Betfair is one of the largest Internet success stories that few of us in the US know much about. This is because Betfair is a UK-based company that operates the world’s largest online betting exchange and does not accept bets from US consumers. Betfair completed a financing in April 2006 that set the company’s valuation at slightly over $3B! The financing should be considered a partial buyout, as Softbank bought a 23% interest in the company for ~$600M. That money was used to provide partial liquidity for the company’s early investors, founders, and employees. That lofty valuation is grounded in spectacular financial performance over the last 4 years, as the company grew from ~$10M in revenue in fiscal 2002 to ~$280M in fiscal 2006. Betfair generated ~$70M in operating profit in fiscal 2006, for a healthy 24% operating margin.
As an avid horseracing fan and semi-professional gambler during my college days, I have been aware of Betfair’s success for several years now. While the company operates in a gambling market that most US entrepreneurs wouldn’t touch, there are many lessons learned from the company’s success that can be applied to more general Internet businesses, particularly those with a marketplace component.
Interviews conducted: Adam Platti, early engineer at Flutter, a company that merged with Betfair in December 2001. Adam is now an engineer at Bebo, and has a nice blog that points to many useful tips and articles. I also had two other very good sources who preferred not to be named.
Initial product designed for niche (sophisticated gamblers), not mainstream consumer
In the early days of what would become the online betting exchange market, there were two major players: Betfair and Flutter. Flutter could be considered first to market, as they raised ~$44M in VC funding in two rounds, one before product launch and one just after product launch in May 2000. Given the large amount of capital Flutter raised, Betfair was unable to raise VC funding itself, and instead raised a $1-2M seed round from angels. While both were targeted broadly in the person to person sports betting market, each took an initially different product approach. As it turned out, the Betfair approach was the right one for several reasons.
Flutter was initially envisioned as an online betting community, where users could place bets against their friends and other members of the community. It could almost be thought of as the eBay for betting – users would list the types of bets they’d like to make and other users would choose whether to accept the bet. The concept was inspired by the use case of friends placing bets against one another via email.
Betfair on the other hand was built like a stock market exchange, where odds functioned as the share prices. Betfair was built on the concept that a bettor didn’t really care who was booking the bet, as long as they got the best deal possible. The concept of community didn’t have much value, but the concept of liquidity in any one betting market was paramount. This would enable players to trade in and out of positions on horses, much like trading in and out of positions on stocks. Betfair’s product brought about some profound innovations to the UK horse and sports betting markets, enabling people to “lay” or bet against horses for the first time, while also creating a new type of gambler that took advantage of market trading dynamics without actually having an opinion on the sporting event itself.
Several months after launching in May 2000, Flutter management came to realize that the Betfair approach to the market was the correct one and altered its product accordingly. Although the Betfair approach was thought to only appeal to a small niche of the population (sophisticated gamblers), it turned out that this niche was driving tremendous amounts of volume. After about a year of competing head-on with Betfair, Flutter management decided that it would be most prudent to merge with Betfair. This occurred in December 2001, allowing the combined entity to draw upon the $20M+ in financing that Flutter still possessed, and focus the company on growing the overall market rather than competing for market share.
Although Betfair covers many betting markets, the majority of the wagering volume is still from UK horseracing, Betfair’s initial target market. Betfair’s system created an inherent cost advantage relative to the traditional bookmaker model in the UK. Bookmakers would offer odds on horses to the public, with the hopes of balancing the number of bets such that any outcome of a horse race would still result in a net profit for the bookmaker. Because the bookmaker was taking a risk on the outcome of the race, this cost was built into the odds the bookmaker would offer the public. Because Betfair does not function as a traditional bookmaker, it does not have any risk exposure on a race. Thus, the odds that the public sees on Betfair are more reflective of true market, resulting in higher odds in most cases. Thus, a gambler might have found odds of 4-1 on a horse through traditional bookmakers, and would find odds of 5-1 for that same horse on Betfair. In addition to the lack of risk exposure, Betfair also benefited from UK tax laws on Internet gambling that did not require them to pay a tax on gross profit, the way that offline bookmakers did. The net result was a cost advantage for Betfair that traditional bookmakers could not match. This cost advantage translated into a significant value proposition for the bettor – higher odds.
Betfair recognized that the key to creating a successful betting marketplace was to improve the chances that any reasonable bet placed, would be matched. In essence, Betfair needed to provide the platform to balance supply and demand the same way that a stock exchange does. As with any marketplace, Betfair needed to solve a chicken and egg problem.
