regulatory environment.
In addition to the fundamental importance of regulatory compliance in the gambling sector, reg tech has further advantages when it comes to securing capital, according to Grove.
“I think one of the reasons why there’s so much interest in reg tech and payments (and some people will bundle those together) is that there are big pockets of external capital that can get behind reg tech,” he suggested.
“It has enough similarities to the financial services sector, that there’s a shared language that allows your larger capital allocators to look at that part of the industry and say ‘that’s where I want to be’.
“Reg tech and payments are very attractive to a very powerful slice of non-endemic capital,” he concluded.
2. Rising interest rates hinder capital deployment
Interest rates have been headline news for several quarters now, with the impact of global rises hitting businesses where it hurts in their search for capital.
That reality brings with it significant challenges to start-ups seeking funding, as the increased cost of capital makes parting with cash more difficult for investors.
“There’s a couple of things that have changed as relates to private funding,” said Catlin on the matter. “And I’d say specifically, one is that interest rates are no longer zero.
“It’s easy to underwrite deals to a 10% return conceptually, when rates are zero. But now that interest rates are somewhere around 5-6%, that 10% deal looks a lot less attractive. So I think that does naturally kind of take people’s willingness to take risks down.”
3. US sports betting no longer the new kid on the block
Hot on the heels of the fifth anniversary of the repeal of PASPA, guests on the podcast were quick to remind listeners that US sports betting is no longer the exciting emerging market it once was.
It is also far more competitive, with multiple companies offering the same solutions.
“Anyone who is investing in this space is now seeing a lot more [businesses] than they would have seen if you were pitching the same thing in 2020, or 2021,” said Grove.
“Something that might have felt fresh or novel or unique or inspiring at that time, they’ve probably now seen that deck five, 10, if not 30 or 40 times.
“So realising that the foundational view of what’s new, what’s fresh, and what’s been heard before, and how founders present things as a result, is another layer of the ‘realism pass’ businesses should go through when seeking investment.”
Gone are the days of getting mega valuations simply by using industry buzzwords in a pitch deck, Grove’s fellow guests agreed.
“Leading the deck with ‘sports betting is broken, and we’re going to fix the whole thing with this start-up’ is probably no longer going to get you there,” he concluded.
4. US wagering market still has plenty of runway left
While the industry is no longer brand-new, it’s important to remember that it is far from being fully mature.
Podcast guests put that into context by discussing just how much growth the market has left, and the impact that will have on businesses within the sector.
“In the formation stage of an industry, everyone’s rushing. But now, I think we’re moving towards a world where things like efficiency, product, user experience, all of that matters a lot more,” commented Catlin.
“I think everyone on this call believes that sports betting and gambling generally will get much much bigger. And with that context, I think we need to get to a stage where the operators are thinking about returns on their investments.”
Indeed, operators across the US have shifted their focus to profitability after a hard-fought opening period saw them spend big in a bid to carve out market share.
To make that pivot successful, Catlin suggested: “I think you’ve either got to lower the customer acquisition costs, or deliver incremental value on the player lifetime value.
“I think that is the new phase that the industry is entering into. And I think if I was an entrepreneur, that’s the kind of macro view I would have of where there’s a lot of opportunity,” he concluded.
5. Pivot to retention is well underway
In order to turn a profit as outlined above, operators have shifted their focus away from costly customer acquisition and towards retention.
“A fundamental change has been a shift from customer acquisition as the primary focus to customer retention and reactivation, which is a fundamental paradigm shift in terms of who your important partners are, where dollars are going, where bandwidth is going,” said Grove.
“What results from that is more of a focus on product, because if I’m no longer looking to just acquire, but to inspire and develop some kind of loyalty, I do need to bring a better product to the table.”
Those developments in product may well lead to increasingly blurred lines between sports betting and iGaming, Grove added, as he expects “to see more and more sports betting games that look less like a traditional sportsbook rows and columns, and look more like casual games, mobile games and casino games.”
Such product differentiation is likely to be key in the retention of existing customers, and therefore the turn to profit for many US operators.
One recent example is Entain’s acquisition of Angstrom Sports, a sports pricing and analytics company expected to help the operator improve the sportsbook margin of its US-facing joint venture, BetMGM.
