With preseason winding down and the NFL season only a few weeks away, many people are suring up their fantasy football teams. In the twenty odd years after the internet really took hold Fantasy Sports have seen a meteoric rise. In the early 1990’s there was only a few million fantasy sports players, but last year that number was almost 60 million!† Where there is rapid growth, there is opportunity.
On October, 13th, 2006 George W. Bush signed into effect The Unlawful Internet Gambling Enforcement Act which effectively crippled online poker and gave rise to daily fantasy sports (DFS). Fantasy Sports were seen as a game of skill vs luck, and thusly exempt from the regulation. By the late 2000’s the first wave of daily fantasy sports sites were coming into their own. Buoyed by the idea that a player could play as much as they want, whenever they want and however they want, DFS grew a breakneck rate.
In no time the two largest DFS sites FanDuel and DraftKings were everywhere, joining the likes of other Silicon Valley unicorns Snap Chat and Uber with valuations nearing $2 billion. You couldn’t go more than 90 seconds without seeing a commercial for one of them. Their logos were on NBA floors, NHL boards, ESPN studios and even UFC Octagons. Just last year alone the DFS giants combined to spend more than $750 million on ads alone, all while processing $3 billion in player entry fees.
But just as most fantasies, there is an abrupt stumble back to reality. Just a year later, neither company is profitable and both privately held companies have had their valuations cut by over half according to some sources. Both companies continue their frivolous ways spending tens of millions of dollars in legal and lobbying expenses, and to make matters worse neither company can raise additional capital due to the uncertainty of the industry’s future and pending criminal investigations.
Companies like these give you chills thinking back to the tech bubble of the 2000’s. You think we’d have learned by now, but massive valuations can still be built on pure fantasy and euphoria with nothing but big talk and excitement to back them up. We’re seeing this make a product first and a business later approach with a lot of today’s technology fueled startups and it’s becoming more important to let emotions subside and really look into how a company is structured and positioned.
“Only when the tide goes out do you discover who's been swimming naked.”
- Warren Buffett All the best,
Wesley R. Nicholson, Mike Allen and Aaron Everdyke
†http://fsta.org/research/industry-demographics/
†† Additional article information provided by Don Van Natta Jr.’s Outside the Lines article “Welcome to the Big Time” 8/14/16