Jason Robins: DraftKings can become a $100bn company

“A crazy year” is how DraftKings CEO and co-founder Jason Robins succinctly characterises what turned out to be an unprecedented and, at times, tumultuous 2020. “It was this strange juxtaposition of really great moments and really challenging moments for the company,” he tells EGR Intel via Zoom rather than a face-to-face conversation at the firm’s 105,000 sq ft headquarters in Boston’s Back Bay due to coronavirus. “For society in general, it’s been tough watching people get sick and die. There are [DraftKings] employees who have relatives that have passed away from Covid and, on top of that, you have people cramped up at home, feeling like they don’t have social connections and having to deal with kids being schooled on Zoom,” he added. Robins, who has three young children himself, says remote working, coupled with the prolonged shutdown of most global sport in the spring and part of the summer, underlined the company’s resilience. Like its peers, DraftKings was forced to rely on slim pickings such as table tennis from Eastern Europe, Korean baseball and esports to fill the sports betting void. “It required us to really be nimble and to be able to deal with whatever curveballs are thrown our way. I’m really proud of the team because they were so resilient and continued to deliver at a high level throughout every challenge. It really speaks to the quality and the character of the people that we have,” he insists.

Moreover, all this came during the most significant moment in the firm’s eight-year journey: the three-way merger with special purpose acquisition company (SPAC) Diamond Eagle Acquisition Corp. (DEAC) and gambling supplier SBTech. The $3.3bn combination, first announced the day before Christmas Eve in 2019, would create what was touted as the only vertically integrated pure-play US sports betting and gaming company, while DEAC, which listed on the Nasdaq in 2019 at $10 a share, would transition into DraftKings Inc. under the ticker symbol DKNG. Then, of course, coronavirus struck. “All of a sudden, sports got canceled, there’s a huge sell-off in the market and our stock went down to like 10 [dollars] something,” Robins recalls. “We were all looking at each other and saying, ‘We were literally a month-and-a-half away from closing and now that’s in real jeopardy’. Thankfully, over the next 30 to 45 days, it recovered and when we closed it was back in the $17 to $18 range, so we felt good and we felt comfortable… but that’s another example of a really crazy moment where everything, at least for a few days, was imploding around us.” After its first day of trading, on April 24, DKNG was up 10% at $19.35, giving the combined business a valuation in excess of $6bn. Since then, the stock is up 177% at the time of writing to $54, giving the business a market cap of $21bn, although it is down from the all-time high of $64 in October. Driven partly by a fear of missing out, or FOMO, on the US online betting goldrush, together with trading apps like Robinhood targeting millennial retail investors, most gambling stocks have rocketed in value after tumbling in the spring, mirroring the tech stocks bull run. The frothiness of the market was perhaps best illustrated when Draft-Kings unveiled NBA legend Michael Jordan as a special advisor to the board and revealed that he would take an undisclosed equity stake in the business. This news in September triggered an immediate 12% jump in DraftKings shares, adding $3.5bn to the market cap. That was more than the entire William Hill business was worth prior to the Caesars takeover. It is also interesting to note that since DraftKings went down the non-conventional path of using a so-called blank-check company to float as opposed to a traditional IPO process, rivals Rush Street Interactive and Golden Nugget Online Gaming have both gone public via SPACs. In fact, SPACs raised a record $82.1bn in 2020 across a wide spectrum of sectors – a six-fold increase on 2019. Suddenly this option for going public was in vogue. “Very unintentionally, I think we helped spark an explosion of the SPAC market,” Robins remarks. Nevertheless, eyebrows were raised when the deal was announced. “People have this weird perception of SPACs that only bad companies that couldn’t go public the normal way would do them,” the CEO says. “So that was the number one knock – people would perceive there was something wrong with us because we did a SPAC. It didn’t play out that way. It’s funny to me how quickly perceptions change; all of a sudden, it’s the opposite and SPACs are an intriguing new way for companies to consider going public and there’s more of them than ever and more companies considering them than ever.”

