Investor relations: Who keeps on betting on betting?

Launching a start-up in the online gambling industry is not easy. Enthusiastic entrepreneurs keep churning out products, and while some of them are inventive, some of them are not. Betting innovation is perceived to be lacking, especially at corporate level where the steps to success are well-trodden and inspire a copycat mentality at the top of the market. At the start-up stage, however, creativity is key and EGR Intel regularly covers product launches of emerging companies looking to procure their slice of the egaming pie.

One recently-launched start-up sparked more debate than usual in betting circles. Wager, the brand-new Flutter-style friend-to-friend betting platform built by two former Oxford University students, is set to go live before the new football season. Wager will handle the technical aspects of a social wager between friends. The pricing will come from Sportradar via the provider’s Acceleradar programme, which offers free data to betting start-ups for the first year.

According to co-founder Elliot Robinson, the app aims to tap into the growing social trends of betting, following the success of Sky’s Super 6 and products like Sky Bet’s Group Bets. “We did hundreds of hours of customer research and a ton of bettors know they aren’t going to win long term, so for them, this is about bragging rights and the truth of being right,” says Robinson.

But is social betting really a growing industry trend? Has the concept ever truly worked? The track record of social betting clearly isn’t great, which is perhaps why the launch of Wager got some commentators hot under the collar when it was reported by EGR Intel.

“HOW DO PEOPLE KEEP GETTING FUNDING FOR THE SAME TERRIBLE IDEA OVER AND OVER AGAIN,” tweeted Eilers & Krejcik Gaming consultant Alun Bowden. In Wager’s case, securing funding was remarkably straightforward. Robinson, alongside co-founder Leo Barnes, built a prototype of the platform using offshore developers and their own savings. The duo used virtual coins to test the mechanics and offered a trial to 100 users, which was well-received by all accounts.

The pair needed financial backing to build the product for real and to obtain a gambling licence from the UK Gambling Commission. Their call was answered by London-based VC firm Forward Partners, which stumped up a £500k investment in November 2018. This included a team of product experts, developers and designers and the opportunity to work in their office for the first 12 months.

“Forward Partners was one of the first VCs we met in person and pitched to,” says Robinson, who presented a financial model as part of a pitch deck and a 40-page business plan. “It seemed like a case of right place, right time and they really liked the concept. They absolutely loved the test-and-learn approach we had taken and appreciated the fact we had an idea and had tested the mechanics,” he added.

An unlikely story

It is important to point out that the Wager investment story is the exception rather than the rule. Securing half a million in funding at such an early stage, from a VC firm that has never previously invested in gambling, is relatively unheard of, according to the founder of Gambling Startup Ventures (GSV), Jonny Robb.

“I would say that their story is very unusual,” says Robb. “They are the unicorn, in that they have a product which is similar to four or five that went before it with a similar model that were never a success. They got invested in by Forward Partners, which has never invested in gambling before but stumped up half a million quid – none of the other start-ups in our network have experienced that,” he adds.

Wager, one of 15 start-ups in the GSV network, is the only betting brand on the books at Forward Partners. “What attracted them to investing in us was the prospect of a business that would disrupt the status quo of the industry and offer a responsible product,” says Robinson. “We are not a bookmaker and we don’t use any of the similar behaviours that attract the negative headlines. That is not our brand.”

The Coingaming Group CEO Tim Heath founded VC firm Vereeni Investments in 2017

What makes Wager’s investment success even more unusual is the fact betting start-ups begin with the disadvantage of being associated with gambling. Many investment firms steer clear of the sector in favour of fintech because they are put off by negative headlines or unwilling to take the risk in a sector at the mercy of ever-changing regulations. In May 2019, Norway’s €70bn public pension fund, KLP, announced it would no longer invest in gambling after pulling its money out of operators including William Hill and Gaming Innovation Group (GiG). Gambling was thrown onto KLP’s investment scrapheap, alongside alcohol, tobacco and pornography.

Robb says: “I’m making this number up but, at a guess, I’d say that 95% of funds are not interested [in gambling]. This is either because they see it as a vice, or because they see it as an esoteric industry which is difficult to understand.”