To do that Angstrom will, among other things, bolster BetMGM’s same-game parlay capabilities, allowing it to offer a broader range of high-margin betting markets to customers.
Other operators are likely on the lookout for similar acquisitions that could help them strengthen their own product offerings.
Hosted by industry veteran Jesse Learmonth, The Betting Startups Podcast is one of the most popular industry business podcasts, and the only one dedicated to its vibrant early-stage ecosystem. iGaming NEXT MD Pierre Lindh appeared on episode 60, which was first broadcast on 15 February 2023.
iGaming entrepreneurs have been advised to carefully manage their finances if they want their businesses to survive long term in the industry.
Speaking at iGaming NEXT Valletta 23, investors agreed we are not facing an economic crisis, but did concede that the time of frivolous spending is well and truly over.
A hot topic throughout 2023 has been the increasing cost of capital and how investors and venture capitalists want to see evidence of profitability before parting with their cash.
And this cautious approach is set to continue according to Kyprock managing partner Jonathan Pettemerides, despite the iGaming industry’s M&A machine whirring back to life over recent weeks.
“It’s difficult to raise capital if you haven’t got runs on the board and you can’t demonstrate that you are on the cusp of profitability at least,” said Pettemerides at investNEXT on 21 June.
“I think some of the earlier stage entrepreneurs will struggle because most VCs are being more selective.
“It is really up to the entrepreneurs to manage their balance sheets, to preserve a little bit of cash and to give themselves a bit more runway than they maybe would have done.
“The strong ones will survive, but I would expect a number of businesses to hit the wall,” he added.
The idea that these businesses hit the wall generally means that they are running out of money to fund their losses.
Some of those companies might get consolidated into other companies via acquisitions, while others could disappear completely.
In May, iGaming NEXT asked whether gambling start-ups would have a better shot at longevity by bootstrapping their businesses instead of relying on VC cash injections.
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 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, 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.
“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.
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.
“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.”
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.
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 1,849% through to 31 January 2023.
In collaboration with iGaming NEXT, the February edition of Waterhouse VC takes a deep dive into US barriers to entry and Flutter’s US listing prospects:
US regulation and taxation pushing away volume
On a recent trip to the US, we spoke with many US bettors who are incredibly frustrated with both the US online wagering experience and the US taxation system (regarding the treatment of winnings).
Due to KYC/AML requirements, it is very cumbersome to set up and fund an online betting account. We do not envision this changing any time soon. If anything, this initial barrier to entry is likely to become more challenging for consumers.
Furthermore, according to the IRS’ website, wagering winnings are fully taxable and a bettor must report winnings as income on their tax return. Gambling spans lotteries, raffles, horse races, online sports betting and iGaming, as well as land-based sports betting and casinos.
An operator is required to issue bettors with a ‘Form W-2G, Certain Gambling Winnings’ if they receive certain gambling winnings.
While gambling losses may be deducted from income for tax purposes, the losses are only deductible off gambling winnings. This taxation system means that every US gambler is effectively forced to track their betting wins and losses to avoid being taxed on winnings.
For example, if a bettor wins $1,000 and then loses $600, they must track this series of bets in order to only pay tax on the $400 of net winnings. If a bettor places 10 bets per week, an Excel with over 500 rows would likely be required to track the net result.
In addition, if more than $5,000 is won on a wager and the pay-out is at least 300x the amount wagered, the IRS requires the operator to withhold 24% of winnings for income taxes. Unique withholding rules apply to slot machines, keno, poker tournaments and bingo winnings.
These hurdles are pushing volume to unregulated operators, such as those operating in Costa Rica. There is not any specific online wagering legislation in Costa Rica so there are no barriers to establishing an operator in the country.
Unregulated wagering websites are restricted from marketing directly to residents in heavily regulated countries, such as the UK and Australia. We have heard stories of US bettors regularly placing US$50,000+ wagers through Costa Rican bookmakers.
According to Costa Rican law, the physical location of an online wagering operator’s server is not where gambling actually takes place. Consequently, it’s legal for Costa Rican operators to offer online wagering services from Costa Rica so long as they do not offer them to residents of the region.
