On the surface, there’s nothing surprising about a $70 million football contract these days. Sure, it’s a hefty sum, but no more than what the Arizona Cardinals agreed to pay cornerback Patrick Peterson this offseason. The most recent $70 million deal, however, is not tied to anyone’s forty yard dash time. Instead it is being pumped by venture capitalists into the vibrant fantasy sports market.
FanDuel, the beneficiary of the aforementioned $70 million, announced today that it has raised its Series C from a host of investors, including Shamrock Capital Advisors (a PE firm that recently sold the Harlem Globetrotters), NBC Sports Ventures, and KKR.
Like its main competitor DraftKings, which announced its own $41 million round last week, FanDuel is a fantasy sports service that facilitates daily cash transactions among its players. During the football season, the two services allow users to draft a team each week. These teams then compete against the fantasy teams of other randomly assigned paying participants for prize money. Acting more or less like the online bookie, FanDuel and DraftKings skim off the top the fees that are paid in. According to its own website, FanDuel projects that revenues will hit $40 million in 2014. Both websites also offer the same games in other sports such as ice hockey, basketball and baseball.
Bigger media companies like Yahoo and ESPN have largely refrained from this market, allowing any money that is exchanged in a “league” to happen externally. But DraftKings and FanDuel have taken full advantage of a provision in the 2006 Unlawful Internet Gaming Enforcement Act passed by U.S. Congress that characterizes fantasy sports as “games of skill.” That is, betting on the outcome of a game between the San Francisco 49ers and the New York Giants is considered luck, but predicting that 49ers quarterback Colin Kaepernick will throw for more yards than Giants quarterback Eli Manning is a skill.
All this means the revenue streams of DraftKings and FanDuel flow from more than just advertising, an enticing proposition to tech investors. They also might be looking across the pond, to the U.K., where there are fewer regulations governing gambling, but a much more crowded market.
“Daily fantasy sports represents a tremendous area for growth in the multi-billion dollar world of fantasy sports,” said John Salter, a partner at The Raine Group, which led the investment in DraftKings last week, through a statement. The Raine Group is a global merchant bank specializing in sports and entertainment investments. In addition to participating in the DraftKings deal, the firm also recently advised former Microsoft CEO Steve Ballmer on his purchase of the Los Angeles Clippers.
But daily fantasy sports is not the only football-related market currently being targeted by Silicon Valley investors. San Francisco-based Fantex has set up a stock exchange where participants can buy and sell shares of an athlete’s earnings power. The company has raised over $30 million to date, and was founded by Buck French, whose previous ventures were acquired by Siebel and McAfee. In July, Fantex held its second “IPO,” for shares of second-year Buffalo Bills quarterback E.J. Manuel. Manuel received $5 million through the offering by agreeing to surrender 10% of his future football-related earnings to his shareholders. The stock is currently trading at $10.60 after originally being available for reserve at $10.
The Fantasy Sports Trade Association estimates that 35.5 million people across the United States played fantasy football last year. If historical trends hold true, expect that number, and the cottage industry around it, to grow even more in 2014.