The daily fantasy sports (DFS) industry has taken one hell of a beating these past seven months, with states from New York and Illinois to Nevada concluding that “betting” on virtual sports teams compiled from real pro and college athletes may not be a game of skill after all — it could be illegal gambling.
The two most prominent players in the saga have been Boston-based DraftKings — founded in 2011 and with $445 million in VC cash to its name so far — and FanDuel, which has raised north of $360 million in financing since its inception in 2009. The DFS industry in North America sits in something of an awkward position, with some states declaring it illegal gambling, some passing new legislation to accommodate it, and some still to make their minds up either way. And this surely can’t be good for business.
In FanDuel’s latest annual report, announced just this week, auditor Deloitte highlighted the “uncertainty” created by this situation:
It is possible that the number of states where the state attorney general may issue opinions against the group’s activities could expand and the group’s activities could be determined to be unlawful in those states and therefore prohibited from operating.
The potential for such an outcome represents a material uncertainty that casts significant doubt upon the group and the company’s ability to continue as a going concern.
Though it’s continuing to challenge the attorneys general preliminary decisions, FanDuel has already suspended operations in both Nevada and New York, which may not bode well for its bottom line. But FanDuel cofounder and CEO Nigel Eccles poured tepid water on such notions. “The loss of turnover in the states in which the group has suspended operations pending further legal clarity represents less than 20 percent of total turnover for the 18 months ended June 30, 2015,” he said.
FanDuel’s predicament helps highlight how much can change in a year. In July, the New York-headquartered company cemented its unicorn status when it raised $275 million from big names such as Google Capital and Time Warner. One week later, it made its first acquisition. Less than 12 weeks later, New York’s attorney general was knocking on its door after reports surfaced that a DraftKings employee had used inside knowledge to scoop $350,000 in a FanDuel fantasy football contest. The employee in question was soon cleared, but this event — in conjunction with an eye-popping amount of TV advertising that catapulted fantasy sports into the mainstream — opened the floodgates for scrutiny.
VentureBeat paid a visit to Eccles in his home city (hint: not New York) to learn more on where the company came from, where it’s at, and where things could go from here.
In the beginning …
Before its rise to daily fantasy sports supremacy, FanDuel was actually known as Hubdub, a news-prediction platform based in Edinburgh, Scotland, with about seven employees. Hubdub let users bet with virtual money on the outcome of key events — for example the presidential election. Though the company received VC investment in its former incarnation, Hubdub closed in 2010 to focus all its efforts on a separate product it had launched a year earlier — FanDuel.
“It was a classic pivot,” said Eccles. “2008 was an election year, and we thought it would be cool to build a prediction market where you could predict the outcome of running news stories. And the election was one of the biggest ones. Users loved it; we had a ton of engagement. But the fatal flaw was that there wasn’t really a business model. So even though we were getting the scale in users, we just couldn’t figure out how we would turn it into an interesting business.”
The company then went Stateside to South by Southwest (SXSW) in Austin, and it set about figuring out how to move the business forward. “We said we seem to know how to build games that people like to engage with, but we really want something with more of a robust business model,” added Eccles. “And we also wanted something that people were willing to pay for.”
Noting that sports was one of the most active categories on Hubdub at that point, and fantasy sports in general was a significant market, Eccles and co. scanned existing fantasy sports products and concluded it had room for improvement. For starters, they weren’t particularly mobile-friendly at a time when the smartphone and accompanying app ecosystems were starting to snowball.
“We thought we could make them a lot better, we could make it more mobile friendly, and we could make it faster — and that was the genesis to FanDuel,” said Eccles. “Even the very earliest version, in 2009, we designed it for mobile. And now, over 80 percent of our users are mobile.”
What Hubdub had were effectively two products — the main Hubdub prediction platform, and its new FanDuel offshoot. But with fresh investors on board, the team was nervous about pivoting so soon, so it continued with both products in parallel to avoid shocking its backers. “It was much easier to say, ‘let’s work on two things,’ but once we started coding the new product, I don’t think we ever touched Hubdub again,” said Eccles.
