DraftKings’ Founders Say Profitability Depends On Rollout Of States Legalizing Sports…

The company’s three cofounders see vast potential for growth as more states legalize sports betting, but they say the industry is still at the bottom of the first inning.

Fourteen months after going public via SPAC merger in the midst of the pandemic, daily fantasy and sports betting operator DraftKings is riding a wave of fast-paced growth as more U.S. states legalize sports gambling or consider legislation to do so. After nearly doubling revenue—to over $600 million—in 2020, DraftKings now aims to surpass $1 billion this year, with its three cofounders citing “tremendous momentum in the industry” and high rates of customer growth as the U.S. sports betting market takes off. But as more states legalize sports gambling, the race for market share and new customers—especially against companies like DraftKings’ chief competitor, FanDuel—has heated up. 

Despite growing at a fast clip, DraftKings, which sports a nearly $22 billion market capitalization, has yet to turn a profit. It posted a net loss of $844 million in 2020 and a loss of around $325 million in the quarter through March 2021. The company doesn’t expect to be profitable for at least a few years. While the cofounders are optimistic about what they say is the vast potential of the U.S. sports betting market, they admit DraftKings’ long-term profitability depends on the rollout of states legalizing sports betting.

“We don’t know how many states are going to launch and over what time frame,” says 40-year-old CEO Jason Robins, speaking to Forbes via Zoom from his home in the Boston area. “What gives us confidence, and I think gives investors confidence, is that we are profitable in our longest tenured state, New Jersey.”

The Garden State accounted for around 25% of DraftKings’ overall revenue last year, across both the company’s online sportsbook and iGaming (online casino gambling such as slot machines, poker and sports betting). Revenue in New Jersey grew from $85 million in 2019 to over $150 million in 2020, and is expected to surpass $200 million in 2021, according to the company.

In total, DraftKings now operates sportsbooks in 14 states and averages 1.5 million monthly unique paying customers across its online sportsbooks, iGaming and daily fantasy offerings. With the U.S. sports betting industry still at an early stage, the company has been pursuing a high-growth strategy, with increased marketing spend for the foreseeable future. If DraftKings keeps growing in more states and maintains a 20% to 30% market share, the company says it could gross $2.9 billion to $4.3 billion a year when the online sports betting market reaches “maturity,” or 65% legalization.

While DraftKings’ shares soared more than 330% in 2020, the stock has struggled in recent months. In May, DraftKings reported first-quarter earnings that beat expectations, but investors were somewhat rattled by the company’s increased marketing spend: Although revenue tripled from the year prior, to $312 million, sales and marketing costs for the quarter quadrupled from a year ago, to nearly $230 million. Shares are down nearly 14% so far in the second quarter.

“If we had that same [earnings] print three months ago, we probably would have gotten a different reaction from the market,” Robins says of the stock’s recent struggles. He and his fellow cofounders remain optimistic about future upside ahead, however: “Our view is that it’s less specific to our industry . . . what we’re seeing is more of an inflation-driven rotation out of high-growth stocks and into value stocks,” Robins says. “Along with what the Federal Reserve is going to do with interest rates, that’s out of our control.”

Wall Street analysts on the whole remain quite bullish on DraftKings. According to Morgan Stanley researchers, despite “higher Ebitda losses” and “lower-than-expected cash,” DraftKings remains a “compelling long-term growth story aided by a unique customer acquisition advantage.

The company entered a new growth phase after May 2018, when the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA), which had effectively banned sports betting almost nationwide. DraftKings, originally created as a daily fantasy sports outlet, was ready to go. “It immediately occurred to us: This is the next direction for the company,” Robins says. He and his cohorts turned the bulk of their resources toward sports gambling and the possibility of legalization in certain states. 

DraftKings launched the first U.S. online sportsbook outside of Nevada in 2018, in New Jersey, and two years later announced that its operations in the state had become profitable, without disclosing numbers. Using its longest-tenured state as an example, DraftKings has told investors that it believes it will typically take two to three years for other sportsbooks to become profitable. 

Since the Supreme Court’s repeal of Paspa, 21 states and Washington, D.C., have legalized sports gambling, opening up a much bigger market for DraftKings and its peers. During the first quarter of 2021, Virginia and Michigan became the latest to legalize sports betting, with several others considering legislation to do so. DraftKings estimates the total U.S. online sports betting market represents a $22 billion annual opportunity at 100% legalization, according to the company’s investor day presentation.

