Sports betting M&A and venture capital in 2021
M&A and startup consultant Lloyd Danzig on key challenges to avoid when considering acquiring or investing in the mobile betting space this year
Across the world of sports and entertainment, 2021 will be a year of immense operational challenges. However, it will also be a year of sustained revenue growth, accelerating M&A activity, and increased venture capital funding in the sports betting industry. The three key drivers of M&A activity in the post-PASPA market have been the access to customers, to markets (i.e. licenses), and to technology.
Covid has only served to amplify the degree to which this is the case. The influx of overseas operators and new entrants has amplified the sense of scarcity that surrounds premium media assets, gaming properties, and sponsorship rights.
Over the coming year, operators will continue to pursue M&As that expand their reach, augment their product offerings, increase the size of their serviceable markets, and provide more control over technological infrastructure. As industry leaders seek to execute on their respective omni-channel strategies, M&A will be a popular modality for the creation of a flywheel effect between product, content, and community.
Historically, various sources of friction have made tenuous the relationship between venture capital funds and sports betting markets in their infancy. In many overseas jurisdictions, the institutional pools of capital from which VCs raise money are often restricted by ‘vice clauses’ that preclude investment in the sector. Other fund managers have sought to avoid the probity process and regulatory burden that comes with territory.
However, attitudes toward sports betting in the US are fundamentally different from those that existed during the nascent stages of other markets’ development. The highly publicized success of DraftKings and Penn/Barstool has brought mainstream and institutional interest to participation in the capital markets.
The sports betting industry in 2021 is ripe for venture capital investment due to the accelerating compound annual revenue growth built atop antiquated tech and a commoditized product landscape. Many VC funds are less interested in betting on companies that will compete with DraftKings and more interested in those that will complement and be acquired by them. That said, there is growing private equity focus placed on rolling up and vertically integrating portfolios of turnkey sports betting assets that can quickly be deployed, scaled, and sold at an attractive internal rate of return.
Without mitigation to the magnitude of the opportunity and mounting bullishness, a number of challenges exist in both the public and private markets. Many bankers and fund managers appreciate the time and cost savings attained by conducting business virtually. However, there is also a cohort for which conducting due diligence and gaining a true sense of the essence and integrity of counterparts has been a challenge without face-to-face interactions.
The impact of Covid, particularly vis-àvis the cancelation of sporting events, has resulted in many early-stage companies struggling to validate the very unit economics that investors care about most. In many cases, startups found themselves unable to generate traction relevant to their core competency, whether because of a forced pivot or inability to execute a planned go-to-market strategy.
Still, an expanding group of startups are reaching profitability and securing the funding needed to supercharge their growth. Potential acquiring entities are taking notice and preparing competitive bids for the premium assets.
Lloyd Danzig is the founder and managing partner of Sharp Alpha Advisors, a firm specializing in sports betting startups, venture capital, M&A, and technology.