DraftKings: The Most Fascinating Company In Sports

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Hey Friends,

DraftKings has quietly become one of the most polarizing companies in sports.

On one hand, people think the financials are disappointing. The 10-year-old company is on pace to spend more than $1 billion on marketing this year, has reported net losses of nearly $1.2 billion over the last nine months alone, and has now watched its market cap plummet from $30 billion in March to just $13 billion today.

And to make matters worse, the critics have become louder than ever.

Capital allocators like Hindenburg Research & Jim Chanos have taken short positions on the stock, publicly shouting from the rooftops about its “flawed business model.”

But on the other hand, DraftKings is a growing business fixated at the top of a massive industry.

The company will do over $1 billion in revenue this year. They are seeing nearly 100% year-over-year growth, have already reached 1.3 million monthly unique paying customers, and are still only live for online sports betting & iGaming in just 29% and 11% of the U.S. population, respectively.

DraftKings Annual Revenue

• 2018: $226 million

• 2019: $323 million

• 2020: $615 million

• 2021(E): $1.25 billion (+103% YoY)

As always, opinions vary, and the truth probably sits somewhere in between.

The history of the company is pretty fascinating. Co-founders Jason Robins, Matt Kalish, and Paul Liberman were all working at Boston-based Vistaprint in 2012 when they had an idea.

The trio loved playing fantasy sports—Robins says that he joined nearly 200 fantasy leagues each year—but grew frustrated that you had to wait until the end of the season to receive payouts. Instead, what if you could compete for cash daily?

The answer was daily fantasy sports (DFS), and DraftKings was born.

Now, to be fair, Robins, Kalish, and Liberman didn’t necessarily come up with the idea for daily fantasy sports (DFS). FanDuel was incorporated years prior, and there were probably 15 to 20 other companies already launching similar products.

Still, DraftKings captured the imagination of venture capitalists around the country, raised millions of dollars, attracted customers, paid out record prizes, and quickly established themselves as a top player in a potentially multi-billion-dollar industry.

But fast forward a few years, and with roughly 90% of the DFS market controlled by DraftKings & FanDuel, the two companies agreed to merge in 2016. That deal was eventually called off after the Federal Trade Commission (FTC) claimed it would create a monopoly, but it set up an even bigger fight between the two companies.

Yes, I’m talking about legalized sports betting & iGaming.

DraftKings (High-Level) Timeline

• 2012: The company is founded by Jason Robins, Matt Kalish & Paul Liberman

• 2013: DraftKings receives an investment from Major League Baseball

• 2014: The company reaches 50k active daily users & 1M registered players

• 2016: DraftKings & FanDeul agree to merch but later terminate the agreement

• 2018: DraftKings launches its first legal online sportsbook in New Jersey

• 2020: DraftKings becomes a public company at a $3.3 billion valuation

Of course, that’s the TLDR version. Still, you get the point, by the time the Supreme Court ruled PASPA unconstitutional in 2018, paving the way for individual states to legalize sports betting, DraftKings had its sights set on something much bigger than just daily fantasy sports (DFS).

Now, just three years after launching its first legal online sportsbook in New Jersey, the DraftKings Sportsbook is legal and available in 14 states, including New Jersey, West Virginia, Indiana, Pennsylvania, New Hampshire, Iowa, Colorado, Illinois, Tennessee, Michigan, Virginia, Wyoming, Arizona, and Connecticut.

And with an expanding total addressable market and additional revenue streams, DraftKings watched its annual revenue soar from just $66 million pre-legalized sports betting to more than $1 billion today — but the losses have piled up also.

With states legalizing sports betting on an individual basis, it has created a fragmented market where operators are incentivized to spend aggressively and acquire as many customers as possible, as quickly as possible.

It’s called a “land grab,” and no one has lived that mantra more than DraftKings.

Sure, the Boston-based company is set to double revenue this year. That’s great, but they have also already spent more than $1 billion on marketing in 2021 and are losing roughly $400 million to $500 million each quarter.

DraftKings Net Losses

• 2021 Q1: $346 million

• 2021 Q2: $305 million

• 2021 Q3: $545 million

Value investors would probably say that’s insane and that the business model is flawed, but being the optimist that I am, let’s look at it from a slightly different angle.

DraftKings has continuously said that their aggressive marketing spend is based on a two to three-year profitability window after a state goes live. New Jersey is the only state to reach that checkpoint so far, and DraftKings has turned it profitable, delivering on its promise to shareholders.

The natural way to look at this is from a customer acquisition cost (CAC) and lifetime value (LTV) perspective. For example, DraftKings says that it cost them about $370 to acquire a customer last year, and that same customer came with a lifetime value of $2,500.

As DraftKings continues to expand its online sportsbook & iGaming operation to the remaining 70% to 90% of the country it doesn’t already have access to, investors are betting that its LTV:CAC ratio remains at a robust 6.7.

Remember, an LTV:CAC ratio of 3 is generally considered good, and anything higher than that usually means you actually aren’t spending enough money on marketing.

Of course, the real question becomes if a customer is actually worth $2,500.

Most industry bears would point to the fact that switching costs are quite low between sportsbooks and that the tech stack offered by these companies is not all the different.

Combine that with the fact that the industry hasn’t been around long enough for people to battle-test average revenue per user (ARPU) assumptions over the long run, and you can see why investors might be worried about the long-term retention, stickiness, churn, and profitability of a customer.

For example, what percentage of sports bettors will continue to shop around for better signup bonuses? How much more valuable are early signups vs. the more casual bettors that will enter the market later? Can DraftKings expand & develop additional revenue streams outside of DFS, OSB, and iGaming? When will the company turn profitable?

These are all fair questions, and after watching the companies valuation aggressively yo-yo back-and-forth for most of the last few years, the conversation between DraftKings bulls and bears has become quite toxic.

But to DraftKings credit, I reached out to CEO Jason Robins on Twitter last week, and he agreed to record a podcast episode with me to run through all of these questions.

Our 40-minute conversation dropped today, and it’s jam-packed with insight, including how DraftKings raised its seed round, its plan to reduce marketing costs & increase retention over time, the diversification of revenue streams, the future of micro-betting, and more.

Jason also talked through DraftKings discussions about potentially putting Bitcoin on its balance sheet and a timeline on when they might allow customers to pay in crypto.

You can listen to our entire conversation below — enjoy!

I hope everyone has a great day, and we’ll talk tomorrow.

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Huddle Up is a daily letter that breaks down the business and money behind sports.

Join more than 51,000 professional athletes, business executives, and casual sports fans that receive it directly in their inbox each morning — it’s free.

THE JOE POMP SHOW: Today’s episode with DraftKings CEO Jason Robins is live!

In this conversation, we discuss:

• How DraftKings raised its seed round

• Their plan to reduce marketing expenses

• The future of micro-betting, iGaming, and more

• The diversification of revenue streams outside DFS/OSB/iGaming

• Lowering CAC, increasing LTV, and reducing customer churn

• Putting Bitcoin on the balance sheet & enabling customers to pay in crypto

This was an epic convo — listen, subscribe, share, and enjoy!

You can also watch the YouTube video below.