“We are bottom of the first, top of the second inning, when it comes to state legalization,” says cofounder Paul Liberman, who serves as DraftKings’ president of global technology and product.

Started in 2011 by Robins, Liberman and Matthew Kalish, DraftKings was created as a daily fantasy sports outlet—where players could compete against each other by building a team of professional athletes from a specific competition and earning points based on actual performance of those players, with cash prizes offered as incentives.

The idea stemmed directly from the three cofounders’ passion for the space. They became fast friends while working at marketing company Vistaprint near Boston, instantly recognizing an entrepreneurial spirit in each other, they say. Working out of Liberman’s spare bedroom in Watertown, Massachusetts, the three began raising capital and building momentum, eventually agreeing to deals with the likes of ESPN, MLB and the NHL.

In 2015, DraftKings became embroiled in an aggressive marketing battle with FanDuel for new customers. Both companies landed in the crosshairs of then New York Attorney General Eric Schneiderman. He alleged that they were guilty of false and deceptive advertising practices, claiming that daily fantasy constituted illegal gambling under state law. A settlement was eventually reached in 2016, with DraftKings and FanDuel each agreeing to pay a $6 million fine and to revamp their marketing practices. “We pulled back a lot of our marketing spend and daily fantasy sports growth slowed,” Robins recalls of the setback. 

After several failed overtures, DraftKings finally got FanDuel to the negotiating table in late 2015 for long-sought merger talks. They struck a deal, but it eventually collapsed in July 2017 after being challenged by the U.S. Federal Trade Commission, along with attorneys general from California and Washington, D.C., for being anticompetitive and monopolistic. 

In June 2017, however, the Supreme Court had announced it would hear New Jersey’s case to legalize sports betting. That served as a big rallying cry and gave new direction to the company, the three cofounders agree. DraftKings’ origins as a daily fantasy sports operator have continued to give it a leg up when opening sportsbooks in new states, since it’s easy to cross-sell existing daily fantasy users, JPMorgan analysts said in a note last month.

“It’s definitely an advantage,” says cofounder Kalish, president of DraftKings’ North America operations. “When new markets open up, the first wave of customers into our sports betting product is typically our daily fantasy users from that state.”

DraftKings is thus able to advertise its daily fantasy offerings nationally, which then helps it acquire new users in states where it’s opening a sportsbook. “There’s a tremendous amount of shared interest between fantasy players and sports bettors—there’s a high affinity to participate in both,” Kalish says.

Navigating regulations for daily fantasy offerings in certain states allowed DraftKings to set the groundwork for dealing with the sports betting market. “Really the whole core infrastructure of DraftKings was all built around daily fantasy offerings—when that did begin to get regulated in many states, there was a lot of work that we did, which is now easily redeployed toward the regulated sports betting market,” Robins says.

In the midst of all this, the cofounders took DraftKings public via SPAC merger in April 2020—despite there being virtually no live sports to bet on at the time because of Covid-19 lockdowns. In one fell swoop, DraftKings merged with blank-check company Diamond Eagle Acquisition Corp. and acquired SBTech, an online gambling technology business founded by Israeli entrepreneur Shalom Meckenzie.

Meckenzie, who has a seat on the board, became a billionaire in May 2020 as DraftKings shares skyrocketed. He and his family, who own around 5% of DraftKings, are currently worth $1.6 billion, according to Forbes’ estimates. CEO Robins, meanwhile, was briefly a billionaire in March 2021, following a stock surge. He’s currently worth about $850 million based on his DraftKings’ stake.

Beyond raising money by going public, the simultaneous acquisition of SBTech turned out to be instrumental for DraftKings as it developed new sportsbooks: “It really allows us to get into states extremely quickly by owning our technology through and through,” Liberman says.

The company raised its full year financial guidance after the first quarter, citing strong “momentum and business growth,” as customer acquisition and retention rates have surpassed expectations over the past six to nine months, according to Robins.

“We have years and years of ideas that we want to put into the product and user experience,” he tells Forbes. “I think there’s going to be so much innovation that we can drive.”