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Start-ups in igaming: which path to success?

| By iGB Editorial Team | Reading Time: 6 minutes
High costs, risk averse prospects, consolidation; are most igaming start-ups fighting a losing battle? Amanda McCormack speaks to start-ups and investors to find out.

Start-ups have always been a big part of the igaming industry, but new businesses face big hurdles in an industry where acquisition and entry costs are high and where incumbent companies are increasingly consolidating and not often open to new products. For all that, is the industry tougher to crack than any other for start-ups?

Amanda McCormack speaks to start ups and investors to find out.

A recent LinkedIn debate highlighted the fact that there are two schools of thought on the subject: those who see igaming start-ups as pushing against a tougher market when compared to other industries, and those who believe start-ups face the same problems in gambling as in any other established, regulated industry.

Graham Carrick, founder of app development company Runlastman, fell into the first school of thought, while David McDowell, founder of sportsbook platform specialist FSB Technology, fell largely into the second.

However, looking at their arguments in more detail suggests the truth is somewhere in the middle; meaning it is harder for some types of start-ups and easier for others.

It depends largely on what business model a start-up pursues and how well it utilises the finance opportunities and technology available to it.

Too tough to crack?
Carrick says in his Linkedin post that “the success rate for gambling related start-ups is looking excruciatingly appalling”. He goes on to explain that it is tough for start-ups to break into the market because of the following issues:

  • a lack of access to government funding – most governments have a ban on investing in anything related to gambling,
  • the fact that angel investors are scared of betting: “Obtaining a licence in the UK requires a lot of red tape. Any decent investor (>10%) needs to hand over a ridiculous amount of info to the [Gambling Commission]”,
  • igaming start-ups are shunned by the press and the competitions and pitching events available to start-ups in other industries,
  • margins are very tight,
  • bookies are very risk averse,
  • acquiring players is very expensive for a B2C start-up

Carrick then cites FanDuel and DraftKings as start-up success stories in perhaps the toughest business model of them all, B2C, although he also concedes both have been around for some five years already. 

It's also worth pointing out that both DFS operators are yet to be profitable despite their near 90% market share in the US and are in the process of merging to achieve synergies. This is despite DraftKings recently securing more than US$100m investment.

Innovation of start-ups
McDowell for his part does not believe it is as gloomy for gambling start-ups and argues that igaming start-ups are usually innovative and many provide something new that traditional legacy suppliers (and operators) cannot. 

“Legacy bookmakers are burdened by legacy technology,” he says. “I have to disagree with the general premise that the gaming industry is somehow more difficult to crack than any other established, regulated and competitive industry.”

McDowell says Carrick’s assertion that it’s difficult to secure backing is mistaken, pointing out that the UK has the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and  Entrepreneur’s Relief to help new companies get off the ground and save on tax.

He adds: “The larger firms like Index and Balderton are generally free to invest into any sector. While there are fewer venture capital (VC) firms that can invest in the sector, those that are able to invest are generally well informed.”

But that said, McDowell emphasises that it is important to remember that one idea on its own does not constitute a good business plan and that start-ups need to focus on an area where they can solve an existing problem or provide something new.

He adds that new B2C firms need to get “new product designs exactly right, building a technology platform to operate the product at scale and getting the marketing exactly right”.

Issues specific to igaming 
Betcade’s chief executive David Chang is perhaps among those best placed to explain why it is so hard for start-ups in the igaming industry.

Despite a number of promising developments last year, including Financial Conduct Authority approval to allow it to offer payments, the Android mobile gaming app store announced suddenly that it was to close all operations in January.

However, in February it announced that it was back in business, thanks to its acquisition by Vancouver-based private equity firm Columbia Ventures Corporation. “Start-up companies always face challenges. In other industries you are typically faced with scheduling, priorities, value proposition, business terms — all of the normal stuff,” says Chang.