They solved this problem by utilizing three strategies: limiting the number of markets in play at any one time, implementing a business model that encouraged volume betting, and marketing to high volume players. Betfair limited the number of events that could be wagered upon to ensure enough liquidity in that event. Betfair’s business model of charging a commission on net profit, rather than gross profit, enabled a new type of bettor – people looking for arbitrage opportunities. These bettors moved large volumes of bets to lock-in a very small profit regardless of the outcome on the race, providing liquidity to the market. Finally, Betfair offered a myriad of incentives and discounts to the heavy bettors responsible for moving large volumes.
Betfair’s recent valuation of $3.2B indicates healthy trailing valuation multiples of 11X sales and 47X operating profit. Unlike most online gambling companies, Betfair’s valuation is more inline with Internet stalwarts like Google, eBay, and Yahoo. There are several reasons as to why one can justify such a lofty valuation for Betfair. For starters, the large majority of Betfair’s revenue has come from the UK. There is enormous financial upside if Betfair can successfully expand into new geographies like Asia, US, and Australia. Secondly, a highly liquid marketplace for bettors is a difficult barrier to entry to overcome. Unlike an online poker or casino site that has very few barriers to entry, creating the critical mass to have an effective betting exchange is difficult and costly. An analogy to eBay comes to mind here.
The financing history of Betfair is an interesting one as well. As stated above, Flutter was the first company to raise money, beating Betfair founders Andrew Black and Ed Wray to the punch. Once Flutter raised $44M in VC funding, the Betfair founders found that other VCs were unwilling to back a second competitor. Betfair instead raised ~$2M in angel financing in small increments from friends and family. Despite significantly less capital, the Betfair team built the right product and got quicker user adoption than Flutter. The two companies merged about a year and a half after launch, combining user bases and bringing ~$20M of unused Flutter capital into Betfair. As a result of Betfair’s successful start on limited capital raised, both Betfair founders still own significant stakes (10-15%) in the company today. This makes for an inspiring story of how a non-VC funded Internet start-up can win against a better-funded, VC-backed start-up in the same market. The Flutter investors and founders also made healthy returns. In a press release issued by the UK office of Benchmark Capital, it states that Benchmark still owns ~7% of Betfair despite a partial cash-out of its shares in the Softbank transaction. This would mean that Benchmark still has a stake in Betfair worth north of $200M on less than $25M total invested. The press release also states that the original Betfair investors made a return of 130X times their initial capital. I assume this refers to the angel investors in Betfair.
Overall, Betfair was able to effectively launch and market its service because it could target a very tight demographic – horseracing and sports gamblers. Reaching gamblers through traditional media is relatively easy because they tend to congregate in the same places. Betfair launched with an offline PR gimmick that brought it high visibility. Betfair staged a mock “bookmaker” funeral procession through Russell Square in central London on Oaks Day, a major horseracing event in the UK. This garnered press coverage and effectively got bettors to try the system upon launch. Mainstream press would continue to play a large part in Betfair’s success over the first few years.
Betfair did a great job of securing partnerships, sponsorships, grassroots marketing and advertising targeted at horseracing gamblers. First, they partnered with the Racing Post, a publication that delivers news and data on races. The Racing Post is equivalent to the Daily Racing Form in the US. Betfair built a co-branded version of the exchange (really just an API to the Betfair exchange) that enabled Racing Post customers to place bets via the Racing Post website; this was a revenue share partnership. Not only did Betfair advertise in the Racing Post, they also sponsored races at the racetracks. Betfair also used some guerilla marketing tactics, approaching bookmakers that operated on-track and making it easy for them to utilize Betfair to hedge their bets. To jumpstart some of the sports betting markets, Betfair sponsored an English Premier League football team.
The merger with Flutter also helped to propel Betfair by combining user bases. It is interesting that Flutter offered users 10 pounds free to wager on Flutter, and while this offer attracted users, it did not result in the desired behavior. Smarter bettors preyed on the new bettors, resulting in a poor experience.
Betfair’s success, particularly relative to their better-funded competitor, Flutter, spurs one topic worthy of further discussion. I find it interesting that Flutter’s initial product was geared towards a mainstream audience, while Betfair was serving a smaller niche of sophisticated gamblers. The VC money bet on the mainstream play (Flutter), but as it turned out, starting with the niche of sophisticated gamblers was the right way to approach the market. In hindsight this makes sense, as targeting the early adopters who are more likely to understand the value proposition feels like a tighter go-to-market strategy. Flutter spent a lot of money acquiring mainstream consumers that didn’t adopt the product the same way that Betfair users did. Is the Betfair approach the right way to launch a consumer Internet service, i.e. build the product to early adopters rather than the mainstream consumer?
