Underdog Fantasy, a sports app company, recently closed on a $35 million Series B fundraising round that valued the company at $485 million. The capital will be used to build out its product and engineering teams, on customer acquisition and on expansion into sports betting. BlackRock and Acies Investments co-led the financing round.
Considering the precipitous valuation declines publicly traded gaming companies have experienced over the last year, and the ongoing venture capital reckoning, it may have been surprising to see the fantasy sports app command a 10x-plus increase over its May 2021 valuation. But Chris Grove (co-founding partner, Acies Investments) said “companies that have traction and growth today—versus offering promises of traction and growth tomorrow—are [still] able to generate often-oversubscribed rounds at premium valuations.”
JWS’ Take: In aggregate, the fundraising environment today is almost certainly more challenging than it was 15 months ago when Underdog raised $5 million at a $55 million post-money valuation. “The general trend line is the greater the leap of faith, the more strict investors are going to be about the valuation and the more skeptical they are going to be about investing at all,” Grove said. Companies that lose a tremendous amount of money are going to require more faith from investors.
Pitchbook reports U.S. venture funds have $230 billion in capital to deploy. “Now, more than ever, it’s not going to sit in a bank account,” Grove said. It’s a good time for companies like Underdog Fantasy—those achieving scale, demonstrating clear product/market fit, and showing substantial revenues and a clear growth trajectory—to be raising money. “In some ways, [those companies] have more opportunities now than they did a year ago because available capital is pooling into companies that aren’t weighed down by risk and uncertainty,” he said.
Underdog seemingly fits that description. “[The company is the] fastest growing paid fantasy company in history,” founder Jeremy Levine said. Revenues are up more than 10x since last May, and the business is profitable YTD, per Levine.
Levine has proven to be a capable founder, too. The former Draft co-founder and CEO built that company into a DFS power with hundreds of thousands of paid monthly users before selling it to Paddy Power Betfair for $48 million in 2017. Paddy has since rebranded as Flutter Entertainment, and FanDuel is one of its brands. And prior to founding Draft, Levine built and sold an early fantasy site called StarStreet to DraftKings.
GP and founder Kevin Carter said that seeing Underdog’s progress, along with understanding how big the sports betting opportunity is, helped him to get comfortable with the sharp YoY valuation increase. “Plus, there are regulatory tailwinds,” Carter said, that should lead to a bigger market and more opportunity moving.
Night Capital, which led Underdog’s Series A, participated in the Series B. Night Capital was also an early investor in Draft, so Carter and Levine have a history together. “If anybody is going to be able to make critical decisions and build product quickly that speaks to the customer that they know is out there, [Levine and Co.] just did it,” Carter said. “They have that information. They have that skill set. They know what works and what doesn’t. That is kind of what got me over the hump originally.”
Underdog plans to roll out licensed sports betting operations in Ohio and Colorado in 2023. Considering the hundreds of millions DraftKings, FanDuel and BetMGM are spending on customer acquisition, trying to compete for sports betting market share might sound like a risky endeavor. But Levine pointed out that his company has proven capable of acquiring DFS users en masse “an order of magnitude cheaper” than its competitors. It is worth reminding DraftKings and FanDuel both started out as DFS companies.
Underdog has built an active, paying, six-figure customer base by delivering a differentiated product that resonates with the user. Its season-long NFL “best ball” game—a casual version of season-long fantasy that requires no team maintenance following the draft—will have a $10 million grand prize this year, a figure almost three times larger than the previous biggest season long prize in history.
Levine believes the company can compete with sports betting’s big three, without spending billions of dollars, by taking that same approach to the vertical. “We like to think of ourselves as a game studio in a licensed betting environment, whereas most of our competitors think of themselves as sports betting companies,” he said.
Carter believes that casual, product-focused mentality will also create a larger addressable market than the competition enjoys, particularly as the industry trends towards more approachable sports betting offerings.
But Underdog’s underlying business is strong enough, in a large enough category (daily fantasy sports is estimated to be worth nine figures based on GGR), that sports betting success is not necessary for the company to generate venture-level returns. “Sports betting is an additional opportunity, but it is not the endpoint,” Grove said. “It is an extension of what this team is already doing well in fantasy.”
While some suspected DFS would fall off after PASPA was revoked and sports betting potentially allowed anywhere in the U.S., that has not been the case. The market has grown “measurably and demonstrably,” Grove said. “Sports betting has created a rising tide of cultural interest in predicting sports outcomes.” The Fantasy Sports and Gaming Association reports fantasy participation has risen about 14% from last year.
It is fair to wonder how the DFS business will be impacted by the anticipated arrival of in-game micro betting. If you can bet the outcome of every play, why wait until the end of the game to find out if you are a winner? But Grove said the two products are not necessarily competing with one another. “There’s also no guarantee that always on micro-betting is going to be a. something that sportsbooks are going to be able to provide and b. something that consumers are really clamoring for,” he said.
Grove views Underdog’s sports betting plans as a hedge against a potential decline in the company’s booming fantasy business. “Anyone who is contesting this market, from any angle, is taking unnecessary risk if all they are shooting at is one target,” he said. Look for the DFS operator to introduce additional fantasy and skill-based variants, and NFT-mediated products that reside somewhere between gaming and gambling, like Zed Run, in the years ahead as well.
Underdog believes the sports bettor and DFS player are one in the same, and the company says it is acquiring DFS customers for less than just about anyone else. But it is not looking to execute sports betting arbitrage and sell off its database to a sports betting operator looking to gain the scale. “We think we can build the biggest company in the space over a long time horizon, and we’re building this company to be a standalone business,” Levine said. “We think we’re on the path to go public.”