Why gambling start ups fail

Why gambling start ups fail

This is a guest contribution by David McDowell, CEO of FSB Tech. If you would like to submit a contribution please contact Bill Beatty for submission details. Thank you.

Why gambling start ups failA lot has been written recently about how and why online gambling start-ups fail. The premise being that the gaming industry is somehow more difficult to crack than any other established, regulated and competitive industry. This I disagree with.

The bottom line is most start-ups fail, the accepted rule of thumb is 85% of start-ups will fail in the first two years. But to stay specific to the gaming industry I would suggest a few reasons as to why start-ups fail:

Access to capital

The vast majority of venture capital firms in Europe top up their investment funds with cash made available through the European Investment Bank through a scheme called the European Investment Fund. Unfortunately, the EIF stipulates that the funds cannot be used for financial services, which captures gambling operations. As such, there is a real shortage of VC firms that can even look at a gambling venture. On the brighter side, there are a small number of specialist firms that focus on the sector and are run by or take advice from industry veterans. The larger firms like Index and Balderton are generally free to invest into any sector. While there are fewer VC firms that can invest in the sector, those that are able to invest are generally well informed.

Yes, angel investors are scared to invest into gambling unless they know the sector. But this is true of most angel investors who wish to make intelligent decisions by focusing their investment capital on an industry they understand. If they don’t know the sector then they will often look to follow other smart money investors who do understand the space. I don’t think the gambling sector is different than any other, with a fairly small number of successful entrepreneurs actively investing into a sector they know well.

Perhaps the best news of all, at least in the UK, is the EIS and SEIS investment schemes and the Entrepreneur’s Relief. The EIS and SEIS schemes encourage angel investors to put their hand into their pocket by giving them huge tax breaks and downside protection. These schemes, as well as the Entrepreneur’s Relief, means that capital gains rates are slashed for both investor and entrepreneur. This is perhaps the most important thing that the UK government has done to facilitate driving capital into new business ventures.

The right B2C business model

Recent articles have focused on razor thin margins and high customer acquisition costs. Yes, these are certainly a factor in the gambling industry but they are also points that are known up front. These should have been worked into a business plan prior to launch, not discovered afterwards. Our industry is, actually, very simple: if your cost to acquire and retain a player is more than the revenue they generate then you are losing money. The margins and operational costs in any gaming business should be easy enough to understand, the real trick is to accurately model your customer acquisition metrics.

A B2C start-up should be looking to exploit some sort of unfair advantage that they can use to attract customers. Skybet are perhaps the best example of a company that learned how to use its media assets to attract and grow a customer base. As a B2C start-up, you have to ask yourself why you will be able to attract and retain customers for a lower cost than the competition. Of course, you should also ask yourself how your unique product or service will generate more cash from each customer.

Here are a few examples of B2C startups who are playing to their strengths (full disclosure, they are all using the FSB platform for their sportsbook and casino games):

21bet – it is a brand new gambling brand targeting the UK market. The team understand digital marketing and traffic generation. They have experience with affiliate networks, VIP customer management and they understand CRM. They have been operating for less than one year and have been very successful since launch.

Black Type – another new brand targeting the UK market. The management team are all traders and they understand how to use price changes and affiliate networks like OddsChecker to attract a customer. They have taken a lot of PR flack from naysayers about their policy against limiting winning customers. We supply the sports betting platform and the managed betting service, they focus on overriding specific prices so that individual selections will go best price on Oddschecker. They are operating to smaller margins but attracting higher stakes and carefully managing their liabilities. Critically, they are much more disciplined than the rest of the market by avoiding all of the free bets, price boosts and best odds guaranteed offers that are eroding the industry’s margins. Customers are responding to the transparency and honesty of a competitive price, in addition to leaving their winnings in the casino.