Undoubtedly, the US will try to clamp down on Americans betting through unregulated operators in Costa Rica and other jurisdictions. However, this will be no easy feat for US regulators, who already have to deal with the circa 40 domestic US operators.
Regulated operators, such as Flutter-owned FanDuel, are able to develop strong brand awareness in the US through marketing channels unavailable to unregulated operators. FanDuel has market-leading brand awareness and user engagement.
The company’s third quarter results illustrated their market leadership, with 18% market share of gross gaming revenue for iGaming and 42% share of online sports betting.
Unregulated operators carry a significant investment risk as they could lose a large portion of their customer base at any moment, while it is also increasingly challenging to effectively market them.
Tax-paying regulated operators can help to form the general direction of regulation and lobby regulators. For example, we see many unregulated operators negotiating promotional/affiliate deals with celebrities (such as UFC fighters, rappers, ex-football players, etc.).
FanDuel and other US operators could lobby regulators and state governments to ban celebrities from accepting such deals. If this occurs, unregulated operators would lose a crucial customer acquisition channel.
Regulated operators like FanDuel are well-positioned to compete with unregulated operators because they have larger marketing budgets, decades of experience and many customer acquisition channels, among several other key advantages. One of these advantages is the relatively easy access to capital from public markets.
Fluttering with a US listing
We have discussed Flutter in several prior newsletters. It has been a core portfolio holding since September 2019.
Flutter has long been listed in the UK and is the 27th largest company by market capitalisation. The company’s logic behind a US dual listing is three-pronged:
The US is now the firm’s largest revenue contributor.
A US listing improves access to US capital pools and makes it easier to offer share incentives to American employees.
US equities have long been valued at a premium P/E ratio compared to other global equity markets. Flutter’s shareholders would benefit from this uplift in P/E ratio, while the company could take advantage of a premium valuation to raise further capital.
The table below shows the P/E ratios of the largest global markets, calculated using the benchmark equity index of each stock market.
As shown in the table, many global markets trade at a >20% discount to the US market, while the UK (most relevant to Flutter) trades at a 25% discount.
Over the last three years, as interest rates have risen globally, P/E ratios have compressed an average of 27%. In comparison, the P/E ratio of the US market has compressed just 15%.
Flutter is certainly making marketing waves in the US, with a $7m Super Bowl commercial offering $10m of free bets. A vote on the US listing would require a 75% approval rate at Flutter’s April annual meeting.
We view Flutter’s US listing aspirations as another example of their genuine commitment to remaining the market leader in US wagering. As at 20 February, Flutter is up +20% this calendar year to date.
Tom Waterhouse will be speaking at iGaming NEXT New York on March 7-9th about ‘Trends Driving M&A Activity in US Sports Betting + iGaming’. Register here.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
As legal sports betting cements its presence across North America, both new and established companies are battling to become the preferred home of the next-generation punter.
iGaming NEXT editor Conor Mulheir sat down with investor, adviser, and principal at Avenue H Capital, Benjie Cherniak, to see where he thinks the market is heading in 2023 and beyond.
Betting and iGaming: The next generation
While many operators rely on tried-and-tested methods to attract online sports bettors, Cherniak believes the time has come for the market to be shaken up by the new kids on the block.
Innovation in gambling is an area of significant interest for Cherniak and Avenue H, who can support new businesses by deploying capital or providing advice built on years of experience.
“The challenge is I’ve been around a long time, and I see the world the way that I see it,” insists Cherniak, adding: “The innovation isn’t going to come from guys like me.
“The innovation is going to come from a teenage kid, who’s probably sitting in his parents’ basement right now and who grew up in a different world than I grew up in, and who has a better sense of what that the next generation of consumers is looking for.”
“The challenge is I’ve been around a long time, and I see the world the way that I see it. The innovation isn’t going to come from guys like me.”
Examples of companies adopting a new approach include, for example, Betr. Founded by Simplebet co-founder Joey Levy, Betr is a microbetting operation which offers sports fans a simplified user experience. It has been referred to as the “TikTok-ification of sports betting” and is backed by online influencer Jake Paul.
Other innovators in the space include Australian start-up Dabble, a social-media inspired brand aiming to inject a more sociable element into online betting.