Shaking off a bad image

This view is echoed by angel investor Chris Ash who is one of the UK’s best-known egaming entrepreneurs, having built casino games provider Ash Gaming. He later sold the business to Playtech for £23m in 2011. During his time at Playtech, Ash ran the content aggregation business alongside 25 partner studios and assisted with the supplier’s M&A strategy. He has since invested in several egaming start-ups, including jackpot-focused CRM platform BlueRibbon, but believes some VCs now avoid gambling like the plague.

“There is a fair bit of truth in that,” says Ash. “These days, any significant investor in betting needs to understand that they are going to be subject to regulatory scrutiny. That is something that people inside the industry are aware of but it likely puts off external investors. Right now, it is even harder because of the bad press the industry has received,” he adds.

There are those, however, including RB Capital co-founder Julian Buhagiar, who believe that investment firms are slowly coming around to the possibility of investing in gambling again due to the clear opportunities in emerging markets like the US.
“I think now there is an acceptance that gambling is moving into the US and they think that early movers will get assets on the cheap,” he says. “Some VCs are also beginning to move their risk profiles – before they weren’t interested in anything remotely risky but now they want to mix their portfolios up a bit.”

This reluctance to invest in gaming does mean a niche has been carved out for a handful of gambling-specific investment firms. In the UK, one of the most prolific is London-based Velo Partners, founded by industry veteran Evan Hoff. The firm has backed successful betting start-ups, including Kwiff and Lottomart, as well as investing in more established operators like Gaming Realms and Hippodrome Casino.

“I think now there is an acceptance that gambling is moving into the US and they think that early movers will get assets on the cheap” – Julian Buhagiar, RB Capital

Outside of the UK, there is the Malta-based Optimizer Invest, which promises to “make good businesses great” across egaming, fintech and lead generation. Founded in 2012 by Henrik Persson Ekdahl, Mikael Riese Harstad and André LavoldIts, its investment is largely responsible for the scale and success of industry giants including Catena Media and GiG.

Also in Malta is Vereeni Investments, a VC firm founded by The Coingaming Group CEO Tim Heath back in 2017. Level Up is Vereeni’s €100m tech fund focused exclusively on early stage investment opportunities across gaming. Beneficiaries so far include Global Gaming, Kalamba Games and Australian DFS platform Moneyball. These are just three examples of VC funds that are willing to back start-ups in online gambling, but just how likely are they to part with their money?

“This is the million-dollar question,” says Buhagiar, who is an advisor to Vereeni Investments. “I would warn start-ups to expect at least nine out of 10 rejections. The ratio on the VC side is to expect to accept one in at least every 10,” he adds.

At Optimizer Invest, those odds tumble dramatically, according to CEO Petter Moldenius. “If you filter it down to just egaming, an estimate would be that we get one pitch per day,” he says. His email inbox is inundated with pitches every day, as he faces a bombardment of ideas from social channels including Facebook and LinkedIn.

Moldenius says the pitches he receives vary in terms of size and maturity – one week it could be a teenager waxing lyrical about his latest brainwave, while the next it could be a global operator gearing up to do an IPO, desperate to get on the stock exchange. Optimizer Invest runs the rule over more than 300 egaming pitches a year. So how many do they actually invest in? “One or two,” Moldenius tells EGR. “Despite the huge spectrum, that is the level we are talking about because it has to be the right fit for us.”

A 90% rejection rate must be demoralising for start-up founders. “When you speak to investors as a start-up, the one thing they say is that you need a thick skin,” says Robb, who, along with co-founder Nilesh Mistry, struggled to get social betting start-up Bet Blocks off the ground before finding success in the industry with UX design consultancy, Bettor Faster. “Not everybody is going to agree that what you’re doing is great,” he adds.

