Why gambling startups fail – by Dave McDowell

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The recent article from Garham Carrick at RunLastMan highlights a number of issues that any start-up would face in our industry. But 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. The bottom line is most start-ups fail, the accepted rule of thumb is 85 percent of start-ups will fail in the first two years. Graham’s post points to a 61 percent failure rate from those B2C start-ups he tracked, and accepts that there are many more that are untracked. All in all, it looks like a pretty standard failure rate.
Graham’s post does, however, point to the lack of innovation and risk-adverse nature of the larger bookmakers, taking meetings and stealing ideas. I think that the bigger picture, though, is that the larger bookmakers are burdened by legacy technology which is extremely inflexible. Platforms like OpenBet were designed in the 1990s before in-play betting, before smart phones and for an unregulated ‘dotcom’ global market.

This inflexibility (coupled with OpenBet’s time and materials billing model) makes it extremely expensive to integrate any new product, which is one of the most significant hurdles for any B2B start-up to overcome. As a bookmaker, why would you spend £50,000 up-front to integrate an unproven new product?

If a B2B business is delivering some sort of new sports-betting concept (such as daily fantasy games), the bookmaker will be concerned that any turnover could cannibalize their existing revenue. Anything they pay in revenue share to the start-up comes out of their existing profit, which is reasonable logic if you assume that a customer will have a fixed amount of cash they are willing to lose each month on sports.  The flip-side of the argument is that the new gambling content will increase the player acquisition, spend or retention metrics but it is practically impossible for a start-up to collect any reasonable data to prove this.

A raft of B2B suppliers were born during the era of sports-betting expansion because they were servicing a genuine need of the bookmakers. These new B2B suppliers are providing live data feeds, odds algorithms, user interface technologies, business intelligence systems, and the rest. All of these businesses were solving a material problem for their customers.

Bookmakers today are desperately trying to remain competitive (or even remain profitable) in the face of increasing operational costs (increased data costs, increased taxation, increased regulatory compliance), decreasing margins (free bets, price boosts and best odds guaranteed) and increased competition. Operators have billion-dollar problems and a new B2B fantasy product won’t even begin to change their fortunes.
An Idea does not make a Business
I have seen a great number of start-ups founded on a single product idea. When starting FSB, we made sure to do our research and focus on an area of the industry that we felt was solving a material problem - in-play sports betting technology. We started out pitching live fantasy football player ratings and betting opportunities on which player would be man of the match, but behind the scenes we were learning how to process real-time data assembling the building blocks of a modern sports betting platform. Our early fantasy products were not appealing to bookmakers, but our longer-term strategy to focus on the B2B supply of modern sports-betting technology is proving to be successful.

In a highly-regulated and competitive industry like gambling, a B2C start-up has the burden of getting their new product designs exactly right, building a technology platform to operate the product at scale and getting the marketing exactly right. These are very different disciplines and you need to execute all of them perfectly to survive.

It also means that you have to divide your management efforts and your capital investment into solving very different problems. In my opinion, most businesses would be better off trying to be great at one thing, either being excellent at the product/technology or being great at the marketing. In my opinion, a B2C start-up should find a strong technology partner to support their vision, and B2B start-up should spend more time making sure that their product is actually creating value for their customer.

Most businesses will fail, but without risk there is no reward. My heart is with the entrepreneurs out there who are trying new things and helping to shape the future of our industry. But my head is urging these entrepreneurs to understand the dynamics of the industry they are trying to break into before they get started rather than learning these expensive lessons the hard way.