As I have been thinking about the common themes across successful Internet companies, Betfair encompasses many of them. First, they offered a low cost alternative to a previously high cost service (bookmakers). Second, they empowered some users to supplement or make a living using their service. Third, they targeted a niche that turned out to be much larger than most people expected. Fourth, they were able to jumpstart user acquisition through a distribution partnership. Fifth, they had a story that lent itself well to mainstream PR. Lots of ingredients at play!
[thanks to nissan gabay via cc]
As an avid horseracing fan and semi-professional gambler during my college days, I have been aware of Betfair’s success for several years now. While the company operates in a gambling market that most US entrepreneurs wouldn’t touch, there are many lessons learned from the company’s success that can be applied to more general Internet businesses, particularly those with a marketplace component.
Interviews conducted: Adam Platti, early engineer at Flutter, a company that merged with Betfair in December 2001. Adam is now an engineer at Bebo, and has a nice blog that points to many useful tips and articles. I also had two other very good sources who preferred not to be named.
Key success factors
Initial product designed for niche (sophisticated gamblers), not mainstream consumer
In the early days of what would become the online betting exchange market, there were two major players: Betfair and Flutter. Flutter could be considered first to market, as they raised ~$44M in VC funding in two rounds, one before product launch and one just after product launch in May 2000. Given the large amount of capital Flutter raised, Betfair was unable to raise VC funding itself, and instead raised a $1-2M seed round from angels. While both were targeted broadly in the person to person sports betting market, each took an initially different product approach. As it turned out, the Betfair approach was the right one for several reasons.
Flutter was initially envisioned as an online betting community, where users could place bets against their friends and other members of the community. It could almost be thought of as the eBay for betting – users would list the types of bets they’d like to make and other users would choose whether to accept the bet. The concept was inspired by the use case of friends placing bets against one another via email.
Betfair on the other hand was built like a stock market exchange, where odds functioned as the share prices. Betfair was built on the concept that a bettor didn’t really care who was booking the bet, as long as they got the best deal possible. The concept of community didn’t have much value, but the concept of liquidity in any one betting market was paramount. This would enable players to trade in and out of positions on horses, much like trading in and out of positions on stocks. Betfair’s product brought about some profound innovations to the UK horse and sports betting markets, enabling people to “lay” or bet against horses for the first time, while also creating a new type of gambler that took advantage of market trading dynamics without actually having an opinion on the sporting event itself.
Several months after launching in May 2000, Flutter management came to realize that the Betfair approach to the market was the correct one and altered its product accordingly. Although the Betfair approach was thought to only appeal to a small niche of the population (sophisticated gamblers), it turned out that this niche was driving tremendous amounts of volume. After about a year of competing head-on with Betfair, Flutter management decided that it would be most prudent to merge with Betfair. This occurred in December 2001, allowing the combined entity to draw upon the $20M+ in financing that Flutter still possessed, and focus the company on growing the overall market rather than competing for market share.
Tremendous cost advantage over traditional methods
Although Betfair covers many betting markets, the majority of the wagering volume is still from UK horseracing, Betfair’s initial target market. Betfair’s system created an inherent cost advantage relative to the traditional bookmaker model in the UK. Bookmakers would offer odds on horses to the public, with the hopes of balancing the number of bets such that any outcome of a horse race would still result in a net profit for the bookmaker. Because the bookmaker was taking a risk on the outcome of the race, this cost was built into the odds the bookmaker would offer the public. Because Betfair does not function as a traditional bookmaker, it does not have any risk exposure on a race. Thus, the odds that the public sees on Betfair are more reflective of true market, resulting in higher odds in most cases. Thus, a gambler might have found odds of 4-1 on a horse through traditional bookmakers, and would find odds of 5-1 for that same horse on Betfair. In addition to the lack of risk exposure, Betfair also benefited from UK tax laws on Internet gambling that did not require them to pay a tax on gross profit, the way that offline bookmakers did. The net result was a cost advantage for Betfair that traditional bookmakers could not match. This cost advantage translated into a significant value proposition for the bettor – higher odds.
Took steps to develop high liquidity marketplaces
Betfair recognized that the key to creating a successful betting marketplace was to improve the chances that any reasonable bet placed, would be matched. In essence, Betfair needed to provide the platform to balance supply and demand the same way that a stock exchange does. As with any marketplace, Betfair needed to solve a chicken and egg problem.
They solved this problem by utilizing three strategies: limiting the number of markets in play at any one time, implementing a business model that encouraged volume betting, and marketing to high volume players. Betfair limited the number of events that could be wagered upon to ensure enough liquidity in that event. Betfair’s business model of charging a commission on net profit, rather than gross profit, enabled a new type of bettor – people looking for arbitrage opportunities. These bettors moved large volumes of bets to lock-in a very small profit regardless of the outcome on the race, providing liquidity to the market. Finally, Betfair offered a myriad of incentives and discounts to the heavy bettors responsible for moving large volumes.
