Down in the dumps: startups’ funding woes
Welcome to this month’s edition of The Startup Month. As has been obvious to those keeping an eye on the betting and gaming startup scene this year, there has been a comparative dearth of (announced) new funding rounds. So this month we look into one of the factors that has been going on in the background for the past 12 months or more and helps explain the apparent drying of the well when it comes to growth company funding – the potential for down rounds. But first, some M&A news from Better Collective. Looking at life through the eyes of a tire hub. M&A extraBetter Collective has announced its second-largest acquisition, snapping up the Toronto-listed sports media and gaming affiliate business Playmaker Capital for €176m in cash and shares.
Strategic fit: Playmaker was founded by Jordan Gnat and quickly built a portfolio of media and affiliate assets via acquisition. In its Q3 earnings, the company said it generated pro forma revenues for the three months to June of C$12.6m ($9.2m) and pro forma adj. EBITDA of C$3.3m.
Deep downThe dreaded phrase ‘down round’ has been more prominent in the betting and gaming startup sector vernacular this year. Down beat: During a panel appearance at the recent G2E conference in Las Vegas, Lloyd Danzig, principal at Sharp Alpha Investments, made the comment that the frequency of “down rounds and recapitalizations is elevated compared to previous years”. This despite the details of these financing rounds being rarely announced publicly.
Big picture, small picture: This can be when there is a major change in market dynamics or when macro funding conditions and revenue multiples have tightened significantly. Jesse Wachtel, co-founder at Huddle, says down rounds occur for both micro and macro reasons.
Chasing rainbows: Getting to the specifics, Benjie Cherniak, principal at Avenue H and a serial angel investor himself, points out that from 2019-21 the betting and gaming space saw a ‘gold rush’ mentality predominate, leading to market inflation that has “proven unsustainable for many startups”.
** SPONSOR’S MESSAGE ** EveryMatrix delivers iGaming software, solutions, content and services for casino, sports betting, payments, and affiliate/agent management to 300+ global Tier-1 operators and newer brands. The platform is modular, scalable, and compliant, allowing operators to choose the optimal solution depending on their needs. EveryMatrix empowers clients to unleash bold ideas and deliver outstanding player experiences in regulated markets. Right of refusalThanks, but no thanks: Down rounds are not welcomed by existing investors for obvious reasons and it means that whether they will participate will always hang in the balance. “Existing investors typically have a first right of refusal but don't always participate in down rounds,” says Danzig.
Bridge building: Perhaps because of the optics, then, involvement from previous investors is more likely than not. Wachtel points out that while their investment might be seen as a sunk cost, they should be open to persuasion that the new, lower valuation makes sense as long as the reasons for the original investment remain in place.
The damage done: Down rounds aren’t just a financial issue. They also present challenges to the company management and its staff in terms of confidence and performance. Some of this is technical. As Danzig points out, while “smart investors” won’t be deterred by the optics, the “anti-dilution protection” triggered for existing investors can result in” incentivization challenges for the management team and other stakeholders”.
Survival strategies: Whether a company can survive a down round, and all the implications it means about past performance and future prospects, is a different matter. “The realization of a down round is generally not viewed favorably by staff and can lead to morale challenges, as staff worry about job security, bonuses and general career growth opportunities,” says Cherniak.
Look on the bright side: The realization on the part of those working for the company that all might not be well when it comes to its funding prospects presents another tricky hurdle for management to negotiate.
Lengthening runway: Wachtel points out that the reason for “fresh capital in the door at whatever valuation” is it gives the business in question “more runway to accomplish the company’s goals”.
Stay positive: But Danzig suggests positivity can win the day. “While a down round can be perceived negatively, it’s not by any means a death knell,” says Danzig. “Many companies can and do adjust successfully after a down round, using the funds to recalibrate and forge a stronger path forward.”
** SPONSOR’S MESSAGE ** Originally founded in 2003, BettingJobs grew rapidly and quickly matured into the full recruitment service provider we are today. We are a globally renowned resource for making qualified connections worldwide. Our industry experts will be attending SiGMA Malta 2023. If you are a candidate seeking your next iGaming role or a client in need of professional hiring advice, contact us to arrange a confidential meeting at the conference. Growth company gazetteWoof: In an interview with E+M on the launch of an initiative to find startups with original ideas around responsible gambling, Underdog Fantasy CEO Jeremy Levine made the understated point that his company is “definitely talking to a lot of regulators”.
Companies and entrepreneurs interested in being considered by GuardDog can learn more and contact the GuardDog team at https://underdogfantasy.com/guarddog. It’s twins! Miami-based AI sports predictive platform provider Gemini Sports Analytics has completed an oversubscribed $3.25m seed round led by Roger Ehrenberg’s Eberg Capital and with the participation of Social Leverage, Raptor Group and Florida Funders. BroThrow has beef: The social sports-betting startup is – quietly – kicking up a stink over what appears to be the clear similarities of its logo and that of the soon-to-launched ESPN Bet. Not only is there the emphasis on the stylized B, but also the choice of color. The month in focuses
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