Billion Dollar Unicorns: DraftKings Looks Worried As Fantasy Sports Come Under Scrutiny

The rapidly growing fantasy sport industry has created a few Billion Dollar Unicorns. According toEilers Research, the daily fantasy games market is projected to generate $2.6 billion in entry fees this year and grow to $14.4 billion by 2020. The big numbers have already attracted companies like Yahoo and CBS into the race. But things may be about to change as legality concerns arise.

DraftKings’s Offerings

Boston-based DraftKings was founded in 2011 by VistaPrint alumni, Matt Kalish, Paul Liberman, and Jason Robins. The three began working on the concept of DraftKings while working at VistaPrint. Once the idea was formalized, they quit their full-time jobs and released the first product as a one-on-one baseball competition. The game was released on the opening day of the Major League Baseball. DrfatKings hasn’t stopped growing since.

Today, it is the second largest daily fantasy sport provider in the country, second after FanDuel. Like its competitor, DraftKings allows users to enter daily and weekly fantasy sports-related contests. Users can win money based on individual player performances in five major sports – MLB, NHL, NFL, NBA, and PGA as well as other sports including the Premier League and UEFA Champions League soccer, NASCAR auto racing, Mixed Martial Arts (MMA), and American college football and college basketball.

DraftKings is not stopping there. Its vision is to “make DraftKings and the sports themselves attached at the hip”. As part of this effort, DraftKings is entering into big, and sometimes expensive, agreements. Earlier this year, it tied up with media channels ESPN and Fox to agree to spend heavily on TV advertising over the next few years. According to DraftKings, nearly 80% of its users end up spending more time on reading and watching sports, thus driving traffic on both the media sites and adding to DraftKings’s revenues.

DraftKings’s Financials

Like others in the industry, DraftKings also earns revenues by charging a fee for entry. It does not disclose detailed revenues, but analysts estimate that DraftKings generated nearly $30 million in revenues in 2014 and it is expected to generate $100 million in 2015.

DraftKings is venture funded with $375 million in funding from 21st Century Fox, Atlas Ventures, BDS Venture Fund, Boston Seed Capital, First Mark Capital, GGV Capital, Kraft Group, Major League Baseball Ventures, Major League Soccer, Melo7 Tech Partners, National Hockey League, Redpoint Ventures, and the Raine Group. Its last funding round was held in July this year when it raised $300 million from 21st Century Fox at a $1.2 billion valuation. The investment involves commitment from DraftKings to spend $250 million in TV ad spending with Fox over the next three years.

The Gambling Industry Controversy

Gambling may be banned in many states, but fantasy sports companies like DraftKings and FanDuel get away with it based on the online gambling laws passed in 2006 that excluded fantasy sports from their definition. The companies advertise and believe that playing in fantasy sports is a matter of skill and not chance, and hence is not gambling. But the markets appear to be waking up now. Recently, New York Attorney General has asked DraftKings and FanDuel to stop operations in the state claiming that fantasy sports was no different than gambling. The state maintains that chance pervades fantasy sports, making it an illegal activity in New York. The companies are fighting the court order, but other states like Florida are now looking at the law to decide whether fantasy sports constitute gambling or not. Conditions have become tougher with increased scrutiny as there are increasing revelations of how employees have won big winnings using information that was not available to other players.

For now, both DraftKings and FanDuel are sticking to their guns in claiming that they are games of skill and not mere chance. They have also banned their employees from participating in the games. A state judge is expected to rule soon on the case.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

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Photo credit:  Ian Kennedy/Flickr.com.