Growth spurt

DraftKings being worth $21bn and employing a global workforce of 3,000-plus is a far cry from when Robins and co-founders Matt Kalish and Paul Liberman decided to launch a daily fantasy sports (DFS) company at the start of the last decade. Initially, the trio, who were co-workers at Vistaprint, decamped to the spare bedroom in Liberman’s Watertown, Massachusetts apartment on evenings and weekends to work on coding and building the product. They installed a whiteboard and turned three beer pong tables from the basement into desks. Between their nine-to-five jobs and the side hustle of getting DraftKings off the ground, they were soon clocking up 100-plus hours a week for months on end. However, angel investors didn’t quite share their enthusiasm for the yet-finished product. Some were also dubious of the legality of DFS – an unintended carveout for fantasy sports in the Unlawful Internet Gaming Enforcement Act of 2006. Therefore, much-needed seed funding was hard to come by. California-born Robins, a sports fanatic who’d had an itch to become an entrepreneur since graduating with a degree in economics and computer science in the wake of the first dotcom crash, was undeterred. After being turned down by more than 50 potential investors, they finally secured $1.4m in seed funding led by Atlas Venture’s Ryan Moore. “I felt that they’d captured the second-screen element well and the social aspect really captured my interest,” the founding investor tells EGR when recalling the pitch. “I liked the team, too – they really understood each other’s roles. Jason was the front man and the go-getter, Paul was the guy who put it all together and made it work, and Matt was the expert who understood the consumer better than anyone else. To this day, when I look at founding teams, I always compare them to DraftKings.” Despite around two dozen startups already competing in the burgeoning DFS space by 2012, it wasn’t long before DraftKings was, after further funding rounds and acquiring rival DraftStreet, snapping at the heels of and then challenging the market leader, FanDuel. These two rivals went on to dominate with a combined market share of over 90% as they slugged it out with eye-popping prizes and aggressive TV advertising blitzes. Such was the marketing onslaught, a DFS commercial aired every 90 seconds at one point in 2015. Indeed, the battle for supremacy between these two tech unicorns was akin to the Nintendo and Sega or Coca-Cola and Pepsi wars of the 1980s and 1990s. Eventually, though, the duo decided a merger made sense, particularly with the legal challenges DFS was now facing, although the deal was subsequently blocked by US antitrust enforcers due to the combined entity’s market share.

Of course, though, the pivotal moment for DraftKings came in May 2018 with PASPA’s repeal. Management were cautiously optimistic of a positive outcome from the US Supreme Court and diverted a large part of internal product engineering resources towards building a sportsbook running on Kambi’s platform. DraftKings went “all in”, says Robins, on sports betting as the co-founders expected “hyper growth” like DFS’ early years. “We knew it could transform our business if it [the Supreme Court ruling] went the right way,” he says. Liberman, now president of global technology and product, confidently told Robins in January 2018 that the product would launch on August 1 that year. And that’s precisely what happened when, on August 1, DraftKings was the first to unleash a mobile sportsbook in New Jersey, just 79 days after the federal ban was struck down. “That’s Paul to a tee,” Robins says. “He’ll tell you a year in advance the date something’s going to be ready and does it.” Management was sure the operator’s strong brand among sports fans, married with a large database of existing DFS players in New Jersey and the investment in the cross-selling engine and data science, would be a deadly combination. “I felt very good about how we were positioned because I already knew from a lot of research that our brand and database would cross-sell well,” Robins explains. “A few months in [to the build], I started to realize we actually might be decently positioned on the product front and I started to have confidence that we could make a real dent in the market.” Industry observers expected DFS to do well with sports wagering, but even they probably didn’t think DraftKings and FanDuel would go on to dominate New Jersey with an estimated combined market share of around 75%. For Robins, Flutter Entertainment acquiring a majority stake in FanDuel nine days after PASPA’s repeal was a clear signal of intent. “Once I saw FanDuel did that deal, I knew they were going to be a major player in the market too.” In December 2020, Flutter shelled out $4.2bn to increase its investment in DraftKings’ old foe from 57.8% to 95%. This valued FanDuel at $11.4bn and had some questioning whether DraftKings’ valuation was over-inflated. Either way, both have left established gambling brands feeding on scraps – at least for now anyway – in many legal online sports betting states. As things stand today, DraftKings Sportsbook is live with mobile and/or retail in 11 US states, yet these are still early days. In fact, Robins referred to it being “spring training” when quizzed by an analyst during the firm’s Q3 results presentation in November as to which inning, to quote baseball terminology, legal US sports betting was in. On that point, Robins tells EGR: “We’re literally two years-plus since New Jersey became the first state outside of Nevada to allow digital sports betting and still only 20% of the population live in states where we can offer a mobile sports betting product. And most of them have been live for less than a year. We can all debate if the analogy should have been the first inning or spring training but any way you slice it, we’re pretty early in the market.”

