Tekkorp Capital founder Matt Davey on investing in iGaming: “We don’t go in with an exit strategy”
Matt Davey made a name for himself in gaming as the CEO of suppliers NYX Gaming Group and SG Digital and his presence is still felt across the industry.
Since stepping up his efforts with Tekkorp Capital in 2019, where he is founder and chairman, the investment vehicle has built up a stable of 20 portfolio companies. These include betting exchange BetConnect, horse racing technology supplier BetMakers and NFT collection Bored Ape Yacht Club.
iGN: How did Tekkorp Capital start and how has the team grown since then?
It was just an investment vehicle for me at first. I founded it as a family office effectively in 2005, and it was only once we sold NYX Gaming Group to Scientific Games in 2018 that I really started to put it to work with additional capital.
I then focused on Tekkorp Capital more in 2019, with a view to investing in the online sports betting and igaming space. We were agnostic as to whether we would invest in the US or outside of that, and we were also agnostic about where we would look for opportunities in the ecosystem, whether it was B2B or B2C, payments or any other ancillary service.
“The mistakes have been more through omission. I won’t name any names, but we are valuation sensitive, and in the last three years, a lot of assets have grown faster than we would have expected.”
We’ve invested in more than 20 companies so far, and as we were working through that process, several businesses we were speaking to wanted advice and help.
It really started to get traction when Robin Chhabra joined the group as CEO, and he’s effectively built the team around him. We’re now a team of nine people.
iGN: Is there a minimum amount a person needs to invest to join Tekkorp?
No, because most of it is funded by me. Anyone else who joins is then free to invest in the deals that we make together.
iGN: Can you talk me through the process before deciding to invest in a company?
We look for whether we like the market segment that business is in. Also, do we like the team? Is there something proprietary and defendable about that company itself, so it’s not just another generic offering?
I think the B2B licensing sector is a very difficult sector. We’ve been in it before, so we know the margins are low and the costs are high. We would need to see a really compelling reason as to why we should invest in that.
At the other end of the spectrum, content businesses are incredibly profitable, provided they have the right content.
iGN: Your total investments as of 2021 reached $200m. Where is that number now?
It all depends, because we’ve got capital on the side and capital in the businesses. Some are public and some are private. Valuations have gone up and down, but I think in 2023, most of our public investments are smaller than they were last year. We think that cycle will reverse itself across the next six months or so. The overall number put in is similar to $200m.
iGN: Is there a particular market cap range you look to buy into?
We get a lot of deal flow on the venture capital side of things, but we’re more focused on growth equity, and that is businesses worth anywhere between $100m to $1bn. That’s the type of EV where we think we can come in and add some value. When you go north of that, you’re really getting into some of the larger private equity businesses, and we don’t want to compete with them.
iGN: Looking back, what have been your main successes and mistakes with Tekkorp and what did you learn from those experiences?
The mistakes have been more through omission. I won’t name any names, but we are valuation sensitive, and in the last three years, a lot of assets have grown faster than we would have expected. In terms of successes, the best case was probably BetMakers, which I’m currently on the board of. We invested at $0.03 a share, and the stock is now as high as $1.50, so it’s a good example of how we can spot an opportunity.
iGN: Have you reached the exit point on any business you invested in and do you go into investments with an exit strategy in mind?
Last year, we either sold down or sold out of four businesses. We don’t go in with an exit strategy, because we’re comfortable holding in the short term, medium term and long term. It comes down to whether we feel good about management, whether we like where the business is at and whether it’s still growing.
iGN: To what extent does regulation play a part in your rationale for investments?We think there is an enormous opportunity in markets that are pre-regulated or at the early stages of regulation. We’ve cut our teeth in heavily-regulated markets like the US, so we know the process of going through that and we think there’s a lot of value there as well. When a market goes from unregulated to regulated, a couple of things happen.
“We were very slow as an industry to catch on to the social gaming model with brands like Playtika. We don’t want to make that mistake again.”
The first is that taxes go up, and if it’s an offshore market, it then becomes onshore. The second thing is that marketing and advertising increases, because you can get access to things like local sponsorships. If there is a change in the economics and we can support the right businesses going through that change, we think that can be very profitable.
iGN: NFT collection Bored Ape Yacht Club is an investment that stands out. What are the opportunities in the NFT space and how will you work around the volatilities in that market?
One of the lessons learned back in 2009/10 is that new models of gaming entertainment come around from time to time. We were very slow as an industry to catch on to the social gaming model with brands like Playtika, and we don’t want to make that mistake again. When it comes to things like NFTs and crypto, we want to learn, although I would say we’re not experts in that field.
Our investment in Bored Ape Yacht Club was just a toe in the water, but it’s an area we are open to. We want to learn and see if the consumer base is moving towards those modalities or if they’re going to stay in the web 2.0 environment.
iGN: Do you have a view on whether NFTs should be regulated?
I do. Regulators should be there to ensure two things. The first is to make sure you know your customer and to eliminate things like money laundering, and the second is to make sure there’s integrity behind the operator and the software that offers the particular games.
From the crypto side, it’s incredibly transparent. Every single transaction is on the blockchain, so it’s not like you can hide. When people talk about the transparency, it’s about knowing the consumer behind whatever that crypto address is, and that’s not hard to establish. I find the technology interesting, but I haven’t seen anything compelling enough to make me see why regulators should shift to embrace it. I think there is still some work to be done there.
iGN: As an investor, what trends are you seeing that could make companies more attractive in the coming years?
We’re looking heavily at the regulated tech space, so suppliers that are offering tools which allow operators to manage their compliance around player lists, prohibitor lists etc. We think that’s a big area and we think that is applicable to Europe as well as Australasia. We’re also looking at payment processing and affiliate businesses.
We’re not heavily focused on the operator space in the US, because that’s been incredibly competitive and it’s very difficult to stand out from the crowd, but when you turn to Latam, we think there is enormous opportunity over there in the operator space.
iGN: How challenging would it be for an investor to back an operator in markets which have already had a thriving grey market?
You would have to be very confident that that operator has a point of difference they can exploit to give themselves an advantage. It’s especially hard in sports betting; more so than igaming.
“I think there’s some further digestion needed in the market to get valuations to reconcile with what investors are prepared to pay.”
It’s very hard to shift against incumbents, particularly when they have greater than 30% or 40% market share. We find that’s very tricky, so we would be very cautious about investing in someone who believes they can come in and shift that market leadership.
iGN: What returns have you made on your investments so far?
We haven’t published anything, but we’ve had good double digit returns on an ROI basis.
iGN: What are your targets on returns?
We don’t have an overall target, but we look for a 2-3x return on our capital over a five-year period. We think that’s reasonable, but we’ll still aim to do better than that.
iGN: What are the big investment challenges over the next five years and where will Tekkorp end up at the end of that period?
I think the main challenge is valuation, because the market is now valuing cash flow and positive EBITDA above revenue growth. I think there’s some further digestion needed in the market to get valuations to reconcile with what investors are prepared to pay, versus what entrepreneurs and sponsors would like to get.
For Tekkorp, we would like to see ourselves as a strong private equity mid-market provider focused on the sports betting and igaming space. We don’t think there is a lot of competition, so we think that market is wide open for us.