Lloyd Danzig, Founder & CEO, Sharp Alpha Advisors, joins the inaugural SBC Digital Summit later this month, speaking alongside Tom DiEnno, Jason Scott and Wayne Kimmel on the Betting on Sports America track, ‘M & A and Investing in Sports Betting Companies’. In advance of the hotly anticipated event, he spoke with SBC Americas about the impact that COVID-19 has had on the industry.

Split into two parts, this first section looks at how the ongoing health crisis has impacted investment activity within the industry, the effectiveness of the industry’s response and what actions need to be taken for sports betting to rise from this crisis in a strong position. 

SBCA: How has COVID-19 impacted investment activity in the industry and how do investors now view the sports betting opportunity? Is any change in appetite from investors likely to be just short-term? 

LD: COVID-19 has had a dramatic but constantly-evolving impact on investment activity across the capital structure. Of course, things are changing quite rapidly and what is true at the time of this interview may not at all be true by the time it is published. Uncertainty has always been the greatest enemy of investment. Regulatory uncertainties, among other factors, had already cloaked many investment opportunities in the sports betting space under a veil of uncertainty, even prior to COVID-19.

How can an investor project the cash flows on which to base valuations if the size of the TAM and the effective tax rate at any point in the future are utterly unknowable? Now, we have the added ambiguity as to when traditional sports will start playing again, when fans will be allowed back into stadiums, how much disposable income consumers will have to spend on entertainment, and the like.  

On the VC side, you hear a lot of talk about focusing capital on existing portfolio companies as well as ceasing due diligence and new deal sourcing. There has been the occasional mention of term sheets being pulled and capital being returned to LPs, but these certainly seem to be the exception and not the rule. 

In public equity markets, many investors in the space have had trouble resisting the urge to pick up shares of WIMHY at $1.38, PENN at $3.75, MGM at $5.90. Those same investors are likely quite satisfied at the time of this interview, with those shares trading at $4.87, $13.12, and $13.67, respectively. The cautious optimism and Fed stimulus seem to have adequately propped up demand for public equity exposure, especially in the short term. If one expects sports interest as well as betting activity to even come close to regaining its prior trajectory, it seems that at least the bigger players will have some substantial upside to enjoy. If the current crisis adds momentum to efforts to legalize online gaming in new states, that would only serve to grow the size of the pie they are fighting for.

Regarding M&A, the pre-COVID landscape was being dominated by headlines pertaining to partnerships between B2C operators and media conglomerates. One would expect that trend to continue, as it was based on factors fundamental to the industry that should persist in a post-COVID world. In addition, one would expect the crisis to accelerate some of the consolidation that seemed inevitable, given the enormous cash and regulatory burden of acquiring customers and operating in new jurisdictions. 

Those seeking earlier stage investments are facing significant difficulties. A number of young startups were planning go to market strategies and initiatives to prove product-market fit that were focused on events such as March Madness and The Masters. The angel investors who do have the capacity and risk appetite to deploy capital at present will be even less inclined to back pre-revenue, pre-product companies than before. On the other hand, the crisis may offer some startups an opportunity to pivot and innovate in ways that leave a differentiated mark on the ecosystem. It will be something of a double whammy to both lack the means to raise funding as well as the means to better position oneself to get funded, but those that prevail and maintain their brand presence will stand to see tremendous growth follow suit.

I advise anyone pitching a deal, startup, M&A, or otherwise, to assume that their credentials and pedigree are worth nothing, and to make sure that there is an inescapable chain of logic that a party can follow from the moment they put their dollar into a venture until the moment it comes back to them, hopefully having multiplied along the way. Those who insist on resting on their laurels, particularly when accomplishments don’t directly relate to raising capital from investors and delivering an ROI in excess of the market return, should expect to be faced with a great deal of resistance that only humility can mitigate.   

SBCA: In your opinion, how effective has the industry been in its response to the COVID-19 pandemic and what positive action has it taken?

LD: I think it’s a bit early to make any sweeping generalizations or comments on the way in which history will reflect on this time. The decision to close all US land-based casinos could not have been easy. However, I think it may be the way in which various businesses and venues reopen that really defines the way in which their COVID-19 response is remembered. Reputations are one of those things that take a lifetime to build and only a day to ruin, which I think is an important phenomenon to bear in mind.

SBCA: What do you think those in the industry must do to ensure the industry comes out of the current crisis in a strong position?

LD: I feel that it is very important to remember that most people’s priorities center around their own physical and financial health, as well as that of family members and close friends. As such, I think it’s important to be decisive, transparent, communicative, and (if possible) generous when messaging around things that impact these area’s of a customer’s life. In the post-COVID world, that will likely mean going above and beyond in placing hand sanitizer at every seat in the sports book, having disinfectant wipes next to slot machines, and the like, as well as properly communicating other protectionary measures.

In the immediate term, I would be focused on matters of ambiguity that cause financial concerns, which can easily be mitigated with transparency and communication. For example, many customers likely had outstanding wagers on NBA team win totals for the season at the time that play was suspended. I think that paying out all bets immediately, for an operator that can afford to do so, would be an indication that such a company knows how to simultaneously maximize customer satisfaction and long-run profitability. In other words, it feels like a situation where the morally praiseworthy thing to do is identical to the long-term profit maximizing customer loyalty and retention strategy. 

Of course, that is a large cash burden to place on an operator who is currently seeing record low revenues. Still, it does not cost anything to reach out to impacted customers and promptly, unambiguously state how their bets will be handled under the conceivable paths that the future can take. Again, this feels like a path that is both sensitive to consumer needs and likely to result in maximum retention over the long-term. Unless someone out there has a time machine to go back and undo the spread of COVID-19, it seems the only argument for delay in communication on such points would be if the opportunity cost of that time spent is offset by an incrementally better solution, but only from the user perspective. 

To read part two click here.