Good morning. Welcome to the latest edition of The Startup Month.

• Until betr’s blockbuster fundraise late last week, the quarterly breakdown for startup funding in the last three months was looking anemic. 

• This month, we look at whether the money raised by the high-profile micro-betting specialist is an indication that the space is showing signs of life.

• The lack of funding rounds brings us neatly to the first of a series on the funding lifecycle, which for its debut focuses on bootstrapping.

• Inside the Raise speaks to gambling adjacent PayNearMe, which recently closed a $45m funding round.

• Plus the latest growth company news and the month’s startup focuses.

I know that better things are on their way.

For betr, for worse

The $35m raised by betr brought a much needed boost at the end of the quarter.

Last minute dotcom: Until betr announced its predicted $35m Series A2 fundraise, the number of funding rounds in the betting and gaming space as tracked by Earnings+More stood at a mere three.

• Prophet Exchange raised $10m in April from MIXI Inc, Ninjabet.com and Chicago Trading Company.

• In the same month, B2B streaming outfit BeyondPlay got $5m from investors including Bettor Capital and Tigrim Capital.

• In early June, OSB data analytics firm Rithmm raised $2m from investors including Boston Seed Capital, Counterview Capital and Oyster Ventures.

Joey and Jake get the cash: The Series A2 round sees betr receive $35m in new funding from a group of investors co-led by Roger Ehrenberg via his IA Sports Ventures and Eberg Capital vehicles, alongside Fuel Venture Capital with an upsized investment in the company. 

• Co-founders Joey Levy and Jake Paul each participated in the round via their own investment vehicles.

• Further investment came from other major existing investors, including FinSight Ventures, Florida Funders and Aliya Capital Partners.

You come and go: The new money will go towards the launch of two additional real-money verticals, which will be supported by the Chameleon OSB platform that betr bought the source code for from FansUnite in May.

• The company says V1 of the betr Betting product is in the works, which would include full pre-match and in-play products.

• One of the new verticals is rumored to be iCasino.

• The company claims its media division is the fastest-growing sports brand in the US, with 1.3bn impressions on social media in its first 10 months of existence.

• It says 20% of Betr Media’s estimated Ohio audience had converted to real-money gaming.

Roger that: Ehrenberg blogged on Medium that betr has become the “nexus in the Eberg Capital ecosystem” for a set of companies that “share the vision of an inclusive, exciting, sports-powered entertainment network”. 

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Better things

Belt tightening: As was noted in E+M’s review of the first quarter, it was already clear that the wider funding environment was having a crimping effect on the number of deals within the betting and gaming sector. 

• Only six deals were announced in the first three months of the year, raising $18m+ between them.

• Added to a Q2 pot of $52m, it means just $70m has been announced this year to date. This compares with over a quarter of a billion in 2022.

Playing it safe: Taken together, it seems clear that, as Chris Grove of Acies Investments puts it, the slow first quarter was a “function of the absolute lack of momentum carrying over from the end of 2022 and both founders and funders trying to get a better read on the economic macro”.

• “That uncertainty definitely spread into Q2 and was exacerbated by the SVB situation,” he notes, referencing the collapse of Silicon Valley Bank.

• Davis Catlin, co-founder and principal at Discerning Capital, says there is no doubt that capital is harder to come by.

• “As someone who is raising a fund, I can tell you that the purse strings are tight everywhere,” he adds. 

• Benjie Cherniak, principal at Avenue H, says investors now have the the “luxury of optionality”, allowing them to be selective about the deals they get involved in.

• With this comes longer deal cycles.

Mattress, mac: The cost of capital has risen so much in the last 18 months, he argues, that it’s hard to convince allocators to invest in illiquid securities when government bonds are paying almost 5%.  

• “The cost of capital going up is forcing investors to underwrite deals to higher return thresholds, which means lower valuations and likely lower risk tolerance for each investment.