Then there are the companies such as Sporttrade, the sports betting-cum-trading platform modelled on financial trading markets, and Mojo, which also presents real-money sports betting in a manner more palatable to those familiar with stocks and trading tools.
“These companies collectively are all very different, but what they have in common is they’re offering users a real-money gaming experience that deviates from what the norm is today,” Cherniak said. “In doing so, by definition, they’re challenging the status quo.”
AI and new tech
Further disruptors in sports betting will doubtless be driven by the advent of new technologies.
Amid the hype of AI-driven products like ChatGPT, Cherniak believes artificial intelligence has reached the stage where it is ready to enter into the mainstream.
“I think 2023 is a turning point in which AI shifts from a buzzword to having real applications for sportsbook operators,” he said.
“Within that, if you look at an area such as personalisation, I think we’re at the point where a number of operators are going to be asking: ‘how can I differentiate my offering so as to maximise my relationship with my existing players, and to help bring in new audiences?’”
The companies that are able to help answer these questions will put themselves on a strong growth trajectory moving forward, he suggested.
Indeed, a Google search for “AI-based personalisation tools for gambling” returns no shortage of results, with businesses such as Graphyte, Vaix and Frosmo all promising to take the heavy lifting out of personalising the end user experience.
Personalisation, of course, is not the only area of application for AI in online gambling.
Sportradar, for example, already offers AI-driven technology services aimed at improving operators’ trading, risk management and marketing capabilities, while Kero Sports uses the tech to curate contextually relevant micro-markets for punters to bet on, based on in-game statistics.
Such technological advancements may serve as a unique selling point for operators in the fiercely competitive US market, Cherniak suggests, now that companies are beginning to shift their focus from aggressive market entry to profitability.
“The focus over the last number of years has been getting live at all costs in the various states that opened up,” he said.
“But that’s slowing down a little bit now because there aren’t as many states opening up in 2023. Now operators are thinking more about how they can offer their players a superior experience. And many operators are starting to realise there are emerging companies that can help them tap into new audiences via personalisation and differentiation.
“These third party products can help them not only retain customers, but also tap into new audiences.”
Investment expectations for 2023
For the founders bringing these products to market, the investment landscape of today may appear unwelcoming. Cherniak remains optimistic, however.
Although macroeconomic headwinds have created significant challenges for those seeking and deploying capital, the situation looks positive for this year and beyond, he insists.
“From an investment standpoint, it’s not as doom and gloom as people think it is, even if the markets struggle again this year,” he said.
“VCs raised a record amount of capital in 2021. They didn’t deploy much of it in 2022 because the world fell apart and VCs were conservative with their capital. Which means they’ve got some capital to deploy in 2023 into deals with sound unit economics.”
“I think there’s more money to go around in 2023 than people think. My best guess is that in 2023, the really hot start-ups and scale-ups are going to be super competitive.”
Indeed, investment slowed in 2022, and the usually-resilient gambling sector suffered just as much as others. New businesses found that cash wasn’t as easy to come by as it had been previously, and that they needed to jump through a lot more hoops to secure investment.
While those holding the money became increasingly reluctant to share it last year, savvy investments continue to garner their attention and companies with real upside potential will still be able to thrive, Cherniak said.
“I think there’s more money to go around in 2023 than people think. My best guess is that in 2023, the really hot start-ups and scale-ups are going to be super competitive, whereas all the other deals are going to create opportunities for investors to capture significant value on terms.
“As such, the majority of start-ups are going to have to be more flexible than they might want to be in the year ahead in order to secure their piece of the investment capital pie that is out there.”
Benjie Cherniak is currently an investor and adviser to emerging companies in the sports betting space. Previously, Benjie was Principal & MD at Don Best, the leading provider of in-play pricing services and sports information products relevant to the North American sports betting industry, acquired by Scientific Games in 2018.
Benjie will be speaking at iGaming NEXT New York City on 8 and 9 March 2023. See the latest conference agenda here.
Earlier this month I was in London for ICE 2023. As usual, it was packed to the hilt. The scale of the event is testament to the burgeoning gaming industry.
But given the broader macro-climate, was it all just smoke and mirrors? Or are we a real canary in the coal mine?