Notable tidbit from our Jan. '21 U.S. Sports Betting Market Monitor: Twice now, FD has overtaken DK in markets where DK had 1st-mover advantage. In NJ, it took 7 months, and in IN, it took 14. Lots of caveats here (FD's NY tailwind > DK's, it's GGR, etc.), but still interesting. pic.twitter.com/hNFildLqMp

— Chris Krafcik (@ckrafcik) January 13, 2021

End product

The primary reason for gobbling up SBTech as part of the three-way merger wasn’t to acquire a B2B business currently powering 50 operators in 17 countries, of course. While a B2B arm is useful for revenue diversification, the deal was ostensibly about DraftKings getting its hands on its own sports betting platform rather than relying on a third party. DraftKings, which is scheduled to migrate from Kambi to its in-house platform in H2 2021, sees product and controlling its tech roadmap – besides avoiding paying revenue share to Kambi – as vital to its future growth and ambitions as sports betting expands. “Kambi is great. I have nothing negative to say about Kambi. However, we view ourselves at our core as a product and technology company,” Robins remarks. “We view ourselves as being able to differentiate over the long term by being the most innovative and being able to really lead in terms of having the best product and the best offering in the market. And, so, the thought of trying to do that while relying on a third party, regardless of who it was, didn’t make sense to us because even though it was a great partnership, Kambi, and any third-party provider, is going to have to balance what they prioritize across their whole client base. They never could and never should do 100% of what we say and ignore everyone else. So, we were never going to have the degree of control and make sure that things we wanted to do were the only important priorities.” The laundry list of items on the product side includes a more robust live betting offering for US sports, more prop betting markets and generally more elements that appeal to sports fans. “There’s so many little things that people ask us that we can’t do today,” Robins admits. “Those things alone would create a multi-year roadmap.” He adds: “For the next decade-plus this space will be innovating. Until bet365 came around in the UK, people weren’t paying as much attention to live betting. If you control your own product and technology stack you can create things, and in that case [bet365] completely changed the entire dynamic of the market. People are going to copy a great idea, but if you’re always two or three years ahead of the competition by the time people are just catching up to the last thing you did, you’re on to the next thing. That’s how you win over the long term in a product-driven tech industry.” On the subject of the UK, Robins insists observing and learning from an online gambling market that has been around for over two decades is “almost like you have a time machine”. Yet, while studying how products, user acquisition, CRM, customer habits and more have evolved is particularly useful, it would be negligent, myopic even, not to take lessons from the mistakes made across the pond around responsible gambling (RG) and failing to protect vulnerable individuals. In the mad scramble to acquire customers and grab market share, there is the real danger the US sleepwalks into going down the same path as the UK, which has culminated in the government launching a root-and-branch review of the 2005 Gambling Act. Critics argue UK operators only had themselves to blame for their gung-ho approach up until recently, and now the sector is paying the price for that recklessness and mistakes. “It would be a shame if insights and lessons learned [in the UK] didn’t get applied here,” Robins stresses. “I’m an optimist – I hope that there’s enough smart people in this industry that, to use your quote, some of the mistakes that maybe were made in the UK aren’t made here.” The patchwork of US regulation on a state-by-state basis potentially complicates matters when it comes to joined-up thinking and uniform efforts around RG. And as an operator, you can’t control how other companies behave or if they only pay lip service to protecting players. “We can have gold-standard RG programs [and] we can do everything exactly the right way, and others may taint the industry by not doing that. But all we can do is try to lead by example, try to evangelize the way we think things should be done. I really hope the whole industry gets together and realizes we have an incredible opportunity in front of us to create an amazing product, an amazing experience for a large segment of the population and to grow our businesses by adding jobs. Let’s do it in the right way, because it would be a real shame if we messed all that up by taking some shortcuts or by not doing things in the right way.” Coronavirus and the forced closure of casino properties could encourage more states to legalize online casino gaming, which ups the ante when it comes to the need for robust and effective RG programs. New Jersey, Pennsylvania, Delaware, West Virginia, and Michigan currently have regulated igamin. A little over two years since releasing a single mobile blackjack game in New Jersey, DraftKings’ first move into igaming, the company has become a major player in the vertical and even usurped established casino brands. According to Eilers & Krejcik Gaming, DraftKings edged ahead as the number one US online casino brand in December based on GGR with an estimated 17% market share. This is even more impressive when it comes to New Jersey specifically as DraftKings was the 24th igaming brand to launch there in December 2018 and certain casino-centric rivals had a five-year head start. The company has also spent very little on marketing, relying instead on cross-sell from its existing betting and DFS database in the Garden State. Today, DraftKings Casino even boasts a standalone app in New Jersey, Pennsylvania, and West Virginia in order to attract a casino-first customer and has introduced variants of blackjack, roulette, and baccarat created in-house to stand out from the competition. “I never thought we’d be number one in the US, which is our position now in igaming. That’s something way beyond what our wildest hopes and dreams were,” Robins reveals. “That also has been a big point for us, showing that we actually can be competitive in this market and we can use the same kind of tech analytic capability that we feel is so applicable to fantasy and sports betting to also be successful in the gaming market.” Even before the New Jersey market’s GGR topped $90m a month, DraftKings estimated US igaming to be a $21bn opportunity. “I would say now it’s become a really big focus for us. I think I under-appreciated what a big opportunity it was – I didn’t realize how big it could be,” Robins admits. He also anticipates online gaming expansion. “Between tax revenue for the state and the ability to help preserve jobs and support the brick-and-mortar operators, logic would suggest that you’ll see an increased appetite among states to consider legislation on igaming.”