• In this scenario, entrepreneurs are “not always comfortable taking those lower valuations”.

• “You have a classic mismatch: investors want lower valuations and companies want the valuations from two years ago.”

Whisper it quietly: The uncertainty has a more subtle effect than just in terms of actual funding rounds. Lloyd Danzig of Sharp Alpha says he has knowledge of six funding rounds that have taken place in Q2 without companies announcing them publicly.

• “I think that many companies do not want to draw unnecessary attention from regulators and suppliers,” he suggests.

• “Also, we are no longer in a climate where raising money is viewed as a major business milestone on a standalone basis in the absence of significant commercial traction.”

• Cherniak agrees that not all funding deals are being publicized.

• “Some of the deals are extensions of previous rounds and/or down rounds that do not merit much attention.  

• “There are also instances where the funding is indeed newsworthy but the company simply prefers to keep a low profile, perhaps as they are in stealth mode or for other personal reasons.”

• He notes the recent news from Splash Tech, which said in a Sportico article in early June it had raised an “eight-figure sum” as it made plans to come out of stealth mode with its sports-pool platform idea.

The waiting game: The financial environment is out of anyone’s control – just ask the Fed or the Bank of England – so when it comes to funding for growth companies, patience is definitely a virtue. 

• For Catlin, the valuation mismatch between investor and companies “simply takes time to work through the disconnect”.

• As per the suggestion that funding rounds are currently going under the radar, Grove suggests the sector is “starting to see valuations reset a bit and checkbooks emerge from hibernation”.

• Cherniak, meanwhile, thinks there will be evidence of more deals in Q3 and Q4 this year.

• But Grove cautions against getting too giddy with excitement. 

• “I think we're a long way out from the funding flow peak we saw a few quarters back,” he warns.

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Funding lifecycle – Bootstrapping

With funding an issue, startups in the sector are having to be more self-reliant.

Zippin’ up my boots: Everyone knows raising money is difficult at the best of times – and, as discussed above, now is definitely not the best of times. It means that entrepreneurs and startup founders are more likely to attempt to get up and running based purely on their own resources.

• This is in essence bootstrapping. “How much of the hypotheses underlying your idea can you prove – in an acceptable time frame – without requiring outside capital?” is how Mike Salvaris, co-founder and partner at Pro League Network, frames the issue.

• He adds that a company can “paint a picture” of where the company is heading, which can then enable “richer discussions with outside capital”.

• Benjie Cherniak of Avenue H says an interesting dynamic right now is that of entrepreneurs “choosing to make do with less capital short term” given the high cost of capital.

• “Some of the startups I am involved with are deliberately bootstrapping and/or minimizing the outside capital that they bring in so as to move the ball further downfield, so that they have a more compelling story to tell when they go out to raise larger sums,” he says. 

Can you get to that: “I had a technical, sales and product background,” says Tomash Devenishek, founder and CEO of Kero Sports. “So I didn't need much external help to go from idea to concept and then to get the product to market.”

• Partly this is down to the B2B nature of his business. “B2B endeavors lend themselves much better to bootstrapping,” he adds.

• B2B is a “different beast” because marketing isn’t as big an issue as for consumer brands. 

• “You can focus on building a minimum viable product (MVP) while reaching customers and potential leads quite quickly via conferences and networking,” he adds.

Show me the money: For Lloyd Danzig, CEO of Sharp Alpha Advisors, an obvious benefit of bootstrapping is equity ownership, but it also “forces founders to focus on execution and unit economics in a way that leads to sustainable growth”.

• Ryan Murphy, founder of SharpSports.io, says business models that generate high gross margins, fast CAC payback periods and durable revenue models are “easier to bootstrap because they lend themselves to predictable cash flows”.

• Being bootstrapped also means founders are very careful with spending money and “nothing teaches that like spending your own capital first before you spend others’”, says Devenishek.

• “The biggest advantage of bootstrapping is you don't waste other people's money and is probably the biggest value that we got from our journey,” he adds.