Halfway through Q1 of 2023, one would be forgiven for thinking that the macro-climate and the access to funding and capital looks ominous for everyone. The borrowing costs set by the US Federal Reserve are a good barometer for global trends across the investing sector.
In November, the US Fed increased the target range for the federal funds rate by 0.75% to 3.75%-4%. Across the world, the cost of capital has continued to rise rapidly to combat high inflation. This impacts the spending and investment decisions made by all households and businesses.
Over the last year, we have seen the SPAC market largely fizzle out, reducing the likelihood of large-scale M&A unless the acquiring business has significant cash on the balance sheet.
When opportunity presents itself
For VCs however, the outlook looks more optimistic — especially in the gaming space when viewed as a portal into web3. While outside money for regulated gaming ventures is becoming more difficult to source, some investors certainly have dry powder ready to deploy when the time is right.
What does that mean in practice? Firstly, all parties are waiting for valuations to come back down to more realistic levels. For more speculative or early-stage companies or those chasing growth markets like the US and Asia, there’s been a significant decline in fast-moving investors, and probably for the good.
Two years ago, most VCs were imbued with a severe fear of missing out. Today, they are looking for fewer, more targeted opportunities, with most re-trenching to what suits “their fit”. But this is no different to other industries, including software firms who are used to easier money.
Yolo Investments general partner Tim Heath: “This downturn is healthy in the sense that the fundamentals were being ignored for too long. I am optimistic that the strong will survive and thrive.”
However at Yolo we’re confident there is an opportunity gap in this sector at the Seed to Series A level, to provide active growth capital to ventures with a proven business model who would benefit from a long-term partner to provide ecosystem support.
We especially think that firms able to bundle their gaming and entertainment offer into broader web3 services, such as banking and education, have a greater chance of success in this market. Jambo, an African web3 and fintech firm in whose recent $30m Series A round we participated, is a great example.
The company will use the funding to hire the engineers needed to build a web3 super app that will enable Africans to trade crypto, buy and sell NFTs, experience play-to-earn crypto games, bank themselves and access educational web3 applications.
Companies like this, bringing real value to growth markets, will not just survive the crypto and VC winters — overhyped though these seasons are — but thrive into the long-term.
End of the road
On the healthy side, I think a lot of the products and companies that are genuinely overhyped have seen their day over the past year, and we’re not likely to see more of them.
Without naming names, these are companies that used to raise easy money only to go on to become the fiftieth entrant to saturated markets — probably only attaining 2–3% market share. Their kind won’t be seeing the light of day again for a long period of time.
The strong use cases on the other hand will only get stronger. Social gaming, for example, has an extraordinary ability to leverage the network effects of traditional social media (Facebook, Twitter, etc.), and will only get more competitive in 2023.
I fundamentally believe in the long-term value proposition of the gaming sector. Games provide a form of escapism, immediate gratification, engaging content, and can provide a crucial portal into life changing applications in education and payments.
This downturn is healthy in the sense that the fundamentals were being ignored for too long. I am optimistic that the strong will survive and thrive, and we will be a more successful industry for it.
In short, there is a wealth of talent out there building innovative products so it would be wrong to say they are all overhyped. Like life, sourcing funding is often a matter of luck and good timing.
Some products might be great solutions in their own right — but their true value won’t be appreciated by investors intent on developing ecosystems that don’t cater to their unique place in the market.
The message is — don’t give up. For those who can stay the course through 2023, great things might still come to those who wait. See you all at ICE 2024.
This post first appeared on Medium.com.
Tim Heath draws upon two decades of experience within the iGaming and emerging technologies sectors as GP of Yolo Investments. An early adopter of Bitcoin in 2013, he was founder and CEO of the Yolo Group (formerly the Coingaming Group) until 2020. The group operates leading crypto gaming brands Bitcasino and Sportsbet.io, with the latter securing high-profile sponsorships with Premier League clubs Arsenal and Southampton.
Venture capital firm Tekkorp Capital has appointed former William Hill US CFO Mark McMillan to its advisory team as a partner.
Tekkorp Capital was founded by gaming entrepreneur Matt Davey.
