Sorry ESPN, But DraftKings and FanDuel Didn’t Implode
Last fall, ESPN senior writer Don Van Natta Jr. began researching a daily fantasy sports industry that was under intense legal pressure, in the midst of an NFL season in which ads for companies like DraftKings and FanDuel were ubiquitous—including on ESPN properties. The fruits of his labor landed today, with nearly 11,000 words that detail how the big industry players were founded, funded and fought—both with regulators and themselves.
Unfortunately, this compelling narrative is undercut by a promise that Van Natta Jr. is going to tell us about “the implosion of the daily fantasy industry.”
He proves utterly unable to do so. Not because he lacks skills or sources. But, rather, because the daily fantasy industry hasn’t actually imploded.
Well, for starters, both DraftKings and FanDuel are still in business. That seems pretty important. Plenty of tech startups have indeed imploded, including requisite site shutdowns and fire-sales of assets like intellectual property (e.g., Fab.com).
Moreover, both companies tell Fortune that their active user and gross revenue figures were significantly higher for the first half of 2016 than for the first half of 2015. DraftKings, for example, says its gross revenue bump was up a whopping 98.2% and unique paying users climbed by 136%.
But wait, says Van Natta Jr. Neither DraftKings nor FanDuel are profitable. He’s right. They aren’t. But that’s probably because they are relatively young tech startups, which almost all lose money for years. FanDuel, for example, was founded the same year as Uber, which also currently loses money. Would ESPN also argue that the ride-hailing industry is imploding?
Ride-hailing is actually a good parallel here, because it and daily fantasy share the challenges of being targeted by regulators at the state and local levels. Again, is Uber “imploding” because it faces lawsuits and unsympathetic elected officials? Of course not. In fact, a counterargument could be made that as lawmakers codify permissive rules for such industries―as has happened for daily fantasy in New York― it creates the type of certainty that businesses and their investors typically crave.
In fact, that’s a big reason why, within the past month, DraftKings managed to quietly raise a “large” round of venture capital funding led by new investor Revolution Growth (the firm led by AOL co-founder Steve Case and Washington Capitals and Wizards owner Ted Leonsis).
Fortune has learned that the undisclosed funding comes at a substantial valuation discount to where DraftKings raised money late last summer—when it secured capital at a $2 billion post-money valuation—but is still multiples higher than what the company was valued at by investors in late 2014. So, yes, DraftKings is worth less at the start of this NFL season than at the start of the last one. But the valley between a “down-round” and an “implosion” is wide, particularly in a (slightly) more rationale venture capital market. Moreover, both companies remain valued north of $1 billion.
For the record, Van Natta Jr. said on television today that daily fantasy sports sites “can’t raise any more money… it’s almost impossible for them to raise money,” because of active grand jury investigations.
Neither DraftKings nor Revolution would comment on the new investment.
Finally, it also is worth noting that his story includes an item about how an investigation into daily fantasy by New York Attorney General Eric Schneiderman resulted in ESPN deciding “on Oct. 6 to remove all DraftKings-sponsored elements from its shows.” Van Natta Jr. neglects to mention that the move was made because ESPN began covering the AG’s action, and has a policy against having show segments sponsored by the same entity that the segments are discussing. Moreover, DraftKings-sponsored elements returned to ESPN programs just days later, and its more traditional ads never stopped running on the network.
I certainly agree with Van Natta Jr. that this has been a very trying year for daily fantasy sports ― much of which was self-inflicted. And we will see far fewer ads for both DraftKings and FanDuel during this NFL season than during the last, as both companies have acknowledged that the barrage ultimately began to backfire. However, there are no implosions here.
Daily fantasy is a young industry that got a bit ahead of itself, as almost all young tech industries are wont to do, but which continues to serve a growing base of customers. It’s not nearly as sexy a story as an industry “imploding.” But it’s a true one.