To further strengthen its position in igaming, there is the real possibility DraftKings acquires a rival operator. Indeed, Eilers & Krejcik Gaming has suggested DraftKings needs to look outside its primary sports brands to drive the kind of growth to maintain its sky-high valuation story. One potential target, according to the analyst firm, could be a casino-first online operator. “Doing so would allow DraftKings a clear path to acquiring casino-first customers versus sports-first customers that make up its primary addressable market today,” Eilers & Krejcik Gaming wrote in a recent edition of EGR North America. DraftKings has the financial firepower to pull off such a play, with $1.3bn on the balance sheet revealed in the Q3 results. This was projected to have swelled to $1.7bn by year-end. Robins says: “We are more well-capitalized than we’ve ever been. And by a lot, it’s not even close – three or four times as much capital on the balance sheet as we’ve ever had in our history.” Unsurprisingly, he’s tight-lipped on possible targets while stressing that DraftKings is in a good position to grow organically and that it is about assessing whether it “makes sense to buy instead of build.” On the financial front, pro forma revenue guidance for 2020 has been raised from $500m-$540m to $540m-$560m, which would be a growth of 25%-30% on 2019, despite the havoc the pandemic wreaked on sport. Meanwhile, revenue for FY 2021 is expected to rise to between $750m and $845m. DraftKings also recorded a strong Q3 2020 as revenue surged 98% year-on-year (YoY), or 42% on a pro forma basis, to $133m. Aggressive marketing as major US sports resumed contributed to monthly unique players rising 64% YoY to above one million. However, this acquisition drive came at a price, with a whopping $203m spent on sales and marketing, which was a 240% increase on Q3 2019, leaving the company with a net loss of $348m during the period. But, as the saying goes, you got to speculate to accumulate. Longer term, Robins, Kalish and Liberman have lofty ambitions of their business one day being worth north of $100bn. Yes, $100bn, or five times today’s value. That would put DraftKings in the realms of General Electric, American Express, and Uber based on market cap. “I think we are just getting started. If this is as far as we go, it’s a huge failure. So, I think we can take it to $100bn-plus, and that’s the goal,” Robins asserts. The three (now very wealthy) founders won’t rest on their laurels. “Matt, Paul and I are all wired this way – we’re never satisfied. We always feel like there’s something bigger that we can achieve, and I think all of us feel more focused, intent, and competitive than ever.” Robins adds: “If we never achieved more than what we’ve achieved right now, from a value standpoint it would be an incredible disappointment to all of us both financially and on a more personal level.” For him, the US sports betting opportunity, estimated by Morgan Stanley to be worth $8bn by 2025, combined with igaming’s potential and the fact the stock market clearly believes in the business, is too good an opportunity to waste. “The worst sin would be to screw that up.” It all comes back to his attitude. “I feel like the second I let my brain start shifting towards [thinking] I’ve done anything or achieved anything, it’s the first step down a slippery slope to complacency and, ultimately, failing. I just can’t let myself go there as I feel like it takes away the edge.” Much of the credit for all that DraftKings has achieved in under a decade has to go to the Vistaprint alumni, who are still at DraftKings in similar roles to when the business first began. This is not always the case with startups that float. Moore, who has sat on the DraftKings board since 2012 and has seen a nine-figure return in dollars on his initial investment, says: “I’m really proud that the three founders are still running it. Founder-led businesses are worth more – whether you like [Mark] Zuckerberg or not, Facebook is worth more because he is driving the product. I think it’s cool Jason, Matt and Paul are still driving this business and, in a lot of ways, driving this industry.” So, what about DraftKings reaching the giddy heights of a $100bn-plus valuation? Moore doesn’t hesitate with his response: “No pun intended, but I wouldn’t bet against them.”