Sports Betting VC Opportunities In Services and Foreign Fantasy Startups, Says Bullpen Capital Partner – Sportico.com

The slump in sports-betting and fantasy-sports companies, both large and small, is turning in the right direction even as their stocks continue to suffer from investor wariness after years of burning cash, says Paul Martino, the general partner and co-founder of venture capital firm Bullpen Capital and one of the earliest investors in FanDuel.

“The correction in sports-betting stocks started way back almost a year before the correction in the broader market,” Martino said in a phone call. “I think the broader market is still going to take quite a dive, but I feel like we may have bottomed in the category of sports gaming and gambling—companies have gotten so much smarter … instead of just lighting money on fire.”

When the U.S. sports-betting market opened in 2018, it was one of the hottest categories of investments through 2020, with companies spending wildly to acquire customers. As an example of the overheated market, Martino said that by the end of that year, companies were paying $2,000 in both marketing and direct cash bonuses to acquire customers in Pennsylvania, where he lives, a level that simply can’t be profitable with the state’s 35% tax rate on bets.

Wall Street noticed and cracks began to show in betting stocks in March 2021 based on customer acquisition costs, breaking down into relentless bearishness since from investors. This year alone, there are seven stocks heavily reliant on sports betting that have lost more than half their value, including Super Group (down 63%), DraftKings (down 71%) and Barstool Sports parent Penn National Gaming (down 66%).

Stock market troubles trickled down into the VC space, where Martino invests, and all the ugliness meant that U.S. startups needed to refine and rationalize their business models, he said. For that reason, Bullpen Capital spent much of the past year seeking direct sports betting/fantasy plays in other markets. In 2021, Martino invested in three non-U.S. fantasy companies: Rei do Pitaco, a daily sports soccer-focused fantasy platform in Brazil; Draftea, a Mexico daily fantasy offering; and Beryllium, a Singapore-based platform with a daily India cricket fantasy offering called Sixer.

“Going international in 2021 made sense because most U.S. companies were overvalued,” Martino said, “but 2022 I have a very different opinion—I think all the deals I’ve done in sports gaming/gambling are going to be U.S. based in ’22.”

Martino’s not disclosing specific 2022 investments yet. “[They] are things that aren’t dead in the center of fantasy sports and gaming. They’re more on the periphery, like services and finance, that are not in this treadmill of [direct-to-consumer],” he said. “Investing in U.S.-centric, next generation fantasy models is very, very difficult—the lifetime values and taxes just don’t work.”

As an example of the types of companies he sees potential in now, he refers to a 2018 Bullpen investment called Swish Analytics. “Swish does real-time line setting as a web service. If the major operators want to offer odds on in-play, they will frequently outsource their line setting to Swish. That’s the kind of business I want to be in more so than the 18th undifferentiated vendor in a free-to-play model,” Martino said.

Bullpen is focusing on earlier stage companies for its VC investing, meaning the time horizon for seeing a return on investment is three to four years out, as opposed to a late-stage VC firm that may need to go public sooner, Martino explained. This strategy has worked well for him in the past. Martino invested in FanDuel last decade when the firm was valued at about $8 million. He said that back then he couldn’t convince other VC friends to join the syndicate with him. A decade later, a 2020 purchase of equity by its now-parent, Flutter, valued FanDuel at $11.2 billion, some 1,600 times the level Martino invested in. It’s a huge win that he believes can still be produced by the fast-growing global sports betting business.

“I would not be surprised if a year from now we are talking about a market no one is talking about being a really hot new space, or a demographic that we weren’t paying attention to being the hot new sector.”