Five hot takes from the Investor Vibe Check for Q2

The Betting Startups Podcast recently released its debut Investor Vibe Check episode. We give a rundown of five hot takes offered up by the episode guests.

Starring in this episode were Acies Investments co-founding partner Chris Grove, Discerning Capital managing partner Davis Catlin, and SeventySix Capital managing partner Wayne Kimmel.

Below are the five biggest takeaways from this episode:

1. Reg tech in pole position for investment

One area of particular interest for all of the podcast’s guests is reg tech, as companies in this space help operators to manage regulatory compliance and responsible gambling.

“I think that reg tech is an area that continues to grow month-by-month to grow in importance, and I think that's to do with the sustainability of the industry, and it's also an attractive model,” explained Catlin, suggesting the growing importance of such solutions in an increasingly strict regulatory environment.

In addition to the fundamental importance of regulatory compliance in the gambling sector, reg tech has further advantages when it comes to securing capital, according to Grove.

“I think one of the reasons why there's so much interest in reg tech and payments (and some people will bundle those together) is that there are big pockets of external capital that can get behind reg tech,” he suggested.

“It has enough similarities to the financial services sector, that there's a shared language that allows your larger capital allocators to look at that part of the industry and say ‘that's where I want to be’.

“Reg tech and payments are very attractive to a very powerful slice of non-endemic capital,” he concluded.

2. Rising interest rates hinder capital deployment

Interest rates have been headline news for several quarters now, with the impact of global rises hitting businesses where it hurts in their search for capital.

That reality brings with it significant challenges to start-ups seeking funding, as the increased cost of capital makes parting with cash more difficult for investors.

“There's a couple of things that have changed as relates to private funding,” said Catlin on the matter. “And I'd say specifically, one is that interest rates are no longer zero.

“It's easy to underwrite deals to a 10% return conceptually, when rates are zero. But now that interest rates are somewhere around 5-6%, that 10% deal looks a lot less attractive. So I think that does naturally kind of take people's willingness to take risks down.”

3. US sports betting no longer the new kid on the block

Hot on the heels of the fifth anniversary of the repeal of PASPA, guests on the podcast were quick to remind listeners that US sports betting is no longer the exciting emerging market it once was.

It is also far more competitive, with multiple companies offering the same solutions.

“Anyone who is investing in this space is now seeing a lot more [businesses] than they would have seen if you were pitching the same thing in 2020, or 2021,” said Grove.

“Something that might have felt fresh or novel or unique or inspiring at that time, they've probably now seen that deck five, 10, if not 30 or 40 times.

“So realising that the foundational view of what's new, what's fresh, and what's been heard before, and how founders present things as a result, is another layer of the ‘realism pass’ businesses should go through when seeking investment.”

Gone are the days of getting mega valuations simply by using industry buzzwords in a pitch deck, Grove’s fellow guests agreed.

“Leading the deck with ‘sports betting is broken, and we're going to fix the whole thing with this start-up’ is probably no longer going to get you there,” he concluded.

4. US wagering market still has plenty of runway left

While the industry is no longer brand-new, it’s important to remember that it is far from being fully mature.

Podcast guests put that into context by discussing just how much growth the market has left, and the impact that will have on businesses within the sector.

“In the formation stage of an industry, everyone's rushing. But now, I think we're moving towards a world where things like efficiency, product, user experience, all of that matters a lot more,” commented Catlin.

“I think everyone on this call believes that sports betting and gambling generally will get much much bigger. And with that context, I think we need to get to a stage where the operators are thinking about returns on their investments.”

Indeed, operators across the US have shifted their focus to profitability after a hard-fought opening period saw them spend big in a bid to carve out market share.

To make that pivot successful, Catlin suggested: “I think you’ve either got to lower the customer acquisition costs, or deliver incremental value on the player lifetime value.

“I think that is the new phase that the industry is entering into. And I think if I was an entrepreneur, that's the kind of macro view I would have of where there's a lot of opportunity,” he concluded.

5. Pivot to retention is well underway

In order to turn a profit as outlined above, operators have shifted their focus away from costly customer acquisition and towards retention.

“A fundamental change has been a shift from customer acquisition as the primary focus to customer retention and reactivation, which is a fundamental paradigm shift in terms of who your important partners are, where dollars are going, where bandwidth is going,” said Grove.

“What results from that is more of a focus on product, because if I'm no longer looking to just acquire, but to inspire and develop some kind of loyalty, I do need to bring a better product to the table.”

Those developments in product may well lead to increasingly blurred lines between sports betting and iGaming, Grove added, as he expects “to see more and more sports betting games that look less like a traditional sportsbook rows and columns, and look more like casual games, mobile games and casino games.”

Such product differentiation is likely to be key in the retention of existing customers, and therefore the turn to profit for many US operators.

One recent example is Entain’s acquisition of Angstrom Sports, a sports pricing and analytics company expected to help the operator improve the sportsbook margin of its US-facing joint venture, BetMGM.

To do that Angstrom will, among other things, bolster BetMGM’s same-game parlay capabilities, allowing it to offer a broader range of high-margin betting markets to customers.

Other operators are likely on the lookout for similar acquisitions that could help them strengthen their own product offerings.