Q&A with Neil Rimer on Betfair, the day’s hottest IPO
If you haven’t heard of the company, it may be because Congress has banned such companies from operating inside the United States. But it’s big business in elsewhere, with around £341 million in revenue for the fiscal year ending April 30.
So I spent some time chatting with Neil Rimer of Index Ventures, a venture capital firm that sold a small part of its stake in the IPO (sold 493,000 shares, still holds around 2.3 million shares). Here is a transcript of our conversation:
Fortune: When did you first invest in Betfair, and were you among those who sold part of your position to Softbank in 2006?
Rimer: We got involved ten years ago, so as the same round that [Balderton] got involved in. And we did sell some of our stake to Softbank, but not all of it. We also sold a little bit in the offering, because without selling shareholders there would have been no offering.
Why was that? Most companies go public to, in part, raise new capital.
The company is just that good. They don’t need the money, so this was more about liquidity.
When you look at Betfair’s financials, you see rising revenue for each of the past three fiscal years. But the fiscal 2010 EBITDA is well below 2009. How come?
I’m uncomfortable talking about that, because I was wasn’t on the road-show and don’t know how they addressed it. I can say, however, that they are generating lots of cash and are investing some of that money to build the business for the next 10 years.
Going back to when you first invested in Betfair, is today’s company similar in scope and strategy to where you thought it would be at this point?
I think it’s not too far from the original grand vision, but the route to get there was very different from what we imagined. Today, Betfair is a very broad platform for sports betting. It’s an exchange. They also have financial bets and casino games and things like that.
When we first invested, it was in a business called Flutter that was started by two American guys who went to London. They saw eBay and thought that they could apply the same end-to-end exchange paradigm to betting. If you disintermediate the bookies on an open platform, then you reduce the spread.
But the original vision of the Flutter guys was that you and I could place a bet for anything, and settle for any stakes. Money, cigars or iTunes credits – even though those weren’t invented yet.
Can you currently bet for cigars on Betfair?
No, not on the stake part. If you could do that, you’d probably do it once and then want money.
We had this original grand vision like a courtyard in which people could go down any path they wanted. But then we began noticing that most people were using a particular path, so that’s the one we wanted to invest in. For Flutter, we saw that most of the money was in football and horseracing, which is where Betfair was playing.
They had more betting DNA, while we probably had a stronger tech platform in those days. So we decided to merge the companies.
That’s one reason why Dave Yu, who was CTO of Flutter, is the CEO today. I don’t mean to detract what [the Betfair founders] did, but it was the marriage that got us to where the company is today.
Betfair is prohibited from doing business in the U.S. How important would an American market be for the company?
Betfair would be many times larger if made decision to move to Gibraltar and service the U.S. market. But we wouldn’t want to be associated with a business taking that perspective, plus we probably could travel to the U.S.
Plus, it could cause troubles for your U.S. investors.
Yes, that too. Remember, the Flutter founders were Americans who moved to the UK because they thought it was the best place to form this sort of business. We enter markets were we can be legally licensed, and have never taken any business from American customers. We’ve been able to build a huge business by avoiding the U.S., but obviously would take advantage of it were the laws to change.
Are you surprised that companies like Zynga haven’t formed London-based affiliates to get a piece of the currency-based online gaming market?
I think they’re very nervous about being tainted by that type of business in the U.S. I think that you have to make a choice: If you want to be a betting business, which means you have to stay out of the U.S. There are people who skirt that, but you’d better like living in Gibraltar
Or you decide that you want to be in the U.S., and stay out of gambling entirely. I think it’s hard to have one foot in both camps.
Are there other deals Index has done that have been specifically informed by your experience with Betfair?
As I mentioned earlier, it’s really the concept of exchanges. If you build the best end-to-end exchange, then you suck all the liquidity to your market which gets you lower spreads which gets you more liquidity and so on. At some point, it becomes hard for someone else to come up. Who going to compete with Nasdaq?
So that’s a concept we’ve been looking to exploit.
One example is Oanda, which is a ForEx exchange business online. We’re leveraging the fact that the Internet exists and cheap and ubiquitous.
If I call my banker for a cross-rate on a ForEx deal, why does he ask if I’m buying or selling? The answer is that he’ll give me a different price for each, and also a different price depending on how much I’m looking to invest. I can’t know the spread. And who gets the interest if you buy and sell a currency before a date change? In other words, they’ll screw you.
So we thought, let’s automate everything straight through, which will lower the spread.
We’ve also got ViaGogo, which is a secondary ticketing market similar to the StubHub model, and PeoplePerHour, which basically is a marketplace for freelance coders, designers, etc. to offer their services on granular hourly basis…
In general, when I think of Betfair it’s just really gratifying to see a business that has built such a powerful machine with great European roots.