A FASCINATING NEW BOOK has just been published in the USA: ‘Billion Dollar Fantasy’, written by Albert Chen, a Sports Illustrated editor. It documents the epic battle to create and establish online daily fantasy sports games, now a multi-million dollar business. But since all this happened in the USA, why should it be of any interest to us here in Scotland?
The reason is that FanDuel, inventors of this industry, was a Scottish company, born at Edinburgh University, and went on to become Scotland’s first ‘unicorn’ – a start-up company worth over $1 billion.
This book is a real page-turner. It tells how the daily fantasy sports concept was envisaged at a brainstorming session during the 2009 South by Southwest conference in Austin Texas.
The first question was – was it legal? The US Professional and Amateur Sports Protection Act (PASPA) in 1992 had outlawed sports betting anywhere in the USA but Nigel Eccles, the FanDuel founder and CEO had identified that there was an exception for games of skill. His claim was that FanDuel games required skill to play successfully and therefore PASPA didn’t apply.
Potential investors however remained wary and Nigel pitched to over 90 venture capitalists before he finally landed his first US investor in the shape of Comcast – the parent company of Universal Studios and NBC.
However the underlying worrying fear that they could be declared as operating an illegal betting operation persisted. As their company grew so did their family, Nigel and his wife Lesley, FanDuel’s VP of Marketing, had had three young children, and still lived in Edinburgh. Every time they made one of their frequent visits to their US office in New York they had to fear the possibility that they might possibly be detained at immigration.
Lesley Eccles, as VP Marketing, persuaded their investors in 2014 that they needed to invest $43m in marketing to compete with their startup rivals, DraftKings, based in Boston.
In a crucial stumble, FanDuel passed on an opportunity to buy a smaller startup, DraftStreet. It was snapped up by competitors DraftKings and contributed to the growth of the rival.
The respective marketing campaigns became brutal – in one month in 2015, DraftKings became the single biggest spender of television advertising in the USA; the following month it was FanDuel's turn. They raised more money from private equity players KKR and Shamrock in order to keep their competitive edge.
Then it all got very legal. Both companies were forced to join forces to defend the legality of their games against Attorneys General of several states who wanted them closed down. Then, a proposed merger between the two rivals was blocked by the Federal Trade Commission in July 2017.
After the failure of the merger, the Scottish founders were eased out of the company. And then, out of the blue, in May 2018, the US Supreme Court struck down PASPA and questions of illegality disappeared overnight.
Suddenly, it seemed like both companies were now worth a great deal of money and within a few weeks FanDuel was merged with a subsidiary of UK’s Paddy Power. On this news, Paddy Power shares shot up by nearly 30%.
The merger however was done in such a way that Scottish founders of the business, the ones who had invented the sector and built the substantial value of this innovative business, were left with nothing to show for their efforts.
It’s a great read, and a huge lesson on how private equity companies make very sure that they will win – even if the others have to lose.
Ian Ritchie was an early investor in FanDuel.