Bookee – another new brand targeting the UK market, Bookee are differentiating themselves by becoming the first Tinder-style betting app. These guys have also taken a lot of badmouthing from the LinkedIn crowd, with many uninformed commenters making assumptions about the cost base required to run a sportsbook. The founders of Bookee have a background in customer acquisition for casino sites and they are applying their specialist knowledge to sports betting. All of their effort is focused on the customer experience and learning from the data produced by their digital marketing efforts. They are extremely disciplined at running a promotion, digesting the feedback (clicks, downloads, deposits, customer value) and using this to improve the customer experience. They are focused on predictive analytics and working hard to push the right betting opportunity to the customer. FSB provide them with a regulated sports betting service, accessible through an API, so that they do not have to worry about running the book. They are targeting a completely different demographic with a differentiated product that drives high margin business from recreational punters.

All three of these companies are approaching the sports betting business with their own specialist knowledge of customer acquisition marketing. Rather than investing their (hard to raise) investment capital into building their own gaming platform and/or running the sports book, they are able to focus their capital on their own unique marketing plans. The same is true for our other licensees, including Genting (casino cross sell), Dafabet (sponsorship), Sportdec (social media), MyClubBetting (grass roots clubs), Toals (retail betting) and BetYetu (African payment gateways).

The B2C business is all about marketing effectiveness and these companies are all executing a different marketing strategy to drive customers into a fully managed sports betting and gaming service.

B2B businesses need to solve a problem for the dominant incumbents

I think that the bigger picture is that the larger bookmakers are burdened by legacy technology which is extremely inflexible. Platforms like Openbet were designed in the 1990s before in-play betting, before smart phones and for an unregulated “.com” global market. This inflexibility (coupled with Openbet’s time and materials billing model) makes it extremely expensive to integrate any new product, which is one of the most significant hurdles for any B2B start-up to overcome. As a bookmaker, why would you spend £50,000 up-front to integrate an unproven new product? If the B2B business is delivering some sort of new sports betting concept (such as daily fantasy games), the bookmaker will be concerned that any turnover could cannibalize their existing revenue. Anything they pay in revenue share to the start-up comes out of their existing profit, which is reasonable logic if you assume that a customer will have a fixed amount of cash they are willing to lose each month on sports.  The flip-side of the argument is that the new gambling content will increase the player acquisition, spend or retention metrics but it is practically impossible for a start-up to collect any reasonable data to prove this.

Sixteen years ago, I co-founded a company called GameAccount (now GAN) and we began by offering skill games like backgammon or gin rummy. We were on the forefront of delivering single-wallet integrations to the bookmakers along with the first casino and poker integrations. We quickly had our products plugged into UKBetting, PaddyPower, GalaCoral, William Hill, SportingBet and several others. It was the golden age of integrations, operators were integrating any and all new product verticals available. But then the recession hit (’08) and all of the larger operators pulled back on new integrations. The recession forced them (for the first time) to focus on retaining the customers they had already paid to acquire, rather than spending their (now) reduced marketing budgets on acquiring new customers. And to save costs, bookmakers actively started to reduce the number of suppliers they bought content from in an effort to achieve volume discounts and reduce management overhead. The business plan based on supplying a new B2B product vertical to the large operators has never recovered since the recession (if there is such a thing as a “new” product verticle).

For bookmakers, the recession was quickly followed by the explosion of in-play betting, which forced bookmakers to expand their manual trading teams, invest into algorithmic models and integrate feeds suppliers. The in-play betting experience required a website upgrade delivered through 3rd party supplied “flash” websites. This was followed by smart phones hitting the scene and forcing bookmakers to upgrade their mobile customer experience, generally by outsourcing to 3rd party app developers before taking the app development in-house. Today, we are in an era of bonuses, price boosts, best odds guarantees and customer analytics.

The point I am trying to make here is that a raft of B2B suppliers were born during this era of sports betting expansion because they were servicing a genuine need of the bookmakers. These new B2B suppliers are providing live data feeds, odds algorithms, user interface technologies, business intelligence systems, etc… all of these businesses were solving a material problem for their customers.

