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One of FanDuel's early investors breaks down how to capitalize on the booming US sports betting industry amid a 'tremendous decade' of growth

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The fantasy sports website FanDuel is shown on October 16, 2015 in Chicago, Illinois The fantasy sports website FanDuel is shown on October 16, 2015 in Chicago, Illinois

  • Paul Martino, co-founder of San Francisco venture capital firm, BullPen Capital, first invested in FanDuel when the company had 7 employees and was generating $1 million in revenue.
  • Martino expects legalization will be the growth engine driving the industry, he believes 40 states will be legalized over the next decade.
  • “I just think we’re gonna go through a tremendous decade from 2018, when it was legalized, to 2028,” Martino told Business Insider in an interview.
  • Here is how Martino believes retail investors can get in on the action without paying above the odds.
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Not many investment strategies are inspired by a singular company. But for Paul Martino, co-founder of San Francisco venture capital firm, BullPen Capital, his approach to investing was inspired by one of his first investments, the sports betting and fantasy sports firm, FanDuel.

Martino calls his firm’s investing approach, off by one. He is looking for interesting investments in firms that have traditionally been off by one, which could mean the company is based in geography no one is paying attention to or situated in a category that everyone else in the industry hates.

“We really got this philosophy around doing deals that everybody else’s scared of,” Martino told Business Insider in an exclusive interview.

FanDuel was off by three, Martino said. It was a business model focused on US fantasy sports but located in Edinburgh, Scotland, and founded by a husband and wife team. These components were off putting to many investors but for Martino it was the easiest deal he ever made.

Paul Martino Bullpen Capital Paul Martino, co-founder and general partner at BullPen Capital

“This is what you wait for your entire year when you see a deal that nobody else can seem that nobody else understands, go do the deal,” said Matt Ocko, founder of the firm Data Collective, to Martino at the time of investment.

When Martino invested in the Series B round, FanDuel only had seven employees but was generating around $1 million in revenue. Now the firm is owned by Flutter Entertainment (PDYPF), a global sports betting, gaming and entertainment provider, which is valued at $27 billion.

Sports betting landscape

The US sports betting industry has exploded since Martino first invested in FanDuel. Morgan Stanley expects the industry to be worth $8 billion by 2025. And has an extremely bullish estimate of $15 billion, if all states are legalized by 2025, according to MarketWatch.

Each month brings another set of record breaking statistics for sports betting apps. A recent Bank of America research report said there had been a 104% year-over-year growth in gross gaming revenues based on October sports betting data.

The main competitors are currently FanDuel and DraftKings (DKNG). However, the competitive landscape is shifting with more players entering the market, such as MGM Resorts (MGM), William Hill (WMH) and PennNational (PENN).

Breakdown of competitors market share in key sports betting states from Bank of America November 18 research note Breakdown of competitors market share in key sports betting states from Bank of America November 18 research note

“I think as time goes by the regional players and other national brands are going to continue to chip away at the early market share leads that FanDuel and DraftKings have,” Martino said. “I just don’t know if they could ever sustain that, in some states 70% to 80% of the revenues go to those two companies.”

Legalization will be the growth engine driving the industry, Martino said. He expects 40 states to be legalized over the next decade.

“As every new state opens, it’s a new set of players. It’s a new set of regulations. It’s a new set of money to be made,” Martino said. “And I just think we’re gonna go through a tremendous decade from 2018, where it was legalized, to 2028.”

There are currently 20 operational sports betting states – 19 allow land-based sports betting, 14 allow online sports betting and 6 allow online casinos, according to the Bank of America research report.

Bank of America expects another 14 states to be legalized in 2021 and 2022. The analysts also highlight the growing momentum in Canada.

Table on the waves of sports betting adoption from Bank of America November 18 research note Table on the waves of sports betting adoption from Bank of America November 18 research note

Martino expects Pennsylvania to be the main sports betting state for the next two to four years. Then larger population states like Illinois, California and New York could overtake Pennsylvania after that.

In fact, Martino believes so much in the growth of sports betting and in the state of Pennsylvania that he is launching a sports-betting parlour and restaurant in the heart of downtown Philadelphia called Bankroll. The parlour will route bets to betting operators in the state, capitalizing on the growth of sports betting without taking bets.

“We think this is a model we can replicate in other cities, like Denver, like Chicago, and like Detroit, where we think this would work,” Martino said. “And oh, by the way, since it’s all on your phone, and there’s no money changing hands, the city doesn’t mind that it’s downtown.”

Investing opportunities

Ultimately Martino’s approach to Bankroll is how he thinks retail investors should approach the growth of sports betting. He thinks investors should be looking for opportunities on the fringe of the industry, where they can capitalize on sports betting without the high multiples.

“Companies like Flutter, who own fanduel, and DraftKings are, to some extent, priced with so much forward appreciation built into them where they know there’s going to be 10 years of legalization,” Martino said. “And so if you’re a retail investor, sure, you might want to hold them, but there might be real risks there because the multiples are so high.”

Instead one opportunity area is within technology. Martino suggests investors consider the “picks and shovel” companies that provide support to the sports betting companies up and down the technology stack. Investors could see significant price appreciation as tools and technologies get used more and more by incumbents, he said.

One example of this type of company is GameAccount Network (GAN), a company that provides back-end services to casino and gaming companies.

Another option for investors to explore is iGaming more broadly. iGaming is the wider industry focused on gambling online through activities like online poker, sports betting and online casinos. The revenue expectations are much higher, according to market research and consulting company, Grand View Research, the global online gambling industry is expected to be worth $127 billion by 2027.

But at the same time because of the gamification qualities, it is more likely to face regulation, even potentially on the federal level, Martino said, 

“Addictive workflows to make you play a free spin game vs a sports bet. I know which one I think the regulators would come after,” Martino said.