US sports betting exchange start-up Novig has concluded a seed funding round, raising a total of $6.4m from a consortium of high-profile tech investors.
This milestone comes just before Novig’s anticipated launch in Colorado in October.
The funding initiative was spearheaded by Lux Capital, a New York-based venture capital firm.
Notably, the funding pool attracted participation from around 30 investors, including computer scientist Paul Graham, investor and Hall of Fame NFL quarterback Joe Montana, and Dropbox co-founder Arash Ferdowsi.
The list also includes prominent VC fund Y Combinator, Soma Capital, Innospark Ventures, Rebel Fund, Bayhouse Capital, Archon Capital, Palm Drive Capital, TRAC, True Culture Fund, CapitalX, and numerous others.
Revenue sources
Novig is a peer-to-peer exchange that offers users the ability to place bets directly against their friends or the market, distinguishing itself from traditional set-ups where bets are placed against the house.
Rather than charging retail users, Novig generates revenue from three main sources: institutional traders, data monetisation and internal market making.
Novig CEO Jacob Fortinsky (pictured left) and CTO Kelechi Ukah, are recent Harvard graduates with previous experience at Jane Street and Bank of America, as well as in machine learning and politics.
“We’re honoured to have the support of so many of the world’s leading tech investors, who believe in our mission to democratise sports betting for good,” Fortinsky stated.
“Our vision is clear: to reshape the sports betting landscape that has long favoured exploitation over innovation, and to usher in an era of integrity, transparency and empowerment.
“Together, we’re rewriting the rules and putting the power back in the hands of bettors,” he added.
“Our vision is clear: to reshape the sports betting landscape that has long favoured exploitation over innovation, and to usher in an era of integrity, transparency and empowerment.”
He added that each year $300bn is wagered on sports in the US. “All of which is bet against retail sportsbooks, which have egregious 7-10% margins, discriminatory and inefficient practices, and a stale betting experience. No matter how good of a sports bettor you are, the house always wins,” he said.
Beta test
In preparation of its launch, Novig conducted a beta test involving 200 users who engaged in a two-week pre-launch trading tournament.
This effort resulted in 15,500 orders across 1,290 markets.
Novig’s platform offers instantaneous confirmation of live bets, and the firm claims that its matching engine is 100 times faster than those employed by industry frontrunners.
“We’ve been overwhelmed by the positive reception of our product from Novig’s first users and are excited to bring our product to regulated markets beginning this fall in Colorado,” said Fortinsky.
Last year, Novig secured a spot in the accelerator portfolio of Silicon Valley’s Y Combinator.
The accelerator invests $500,000 per company biannually in multiple start-ups.
The start-ups then relocate to Silicon Valley for a three-month period, during which mentors collaborate closely with each enterprise to refine their processes and enhance their investor pitches.
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.
US sports betting exchange start-up Novig has secured a place in the accelerator portfolio of Silicon Valley’s Y Combinator, a fund that gave rise to the likes of Airbnb, Stripe, Dropbox and Coinbase.
Novig is in the process of building a commission-free, high-frequency sports betting exchange that allows users to wager directly against friends or the market, rather than against the house – hence the name Novig. In the US, vig, or vigorish, is the amount charged by the sportsbook for taking a bet.
The peer-to-peer platform aims to launch in 2023. The backing of Y Combinator marks a significant milestone in the company’s ambition to disrupt the US sports betting industry, the company said in a statement.
Betting exchanges traditionally have low overheads because they don’t need expansive trading departments. They charge a small commission on each bet, which is usually less than the 5-10% charged by traditional sportsbooks.
Flutter Entertainment-owned Betfair is the European market leader of exchange betting, while US-focused start-ups like Prophet and Sporttrade are hoping to launch exchange betting products in New Jersey this year.
Cultivating enough liquidity is the central operational issue of any betting exchange. This is particularly true in the US, where bettors can only match or lay other bettors within the same state lines due to the state-by-state regulatory model.
Novig CEO Jacob Fortinsky: “Our platform will revolutionise the sports betting industry and experience as we know it, and it is great to have YC’s support in realising that vision.”
Y Combinator is a start-up fund based in California. Twice a year, they invest $500,000 per company in a number of start-ups.
The start-ups then move to Silicon Valley for three months, where mentors work closely with each company to improve processes and refine their pitch to investors.
Each programme culminates in Demo Day, when the start-ups present their companies to a carefully selected audience of investors. Since 2005, Y Combinator has invested in more than 3,000 companies, that are now worth over $400bn combined.
Novig was co-founded by CEO Jacob Fortinsky and CTO Kelechi Ukah (pictured). The duo are recent Harvard University graduates who are experienced in quantitative trading, financial technology, and sports betting markets.
Commenting on the Y Combinator investment, Fortinsky said: “We’re thrilled to be joining this incredible community of founders, and we’d particularly like to thank our group partners Dalton Caldwell, Diana Hu, Nicolas Dessaigne, and Richard Aberman.
“Our platform will revolutionise the sports betting industry and experience as we know it, and it’s great to have YC’s support in realising that vision,” he added.
Investor interest in the rapidly evolving US sports betting market remains high, particularly among niche start-ups that claim to solve a pain point.
Even though the public markets are struggling significantly, US sports betting start-ups are still able to attract investment from venture capitalists and seed funds.
Earlier this month, fan engagement business Tally Technology closed an oversubscribed $4m Series Seed funding round led by Acies Investments.