Bookmakers today are desperately trying to remain competitive (or even remain profitable) in the face of increasing operational costs (increased data costs, increased taxation, increased regulatory compliance), decreasing margins (free bets, price boosts and best odds guaranteed) and increased competition (Ray Winstone anyone?).  Ladbrokes Coral is trading at 125p against a pre-recession high of 450p and William Hill is trading at 300p against a pre-recession high of 650p. These operators have billion dollar problems and a new B2B fantasy product won’t even begin to change their fortunes.

Let’s look at the B2B start-ups that have been classified as successful to see if we can understand why an operator would use their services.

Fresh8 – It is my understanding that they got started by building technology that would scan a recipe on a web page and link it through to your supermarket shopping cart. Clever stuff, but maybe not a very lucrative market opportunity. They proved that if they could understand the content on a particular web page they could do a better job of targeting an advertisement. Surely a targeted advertisement with odds that relate to the content on the page must be better than a generic advertisement without odds. Better targeting will reduce the cost of acquisition for bookmakers, a pretty material issue for any gaming company today. If they can prove that their product can reduce customer acquisition costs then they are solving a material problem for the bookmakers and I would expect big things. (Sorry guys, it is an over simplified illustration of the Fresh8 products and I’m sure you are doing much more than this now).

Colossus – Anyone who knows Bernard will understand that he loves the mathematics behind large scale pools betting more than anyone else on the planet. Before you even look at the revenues his product can make for the bookmakers, his product provides a massive £10,000,000 jackpot. Stick that onto a banner ad and see who clicks. Large jackpots are great for acquiring customers when you are marketing. Even if you think his product is cannibalizing your revenues, it is great to be able to advertise a massive jackpot to acquire new customers. With his partial cash out option it can help recycle winnings back into the sportsbook and also increase revenues. A great advertising message combined with some incremental revenues is a really interesting proposition for any gaming business.

An Idea does not make a Business

I have seen a great number of start-ups founded on a single product idea. But a single product does not make a viable business plan. When I started GameAccount, my co-founder and I had that classic moment where we looked at each other and said “this is going to be huge” and jumped in with both feet. We did a ton of market research into the casual games market but we had no real understanding of the consumer or of the gambling industry. All of my complicated spreadsheets were pretty much worthless. Quite frankly, the skill-games business was not economic, we wasted a lot of capital and we would have closed our doors if it were not for investors with deep pockets. We pivoted the business and moved from skill-based games to focus on casino games and turned the business around.

When starting FSB, we made sure to do our research and focus on an area of the industry that we felt was solving a material problem – in-play sports betting technology (see my earlier post on The Industrial Revolution comes to sports betting). We started out pitching live fantasy football player ratings and betting opportunities on which player would be man of the match, but behind the scenes we were learning how to process real-time data assembling the building blocks of a modern sports betting platform. Our early fantasy products were not appealing to bookmakers (thus the B2B lessons above), but our longer-term strategy to focus on the B2B supply of modern sports betting technology is proving to be successful.

In a highly regulated and competitive industry like gambling, a B2C start-up has the burden of getting their new product designs exactly right, building a technology platform to operate the product at scale and getting the marketing exactly right. These are very different disciplines and you need to execute all of them perfectly to survive. It also means that you have to divide your management efforts and your capital investment into solving very different problems. In my opinion, most businesses would be better off trying to be great at one thing, either being excellent at the product/technology or being great at the marketing. In my opinion, a B2C start-up should find a strong technology partner to support their vision, and B2B start-up should spend more time making sure that their product is actually creating value for their customer.

Most businesses will fail, but without risk there is no reward. My heart is with the entrepreneurs out there who are trying new things and helping to shape the future of our industry. But my head is urging these entrepreneurs to understand the dynamics of the industry they are trying to break into before they get started rather than learning these expensive lessons the hard way.