McMillan brings with him 20 years of experience in corporate finance and strategy, including extensive knowledge of the gaming industry.
He previously served as an analyst and senior associate in M&A advisory at HSBC and as the CFO of William Hill’s US business.
During his time as CFO, McMillan was instrumental in guiding the company through the repeal of PASPA and positioning it as a national leader in sports betting.
The business was subsequently sold to Caesars Entertainment in 2021.
McMillan joins an illustrious team of seasoned iGaming executives, including former managing director of William Hill Online, Crispin Nieboer; US media and gaming specialist, Andy Clerkson; and ex-CCO of SG Digital, Steve Schrier.
Commenting on his appointment, McMillan said: “I’m thrilled to be joining Tekkorp Capital. As part of a multi-faceted team, I will assist my fellow partners in delivering strategic and value-additive solutions for our clients at this exciting time for the iGaming sector.
“Tekkorp has expanded rapidly, and I am excited to be a part of its development,” he added.
Chhabra promoted to CEO
In addition to McMillan’s appointment, Robin Chhabra has been promoted from president to CEO of the group, with founder Davey set to become chairman.
Chhabra commented: “We’re delighted to have added another Tekkorp Capital partner as well-respected as Mark. Collectively, our team has led many business transformations, as well as executing a number of the most significant merger and acquisition transactions in the sector.
“Our combined history as hands-on operators represents our core strength and differentiator, allowing us to solve our clients’ critical strategic issues and help them create value.”
Davey, who became president and executive chairman of BetMakers last month, added: “Tekkorp Capital has grown rapidly over the last couple of years. Robin Chhabra has done an incredible job in not only building the team but also setting the standard for M&A across the industry.
“I couldn’t be more pleased to have Mark join our world-class team.”
Tekkorp Capital’s investment portfolio includes companies such as BetMakers, PlayUp, PlayVig, Voxbet, and Low6.
The firm has also built a strong reputation in M&A, having completed over $24bn in deals to date.
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 1,837% through to 31 December 2022.
In collaboration with iGaming NEXT, the January edition of Waterhouse VC takes a deep dive into crypto wagering:
In May, we discussed the significant opportunity in crypto wagering, which is currently growing gross gaming revenue (GGR) at 36.6% per annum according to iGaming solutions supplier SOFTSWISS.
Online crypto operators, such as Stake.com and Sportsbet.io, have a similar user experience to online fiat operators, and are already recording extraordinary turnover.
White label platform solutions for crypto operators are leveraged to the growth of crypto wagering as a whole, rather than being exposed to the operational and regulatory risk of a single crypto wagering business.
Existing wagering platforms
Many fiat operators rely on white label sportsbook and iGaming platform solutions, such as Kambi, OpenBet and SBTech.
However, our research concludes that many existing platform solutions have been built without all core internal needs across marketing, trading, operations, customer service and compliance.
Some do not have customisation and changes typically require further costly development. The customer profiling and risk configurations result in suboptimal customer experiences for highly profitable customers and deeper losses to negative value customers.
Some platforms are unable to keep up with customer demands or provide segmented customer experience. All of the above existing platforms were founded over 12 years ago and some continue to rely on legacy technology.
Technical debt compounds over time and is a key challenge for platforms, as well as technology companies more broadly.
Future of wagering platforms
There is a significant opportunity to develop a new breed of wagering platform that combines racing, sports and gaming with both crypto and fiat payment capabilities. Key core platform capabilities are summarised below.
We are seeing opportunities emerging to invest in the next generation of wagering platforms, leveraging new technology and embedding modern third party integrations.
These platforms will integrate crypto at the technology layer rather than as an afterthought. Considering the continued growth of crypto wagering globally, as well as all online wagering in the US, we are very excited by the possible opportunities.
A key element of our approach will be to identify management teams that have significant experience in the direct build and operation of successful platforms in competitive markets.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
The iGaming AI sector is heating up for investment as companies shift their focus to efficiency and profitability amid a tougher economic climate.
VC firms and iGaming companies are investing in AI start-ups at an increasing rate, and the recent buzz surrounding OpenAI’s ChatGPT, an artificial intelligence chatbot that uses cutting-edge generative AI, has boosted this interest further.