• “In addition, you can recover from most failures, except for bad reputation. Having a reputation of taking great care of investor capital will only benefit you in the long term.”

I’m in control, never gonna stop: One reason to continue with self-funding is that a founder or founders get to keep all the equity to themselves and aren’t diluted by new investors. 

• Salvaris says the trade-off is between “speed vs. preservation of equity”.

• Bootstrapping downsides can include “slower growth, harder recruitment and sudden unforeseen costs can be a major risk,” says Murphy.

• “One big error is having inflated early expectations,” adds Devenishek. 

• Bootstrapping has its limits, yet bringing in capital won’t just be about bringing in extra financial resources. “Good venture investors bring a lot more than capital to the table,” Danzig points out. 

• A strong founder-investor fit can produce “a significantly larger outcome that more than offsets any dilution from equity financing”.

Comes a time: Devenishek says startups will recognise the moment when they need outside financing. “When you see genuine users enjoying what you’ve built is a good time to start thinking bigger and going faster,” he says.

• “There’s no point digging a deeper hole with other people’s money if you don't see positive feedback from customers.” 

• Salvaris adds that when an investor provides capital and “a ton of value to the business in networking and value signaling, it’s an easy call to make”.

• For Murphy, whether a startup is bootstrapping or not, “advisors are crucial” but outside capital can also be raised via merchant cash-advance providers such as Stripe, receivables financing or accelerators.

In the next issue, The Startup Month will look at funding options.

Inside the raise – PayNearMe

Michael Kaplan, chief revenue officer at PayNearMe, guns through the recent $45m fundraise.

Out of the gate: PayNearMe has been involved in the gaming industry since 2013 in the early days when online gaming was first legalized in a few states, including New Jersey and Nevada. “In fact, PayNearMe processed the first real-money gaming transaction in New Jersey,” says Kaplan. “We are currently active in 22 regulated gaming markets in the US.”

• “PayNearMe is, first and foremost, a technology company,” he adds.

• “The MoneyLine platform was built off the backbone of the most successful cash payment solution in the industry and is trusted by nine of the 10 largest US iGaming operators and 16 of the top 17 largest online casinos in the US.”

Reflected glory: The excitement generated by the US OSB opportunity has rubbed off on sectors that service it. “It is as dynamic as it is competitive,” says Kaplan. “This provides an incredible opportunity for investors to get in on the ground floor with organizations like PayNearMe.”  

• Still, the US payments market contains “far more complexity” than the equivalent markets in Europe, he adds. 

• Companies like PayNearMe are constantly “innovating to simplify the complexity of online gaming payments for both operators and consumers alike”.

• “Payment providers will excel in the US when they can find that delicate balance between compliance, KYC, fraud protection and speed.”

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Growth company gazette

The Unit has announced it will be supplying marketing services to gaming platform PlayStar in New Jersey.

BettorEdge and BettingLadies.com have launched what they say is the first sports-betting community for women.

Simplebet has partnered with BlueBet’s US-facing operation ClutchBet to deliver micro-betting solutions.

BetDEX Labs has launched tennis markets on its blockchain-based exchange, with the initial offering coinciding with the start of the French Open on 28 May. The company is also preparing to launch in-game wagering in the coming weeks.

iGaming tech company ThrillTech, founded by former Happyhour.io co-founder Benjamin Bradtke, has launched a software-as-a-service jackpot server called ThrillPots.

Pro League Network’s World Putting League championship will be available for betting in eight states. The Action Network will stream the tournament live as the exclusive broadcast media partner.

The month in focuses

• Swedish games developer Split The Pot.

• Affordability solutions provider ClearStake.

• AI-assisted provider GamePLAI.

Calendar

• Jul 27: Churchill Downs (earnings), VICI (earnings)

• Jul 28: Churchill Downs (call), VICI (call)

• Aug 2: MGM Resorts

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