“Start-ups in igaming face all of that, however, igaming is particularly challenging in that many online operators do not control a lot of the ‘core’ technology systems that a start-up may need to integrate with.

“And, interestingly enough, it seems that the embedded technology providers seem to have more control over product decisions than the operator customers do. It is a very unique situation and it does make things very difficult for those who require any type of technical integration.”

Carrick says the biggest questions for start-ups in the betting space are whether to build something yourself and have some intellectual property or buy a plugin for your wallet or sportsbook product, and second, whether to get your own licences or simply piggyback on those of your clients. As ever, in the end it often comes down to money.

Which model is best?
For operator start-ups, “building the tech in-house you take a certain amount of risk (it may not work properly) and need a hefty bank balance to create a pools-based game, casino or sportsbook from scratch” says Carrick. 

Other issues will be about whether to get certain licences, choosing a payment provider and a merchant bank, picking the right age verification tool (which is expensive), and deciding on a mobile format (web app or native).

On the other hand, a white label sportsbook set-up is the less expensive route, costing around £34,000 in the UK, estimates Carrick.

Evan Hoff, founder of gaming investment company Velo Partners says: “We have seen that some operators prefer to own their tech (e.g. Stride, for example, or Betfair obviously owning their exchange) and some outsource (Betway using Microgaming, Hills on Openbet and so on) and I don’t think there are any rules as to which is more successful.

“Building your own software can be extremely complex and outsourcing it, provided it can be lean enough, is probably the optimal way to go. However, if I were an operator I would probably outsource to a third party but control my UI and some of the UX.”

Hoff also points out that sometimes technology does become a determining factor of a start-up’s success because something that integrates easily and has a light footprint is something that operators will always gravitate towards, and third party platforms, which are the focus for many start-ups to host their content, will likely see it in the same way.

Chang’s three biggest tips for igaming start-ups are:

  1. decide if you are going to re-invent things or provide incremental improvement — you cannot do both,
  2. your value proposition has to be extremely clear,
  3. if you are a B2B start-up, there has to be nearly zero effort required by your operator partner.

Chang adds that from an entrepreneurial perspective, start-ups shape the future of every industry, not just igaming. “Start-ups take business model risks that the incumbent business entities simply cannot or will not. Why? Because of the risk of failure.

“They constantly push the boundaries of an industry and really force new ideas, thought patterns and conventions; where most businesses are focused on incrementally improving their KPIs. More start-ups fail than succeed, but those that do change their industries in very fundamental ways.”

The affiliate route
With companies such as Catena Media snapping up affiliates for eye-watering sums recently, the affiliate route may seem enticing to new start-ups. 

But Sadok Kohen, founder of social betting platform Betbull, says the affiliate route is not the best path to take in social gaming at least.

He says: “You can only run loyalty programs if you have that loyalty and you don’t have the full lifetime value if you are an affiliate. There are a lot of restrictions if you are an affiliate.”

Carrick argues that the affiliate model is generally seen as the easier path to take if an eventual sale is the goal. There are also other advantages over the operator route.

“Both models have their difficulties in that you need a massive amount of traffic in order to cover the costs. Having said that being an affiliate or operating a free-to-play platform means you do not need a licence or payments platform so your costs are dramatically reduced.

“Affiliates that are converting well are being bought all over Europe, whereas very few operators are getting bought. My advice would be to go down the affiliate route if you're looking for an exit, which we all are.”

Long time gaming investor Anton Kaszubowski says the most sensible route to focus on is a B2B strategy: “It is so difficult and expensive to establish a B2C presence in such a crowded and mature market.

“However, in order to support B2B sales you need to be able to demonstrate a clear business case to a potential customer and that’s very difficult to achieve without first having your own operations.”

There are clear opportunities for igaming start-ups to succeed, but as much as business models and innovation levels are important, operational excellence and keeping expectations realistic also play vital roles. The key to success is combining all those factors.  

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