Exit analysis
Betfair’s recent valuation of $3.2B indicates healthy trailing valuation multiples of 11X sales and 47X operating profit. Unlike most online gambling companies, Betfair’s valuation is more inline with Internet stalwarts like Google, eBay, and Yahoo. There are several reasons as to why one can justify such a lofty valuation for Betfair. For starters, the large majority of Betfair’s revenue has come from the UK. There is enormous financial upside if Betfair can successfully expand into new geographies like Asia, US, and Australia. Secondly, a highly liquid marketplace for bettors is a difficult barrier to entry to overcome. Unlike an online poker or casino site that has very few barriers to entry, creating the critical mass to have an effective betting exchange is difficult and costly. An analogy to eBay comes to mind here.
The financing history of Betfair is an interesting one as well. As stated above, Flutter was the first company to raise money, beating Betfair founders Andrew Black and Ed Wray to the punch. Once Flutter raised $44M in VC funding, the Betfair founders found that other VCs were unwilling to back a second competitor. Betfair instead raised ~$2M in angel financing in small increments from friends and family. Despite significantly less capital, the Betfair team built the right product and got quicker user adoption than Flutter. The two companies merged about a year and a half after launch, combining user bases and bringing ~$20M of unused Flutter capital into Betfair. As a result of Betfair’s successful start on limited capital raised, both Betfair founders still own significant stakes (10-15%) in the company today. This makes for an inspiring story of how a non-VC funded Internet start-up can win against a better-funded, VC-backed start-up in the same market. The Flutter investors and founders also made healthy returns. In a press release issued by the UK office of Benchmark Capital, it states that Benchmark still owns ~7% of Betfair despite a partial cash-out of its shares in the Softbank transaction. This would mean that Benchmark still has a stake in Betfair worth north of $200M on less than $25M total invested. The press release also states that the original Betfair investors made a return of 130X times their initial capital. I assume this refers to the angel investors in Betfair.
Launch strategy and marketing
Overall, Betfair was able to effectively launch and market its service because it could target a very tight demographic – horseracing and sports gamblers. Reaching gamblers through traditional media is relatively easy because they tend to congregate in the same places. Betfair launched with an offline PR gimmick that brought it high visibility. Betfair staged a mock “bookmaker” funeral procession through Russell Square in central London on Oaks Day, a major horseracing event in the UK. This garnered press coverage and effectively got bettors to try the system upon launch. Mainstream press would continue to play a large part in Betfair’s success over the first few years.
Betfair did a great job of securing partnerships, sponsorships, grassroots marketing and advertising targeted at horseracing gamblers. First, they partnered with the Racing Post, a publication that delivers news and data on races. The Racing Post is equivalent to the Daily Racing Form in the US. Betfair built a co-branded version of the exchange (really just an API to the Betfair exchange) that enabled Racing Post customers to place bets via the Racing Post website; this was a revenue share partnership. Not only did Betfair advertise in the Racing Post, they also sponsored races at the racetracks. Betfair also used some guerilla marketing tactics, approaching bookmakers that operated on-track and making it easy for them to utilize Betfair to hedge their bets. To jumpstart some of the sports betting markets, Betfair sponsored an English Premier League football team.
The merger with Flutter also helped to propel Betfair by combining user bases. It is interesting that Flutter offered users 10 pounds free to wager on Flutter, and while this offer attracted users, it did not result in the desired behavior. Smarter bettors preyed on the new bettors, resulting in a poor experience.
Food for thought
Betfair’s success, particularly relative to their better-funded competitor, Flutter, spurs one topic worthy of further discussion. I find it interesting that Flutter’s initial product was geared towards a mainstream audience, while Betfair was serving a smaller niche of sophisticated gamblers. The VC money bet on the mainstream play (Flutter), but as it turned out, starting with the niche of sophisticated gamblers was the right way to approach the market. In hindsight this makes sense, as targeting the early adopters who are more likely to understand the value proposition feels like a tighter go-to-market strategy. Flutter spent a lot of money acquiring mainstream consumers that didn’t adopt the product the same way that Betfair users did. Is the Betfair approach the right way to launch a consumer Internet service, i.e. build the product to early adopters rather than the mainstream consumer?
As I have been thinking about the common themes across successful Internet companies, Betfair encompasses many of them. First, they offered a low cost alternative to a previously high cost service (bookmakers). Second, they empowered some users to supplement or make a living using their service. Third, they targeted a niche that turned out to be much larger than most people expected. Fourth, they were able to jumpstart user acquisition through a distribution partnership. Fifth, they had a story that lent itself well to mainstream PR. Lots of ingredients at play!
[thanks to nissan gabay via cc]