Learn to let go

For firms like Wager, lucky enough to get an early-stage investment, there is still plenty to consider. Nothing comes free in the world of business, and those familiar with BBC show Dragons Den will recognise that a percentage of the business must be sacrificed in exchange for that potentially life-changing cash boost. “The biggest risk with taking investment is the amount of time you must devote to working with investors and ensuring you are creating a return,” says Robb. “They will have seats on the board and strong views about the direction of the product, so you lose that sense of autonomy, even though there is an increased chance your product will be successful,” he adds.

Optimizer Invest and Vereeni Investments both aim for a 30% stake and prefer a hands-on approach when investing, but these are firms with a proven track record in egaming and both boast an extensive network of leverageable contacts and assets. According to RB Capital’s Buhagiar, bigger VC funds would go a different way. “A mid-stage VC with a £200m fund would assign you an account manager, but the most important thing would be that you submit a report every month. The more mature funds would say, ‘we know our business, you know yours, just give us the KPIs and we will continue to monitor the situation’.”

While egaming entrepreneurs might understandably be tentative about giving up a significant chunk of their business to investors, conceding some equity should not necessarily be viewed as a negative. VCs argue sharing the load eases early pressure on start-ups, many of which often struggle with the demands of building and running a business, and constantly seeking investment.

Buhagiar warns: “If you do that, you will destroy yourselves. You can’t be the person raising capital and also the one running the business because you will end up doing one of them very badly. You must recognise that you are not the best person at doing everything. You can easily dedicate your life to these things, and you start wishing there were 28 hours in a day.” He adds: “Focus on your strengths and on growing the business instead of raising capital, then appoint a team you can trust.”

What Buhagiar is talking about is essentially the Vereeni Investments VC model. Founder Heath is himself a shrewd entrepreneur, having created a vast network of egaming assets, adding mobile games developer OneTouch and integration platform hub88 to his portfolio in recent years. Empathising with start-up founders, Heath says: “When I’m starting a business, I don’t want to sit there doing the legal and the contracts and the accounting and the bookkeeping and the VAT registration and all that crap.” He adds: “I want to build a product because that is what I’m best at. If we can help a company out by taking care of all that boring, back-office business, they are free to focus on building the best possible product while we take care of the rest.”

Socially acceptable

Robinson insists the social betting element of Wager played a significant part in persuading Forward Partners to invest £500k. He acknowledges the industry adopts a pessimistic view of the concept but, on this occasion, he is convinced that worked to their advantage. “We are an exchange model which is scalable and they loved the simplicity of the product,” Robinson told EGR. When asked whether Forward Partners was aware of social betting products that have failed to make the grade in the past, Robinson replied: “They were absolutely aware of that. It is their job to do the due diligence and investigate the industry. Of course, they acknowledged the risk – they are venture capitalists at the end of the day.”

Heath says he would “not put a penny towards” social betting. Ash and Moldenius like the concept but remain reluctant to invest until somebody truly makes a success of it. Perhaps the lesson here is that the product is not the most crucial factor to consider when deciding to invest in a start-up.

The investors quoted in this piece unanimously agreed that the people behind the product are just as important. Ash maintains that 90% of his decision to invest in a company will depend on the attitude and capabilities of the founders – his former Playtech colleagues, Amir Askarov and Dan Fischer, are behind the BlueRibbon platform he is backing. “Lots of people start businesses that turn out in a very different way to how they imagined,” he says. “A good team will work on an idea and turn it into something good – a bad team won’t.”

Moldenius tells EGR that “the team is key in every way”, while Buhagiar adds: “If you say that you are going to take over the world, it is really your vision that we are investing in, and not necessarily your business. A common phrase in VCs is that they invest in people – not in entities,” he adds.

For start-ups, there is no guaranteed way to attract investment. The 15 start-ups in the GSV network will all have a different story to tell. Wager hit the half million jackpot straight away, while cash-out app Prophet joked about having to persuade almost 250 investors to invest a combined £100,000.

Robb believes success comes down to finding the right balance, not only between the product and the people, but also between time and money. “For a start-up to be successful, you need money and time, but earning enough money to be self-sufficient takes up all that time. The two are at odds with each other.” He concludes: “You have to strike a balance by generating enough revenue to keep the project moving, and that is extremely difficult.”