From writing code and composing essays to generating ideas and scripts, ChatGPT can perform a multitude of tasks that got many to exclaim in recent weeks that AI has finally arrived.
Robin Reed, CEO of iGaming accelerator HappyHour.io, was amazed by ChatGPT’s capabilities, calling it “pretty insane” after testing it out.
Nico Jansen, CEO and founder of Bet IT Best, also praised ChatGPT’s coding abilities as being of an “unprecedented quality” in a recent episode of iGaming NEXT’s Weekly News.
It therefore comes as no surprise that interest in, and funding for, AI start-ups is on the rise.
Generative AI companies, which use large language models, received $1.37bn in venture capital investment in 2022, according to PitchBook.
This is nearly as much as was invested in the previous five years combined, and stands out in a year where deal values generally declined in other categories.
Tim Heath, founder of Yolo Group and Yolo Investments, told iGaming NEXT that there has been a significant increase in Google searches for ChatGPT since its release, despite the fact the “underlying technology has been around for a long time.”
Heath cited two companies in Yolo’s portfolio as examples: Narrativa, a natural language generation platform that provides content automation to various industries, and proto.cx, which also uses a GPT engine within its customer support technology.
In a gaming context, Heath said, approximately 50% of customer support requests concern deposits or withdrawals, while 40% are related to when bets will be settled.
Heath believes there is significant potential to proactively communicate with customers and answer their questions before they ask them.
Looking ahead, Heath predicts we will see many start-ups using the ChatGPT rails to solve specific and niche problem areas, “which is always exciting for an investor looking to invest into early-stage companies solving customer problems”.
However, generative AI is not the only type of AI that is attracting the attention of the sector.
Lloyd Danzig, founder and managing partner of US sports betting VC fund Sharp Alpha Advisors, told iGaming NEXT that AI is especially adept at pattern recognition and prediction, which are crucial tasks for gaming companies.
Danzig pointed out that odds-making, risk management, fraud detection, responsible gaming, user experience (UX) personalisation, and bet recommendations all rely on the ability to detect patterns and make accurate predictions in real-time.
He also emphasised that machine learning, another subfield of AI, is already being widely used across tech stacks, and is only “increasing in its pervasiveness”.
Many gaming operators have in-house data science teams that build custom models and solutions, but there are also several B2B companies that offer model-as-a-service options.
“Future Anthem leverages AI to help operators optimise each user’s experience while reinforcing responsible gaming behaviours. Kero Sports uses AI to curate contextually-relevant micro markets based on game states,” Danzig said.
LeoVentures, the venture capital arm of LeoVegas, just made a seed investment of €250,000 in humbl.ai, a start-up developing a modular suite of tools that, besides automation, also uses machine learning and predictive models to support iGaming and e-commerce businesses in areas such as paid media, affiliation, SEO, and compliance.
Founder Alen Kojadinovic told iGaming NEXT that AI’s problem-solving capabilities can speed up analysing large amounts of data, making many business decisions cheaper.
“Our solutions will help companies to optimise their marketing spend, while on the compliance front, humbl.ai’s tools will allow operators help to predict and prevent compliance breaches,” he said.
The company plans to commercialise its product within the next quarter and sell it to other iGaming firms and digital verticals in the future.
“We’re incredibly grateful to be able to work with a top-tier operator,” Kojadinovic stated, noting the difficulty of raising capital in the current market.
“During the boom, virtually every start-up could secure funding at high valuations, with only unprofitable, or unsustainable, growth to show for it.
“But with rising interest rates, the situation has changed dramatically. Many VCs now want to see a plan for reaching break-even at minimum, and at Humbl.ai, that is certainly a goal we are striving for as well,” he added.
Kojadinovic agreed with statements made by VC firms to iGaming NEXT last year that the current macroeconomic climate is causing venture capitalists in the iGaming industry to exercise caution.
However, AI appears to be a popular investment opportunity as companies recognise the potential for enhanced operations and cost-savings through the implementation of the latest AI technologies.
The human impact on people and staff as a result of those savings is a conversation for another day, but the buzz surrounding ChatGPT and AI has almost certainly generated new start-up ideas for entrepreneurs in our industry.