The world was in a state of financial uncertainty at that point, with many companies missing their numbers, but after explaining to their investors what it wanted to do, it received the greenlight to go all-in on FanDuel. “Eventually they just said, ‘We backed the team, there’s five of you, we always knew it was super-early stage so if the team wants to go in that direction, let’s see where you go,” he added.
Today, FanDuel counts 360 employees around the world. Eccles divides his time between its two biggest offices in Edinburgh, where engineers represent the majority of the 140-strong headcount; and New York, the company’s official headquarters and operational hub for 160 people. Orlando, Los Angeles, and Glasgow (Scotland) make up the remaining employees, covering roles such as marketing, customer support, and engineering.
Given that FanDuel is essentially split between two key hubs on either side of a large ocean, does this cause any operational headaches?
“The challenge hasn’t been so much operations, the challenge has been more inter-office communications,” said Eccles. “From the East Coast, there’s a 5-hour time difference, so you’re only starting on emails from New York at around lunch time, and for me, 10 p.m. is when my emails start to settle down. Sure, there are a lot of evening calls, and a lot of early morning calls from New York. That can be hard, getting everyone together in one room.”
FanDuel was actually close to moving to the San Francisco Bay Area at various points, the main attraction being the availability of capital. “When we went to the States pitching, we always seemed to end up on the West Coast,” said Eccles. “But we found that by the time we started to raise significant amounts of money, we had already built a very good engineering base in Edinburgh. So once we got to scale, we said Edinburgh should really be our engineering base rather than trying to move everything to the U.S.”
FanDuel’s main engineering hub is in Quartermile, a large office complex in central Edinburgh, shared with a number of companies — including another recent entrant to the U.K. unicorn brigade — Skyscanner.
The office ticks many of the boxes you’ve no doubt come to expect from a modern-day startup — it has the obligatory table tennis table, mini-basketball, a Space Invaders arcade machine, scooters, unlimited snacks, and a sports theme that permeates the space.
Though FanDuel is a big name in North America, the company is close to unknown in its native country — but that is about to change. Eccles confirmed to VentureBeat that it will launch in the U.K. this summer, its first market outside of North America, with a firm focus on the domestic and European soccer calendar.
This has been a long time coming and it leads us to one curious question: Why would a company that was founded and based out of Scotland in the U.K., build its business entirely on a market thousands of miles west across the Atlantic?
“Early on, we recognized the challenge of being in two markets — the U.S. there are 230 million sports fans, and something like 50 million fantasy sports players,” said Eccles. “We just thought that was a really big market, and every time we looked at international we said ‘do we go get another 100,000 or 1 million users in the U.S., who are very similar to the users we already have, or do we go into a different market where people behave quite differently’?”
In short, every time FanDuel looked at expanding outside of North America, it was pulled back in by the untapped potential of its vast existing market. But the company’s gargantuan funding round last July was the seed that would lead to the company tackling more markets, kicking off with its home nation.
So will this lead to a massive global rollout?
“It was only really last year that we felt we were adequately funded to manage both markets [North America and U.K.], so we’ll launch in the U.K. to see how it performs with the [English] Premier League and [European] Champions League,” said Eccles. “Then we’ll maybe look at the next market.”
It’s worth noting that the U.K. launch will be completely separate to the U.S. and Canada — those in North America won’t be able to participate in soccer fantasy sports competitions, and likewise for those in Britain with NFL and college football, baseball, basketball, and ice hockey. “We could’ve taken a very simple approach and taken our U.S. product, a very mature product with eight years of development, and just flip it onto the U.K. and run it in U.S. dollars,” said Eccles. “But the consumer feedback was very clear — they didn’t want a U.S. product. They really wanted a product in their currency, in their language, and which was clearly native to the U.K.”
