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Venture capital funding tends to go to companies with an expected return of 10 times an investment. If a venture capitalist invests $10 million, it’s because that investor expects $100 million back. To make those returns,VCs must back some of the most speculative companies.
Many of those companies fail because they’re trying to tap into a market in its infancy. Imagine having the foresight to invest in Facebook in 2003 or Bitcoin in 2010.
Consequently, venture capitalist investment offers clues as to industry trends. In the sports betting industry, here are three areas to which venture capital is flowing:
- NFTs and Digital Goods
- Audience Engagement
- Infrastructure
These may not sound like the most thrilling sports betting investments, but they promise unique features for bettors of all skill levels.
Gaming Today spoke with Sharp Alpha Advisors Managing Partner Lloyd Danzig to understand what investment in these areas mean for bettors and the sports betting industry.
NFTs And Digital Goods
“NFT gaming, NFT marketplaces, [and] infrastructure that allows platforms to more quickly incorporate and traffic in NFTs and digital goods are an area of great interest,” Danzig said.
NFTs — or non-fungible tokens — range from the promising to the ridiculous. However, the technology that powers NFT transactions will also power metaverse purchases. So bettors who want to place sports wagers or buy sports swag in the metaverse will use NFT technology.
VC firm SeventySix Capital recently announced investments in three new companies. One mints NFTs, and another is an augmented reality company. That two of a VC firm’s investments include companies with metaverse ties says much about the interest in this area.
Major sports betting companies are getting into the metaverse, too. DraftKings has created its own NFT marketplace. Fanatics helped launch Candy Digital, an NFT collectibles platform.
But for all the promising companies, more companies will fail trying to cash in on the metaverse than will make it big.
“Many entrepreneurs, not just in the sports betting space, try to hack this [metaverse hype] by throwing buzzwords that are not only topical but also associated with the largest total addressable markets,” Danzig said. “The metaverse is a trillion-dollar market. Blockchain and crypto is a however-many-trillion-dollar market.”
Bettors must beware of overhype in this area of the industry. Many companies that try to reach every potential NFT or metaverse customer at once will fail. That’ll result in features bettors may briefly enjoy disappearing due to a company’s mistakes.
This will simultaneously be among the most speculative, exciting, and disappointing parts of the industry.
Audience Engagement
Sportsbooks operators can often do a better job of targeting specific customers. Rather than casting a wide net, they could take advantage of highly engaged fanbases of certain sports or demographics. Products geared more precisely will likely increase revenue across entire categories.
“There’s a lot of interest in products that feel authentic to the motorsports audience, the esports audience, the mixed martial arts audience, the Spanish-speaking audience, the audience that likes to bet on sports in a format that more closely resembles financial products,” Danzig said. “So I think all of those as well as other audiences are of particularly high value. And so, you’re seeing investment dollars flowing into products, platforms, and content ecosystems that appeal to them.”
Targeting sports fans with customized bets will improve bettor conversion. If bettors are given wagers they feel passionate and knowledgeable about, then they’ll be more likely to bet. And if a product has the potential to boost handle, it’ll attract attention from venture capitalists.
Infrastructure
Businesses that own technologies that can reduce dependence third parties have excellent revenue potential.
“Because the [sports betting] industry has historically been so reliant on a handful of third-party vendors — and because now all of the major players are racing to not only differentiate but also vertically integrate their tech stacks — I think the most money of all is flowing into infrastructure,” Danzig said. “Whether that’s oddsmaking, risk and trading infrastructure, payment, KYC, AML, geolocation infrastructure, or media and content infrastructure, a lot of money [is] flowing into that space in particular because of the race toward vertical integration.”
One of the biggest vulnerabilities for any sportsbook operator is reliance on outside companies. For example, different companies are responsible for processing deposits, withdrawals, and cash movements outside a sportsbook. That makes deposits clunky, withdrawals lengthy, and third parties necessary. The company that figures out how to solve these payment issues alone could:
- Ease deposit and withdrawal procedures for bettors.
- Save sportsbooks money by reducing the number of third-party contracts.
- Monopolize sportsbook payments processing, leading to massive investment returns.
The same can be said for other challenges operators rely on third parties to solve. If one company can provide solutions to an operator and its customers, it’ll be a lucrative investment for venture capitalists.
The Innovation Trap
Sports betting startups are in a unique position. Large sportsbook operators are spending aggressively on marketing and disparate state regulatory requirements, leaving little resources for disruptive R&D. High rates of entrepreneurship in the sports betting industry help companies out of this trap.
“I’d say if you look toward the next five or so years in the industry,” Danzig said, “the biggest problem that startups are solving is many market leaders are unable to provide the very innovation that they need most that will allow them to expand into adjacent verticals and revenue streams — Web 3 and crypto being top among them.”
Successful startups will address issues that currently take multiple partnerships to solve. They’ll also allow sportsbooks to tap into revenue besides sports betting, like NFT trading or advertising. So, if bettors want clues about what new cool features they’ll gain access to, they should pay attention to the startups getting VC funding.
