NY AG Wants $M’s from Draft Kings and Fan Duel — The Vultures Are Circling
You gotta love businesses that can lose millions of dollars per year (Draft Kings’ $280MM loss in 2015; Fan Duel’s $137MM loss in 2015) and still raise even more money from their original investors and new ones as well. It’s common knowledge that both Draft Kings and Fan Duel have raised millions of VC dollars (as revealed by the 24/7 Wall Street review of PrivCo’s Private Company Financial Database):
24/7 Wall Street reports that earlier this year, DraftKings raised a $70MM dollar series E round from a number of existing investors including KKR, as well as from new investors like NBC Sports Ventures. As of September 1st, 2015 DraftKings closed an additional round raising $153MM. (Kudos to 24/7 Wall Street.)
Lots of Internet giants started out losing money. No news there. And, there’s a rich American market of fantasy sports players who, denied the opportunity for online sports betting, still represent a good bet for investment.
But, Draft Kings and Fan Duel have to fight for more than growth, profitability and market share. They, and the rest of the DFS industry, are still fighting for survival. Don’t get me wrong. We think that DFS is going to be legalized, taxed and regulated.
The real issue is going to be whether any of these companies can survive the typical challenges of online business AND pay the penalties associated with their pre-legalization conduct. PLAIN ENGLISH: In New York, legalization did not end the claims that Draft Kings and Fan Duel engaged in consumer fraud prior to legalization. There will be a penalty to be paid for that conduct. You can bet that, if the NY AG is successful in reaching a settlement (rumored to be in the $8 — $12 million range), then 49 other state AG’s will be lining up to take their bite of these limping unicorns.
So, who is the political winner in all of this? The winner is going to be NY AG Eric Schneiderman who will have (i) successfully battled “the powers that be” on behalf of the little guy and won millions of dollars; AND (ii) made DFS a fairer game for the Average Joe. Will it be enough to make him the next Governor of New York? Who knows.
Who is the economic winner? That answer is less clear. When the cost of all settlements and net revenues is at least projectable, the current investors in DFS will have to find yet another major investor who will provide sufficient funds to pay off the State AG’s and carry the business to cash flow break-even. Given their 2015 losses and the absence of settlements to date, the smart money is probably still sitting on the sidelines waiting first for the smoke to clear and then to “cram down” earlier investors and founders with punishing dilution. PLAIN ENGLISH: Whoever invests the last dollars needed to get these businesses to break-even is going to the economic winner. As the Brothers Grimm might have said, a three-legged unicorn is better than horse meat.