So rather than embarking on a three month project of porting the North American version to the U.K., FanDuel opted for a year-long effort tailored and localized for its target audience. The company’s strategy for its U.K. launch is also notable in that it will focus entirely on the single biggest sport in the country, though Eccles conceded there could be scope for expanding into others, such as rugby, golf, or cricket further down the line. “If we do go multisport, I still suspect that football [soccer] will be 80 percent,” he said.
The obvious question here is whether the international expansion is in any way connected to the legal wrangles the company’s facing in the U.S. According to Eccles, it isn’t. “No no, we started the process last summer, it was absolutely going to happen anyway,” he said. “We have a challenge in the U.S., but we feel pretty good about the direction there. But international is the next step in the development of the company.”
The big issue is, of course, FanDuel’s legal and legislative predicament in the States.
“I think what we’re seeing in the U.S. is that it’s moving from a nonregulated to a regulated market on a state-by-state basis,” said Eccles. “Starting this year there was only two states that had specific fantasy sports legislation, and that was Kansas and Maryland, but in the last four months we’ve seen another five states pass legislation. We’ve seen bills in maybe another 20 states. Our view, and the common view, is that fantasy sports has been around for fifty years, it’s clearly legal under federal and state law, but it’s now becoming a very big industry. So there’s legitimate consumer protection concerns.”
According to Eccles, the real underlying concern among lawmakers is player protection — whether player funds are being kept separate from operational funds and, ultimately, whether the games are being kept fair. The long-term impact of this legislative shift on companies such as FanDuel and DraftKings isn’t yet clear, but Eccles remains optimistic and says they are already doing much of what is being proposed.
“Some states will be making more taxes, some won’t be, but I think there will obviously be more of a regulatory compliance burden on us,” he said. “To be honest, a lot of these things we were already doing — separating player funds from operational funds is something we’ve done forever. Protection of players, keeping the games fair, things like that. But there are nuances in some laws, for example in Massachusetts they’re saying legal age to play is 21, while in others states like Virginia they say it’s 18.
“It’s going in the right direction; there are five states that have passed legislation this year. I can’t tell you if by the end of the year that will be 10 or 12 or 15 or more. I can’t tell you what it’ll be like next year, but you can see the direction of travel.”
FanDuel’s expansion plans extend beyond that of new market launches. In September, the company acquired esports startup AlphaDraft, news that emerged one day after DraftKings announced it was expanding into esports. The esports market is big business, expected to grow to $1.1 billion by 2019, and this hasn’t gone ignored by the big dogs of the tech world. Amazon acquired Twitch back in 2014, and Google is embracing the trend, too, with YouTube seeing 144 billion minutes of game videos each month. Even Yahoo has joined the esports frenzy.
It’s reported that esports will drive $325 million in sponsorship and advertising spending from brands in 2016 alone, and this is evidently one of the reasons why FanDuel is exploring this industry, especially when it’s so closely aligned with its current offering. “Esports is a hugely interesting category in its own right, it’s a game of skill itself, and AlphaDraft was a really nice way to tap into that,” said Eccles.
But this doesn’t mean esports will be shoehorned in alongside its usual daily fantasy sports offering — the plan is to keep them as separate brands and products. “It made sense to acquire and have a different platform,” added Eccles. “I think esports is continuing to evolve, so we’re keeping really close to that.”
Looking to the future, FanDuel faces some challenges for sure, but by expanding into new markets and categories, and working with legislators in its existing markets, it’s pushing hard to ensure it stands the test of time. The company is an unusual beast in many ways — not many Scottish startups receive VC funding, pivot a matter of months later, and go on to become a billion-dollar “unicorn” in the U.S.
So what is FanDuel? Is it a European, British, Scottish, or American startup?
“I don’t think of ourselves like that,” said Eccles. “I try to think about the common values that we share across the U.S. and U.K., the values of openness, collaboration, entrepreneurialism, risk-seeking … these are all things we aspire to.”