The Wild West of Daily Fantasy Sports – Founding a Startup in an Unregulated Industry

A year and a half ago, I was talking to one of my now cofounders (Brandon) about doing something together. We had spoken about this a lot, and threw a bunch of ideas around, but ultimately agreed that we needed to do something we were passionate about. So we disregarded what we had thrown out before and started to talk about what we always talk about, sports.

Both he and I are very passionate about sports, he is a Lakers fan (booo!), I am a Celtics fan (17 banners!), we co-manage a fantasy football league together, and were in two other leagues together. That got us thinking, is there something that we could do together in the sports field, and that’s when we started to talk about a new format for fantasy sports – daily fantasy sports. I’ve written about daily fantasy sports before and you can see some of my previous entries listed in this footnote[1] but what made us think to look at daily fantasy sports was the fact that the market is still very new – FanDuel, the veteran of the daily fantasy sports world was only founded in 2009, and DraftKings in 2012 – and that it was perfect for innovation and new ideas.

So we liked the idea of going into this industry, and Brandon spoke to our other now cofounder (Mando) about what we were thinking and we started to discuss the problems we face as a casual daily fantasy sports user. The crosscutting problem for all three of us was around data management.

In daily fantasy sports there is a lot of data floating around – first all the athlete statistics, and then there is data on your entry type (specific type of contest like league, multiplier or guaranteed prize pool), entry size (from 1 – 500K people), and entry fee (from $0.25 – $1,500). And the problem we were having was keeping track of our own data, how much money we spent, how well athletes were performing and what game types we were over playing. Realizing this, we decided to build a company focused on helping daily fantasy sports players manage their data and the result has been huddlehive – a daily fantasy sports management platform that combines a user’s transaction history from DraftKings and FanDuel and a user’s lineup data to provide personalized insights on a user’s financial health, playing behavior and athlete performance. We are currently in private beta, have about 100 beta testers[2] and are working to improve and build the platform. And when working in a startup, the question is always – what’s next, what can I do to get more users, what can I do to gain traction?

But last week the question changed and it changed because of things that were out of our control. Last week news broke of allegations of insider trading and a data breach at DraftKings. No one knows the full extent of the breach and what ultimately happened. We wrote about it from the perspective of a startup in daily fantasy sports, but I am writing this from the perspective of a startup in an unregulated field.

And that’s the deal, daily fantasy sports is currently unregulated by the government. It is legal because there is a carve out for fantasy sports in the Unlawful Internet Gaming Enforcement Act but there are a number of states, like California who are trying to put regulations in place. What made the allegations such a big deal is the fact that the industry is self-regulated – it comes together and regulates through the Fantasy Sports Trade Association.

Being in the position of a startup cofounder, startups are already a risky business – we are trying to do things either that 1. No one has ever done before or 2. Better than the current practice; either way we are faced with institutional barriers. But what makes being in the daily fantasy sports industry interesting and also terrifying is that many of those institutional barriers don’t exist yet, because daily fantasy sports is just too new. But the flip side of the barrier free environment is the fear that it could all be shut off faster than a light switch – and that was the feeling we had last week.

So last week we were all very interested in what was going on and the reactions the public was going to have to these allegations. And it got us talking and asking each other, given the allegations are you going to stop playing daily fantasy – and the quick answer was – while I’m upset with how things have been handled, there is still no way I am going to stop. There is good reason for this, the data breach and insider trading allegations hurt the reputation of DraftKings and the integrity of daily fantasy sports, but the data that an employee may or may not have gotten doesn’t give him enough of a statistical advantage over the entire field to make a difference. You may say, “But I heard he won $350,000 on a tournament and that DraftKings employees had won a total of $6 million.” True, I heard that too, but do we know how much in entry fees that player had to put up to win that much? Daily fantasy sports isn’t about your winnings, it’s about your profit – what is your return on investment? And let me be clear, I am not condoning what happened by any means, but I am just providing some clarity to the situation that blew up bigger than the Hindenburg.

The big question coming into this week was, did the allegations hurt DraftKings and FanDuel, did they lose users? Not so surprising, the answer is no – at least it looks that way on the surface. In fact, DraftKings and FanDuel saw an increase in entry fees by 4% – 5% as compared to the previous week, hitting an all-time high. There are some lingering questions, one which Mando asked Brandon and I last night on our podcast[3], are the increased entry fees from professional players who tried to maximize their advantage or from new users? Something we don’t know but probably something the boards of each company are looking at.

Just like that, from one week to another, daily fantasy sports looked like it was deader than Ned Stark (Not spoiler alert, GoT has been out since 1996) to being more alive than Arya Stark. But does this mean that we can let our guard down? Can we expect self-regulation to continue? The answer to both is no.

After these allegations the federal government is looking at daily fantasy sports harder than the Eye of Sauron was looking for the ring that ruled them all[4].

And that is where there is a difference in a startup that is operating in an already regulated industry vs. an unregulated industry. While we have a duty to ourselves as startup founders to produce the best product available for our users, we also have an interest in looking at the larger industry and contributing for the greater good because of the many unknowns due to the unregulated and still very nascent industry we operate in.

The way I see it is my cofounders and I are fighting everyday to keep the lights on in our startup, but since we operate in an unregulated industry, we are also fighting to keep the industry lights on – because if either go out, we are dead in the water.

So what does this mean? Steer clear of unregulated industries? NO, not at all, just know what you are getting into before you wade into those uncharted waters. Even more important than in other areas, get real friendly with people in the community – because while you may be competitors at some level, you still have a lot of common interest. And the fact that we are pushing and helping to define the boundaries of a $2 billion dollar industry while building a company, is probably one of the most exciting things I have been a part of.

And if you think regulated industries are any safer or easier to navigate, you aren’t completely correct. One quick example, I was working on standing up a beer delivery service in Texas. Basically, a user places an order for beer via the web, and it’s processed and delivered. To do this in the state of Texas you need a retail license to sell alcohol; with that there are 3 possible types of licenses, 1. Beer only 2. Beer and Wine 3. Liquor Store. With the different types of licenses, there are requirements and restrictions. For instance, with a liquor store permit, to get it you have to operate in a building that is free standing, has a front and rear entrance and as an ADA compliant bathroom and operate in limited hours (12PM – 9PM). Those requirements don’t really mesh with the model we were going for, the biggest red flag being a building. Why do we need a free standing building if we are a delivery only service? The model was built around using underutilized spaces around the city, like storage closets or empty offices. The other pitfalls where around regulations that are currently in place. In the state of Texas you can’t deliver wine with a retail license. I wasn’t given a why – just a no. So wine is out. We ended up getting a beer only license. With that license is a whole slew of regulations and definitions that are ridiculous.

For instance, did you know the definition of beer was changed in 2012 to be defined as any alcoholic beverage with 4% alcohol or less. Who the fuck drinks beer with 4% alcohol or less? Bud Light, Coors, Miller Light – all have an alcohol content of 4.2%! This leads to the question – “What is Bud Light and every other beer considered?” – glad you asked – it’s considered an ale, which requires a different type of alcohol license and a whole new set of requirements.

The point of all this is that the world of a regulated industry isn’t all unicorns and piles of money. In fact, the example above is just another reason we need innovation in government and why government needs to look at their regulations and update them for the technology that is out pacing them (most of federal government is on IE 10).

And at this point, I welcome the risk involved with an unregulated industry – it at least gives us the opportunity to develop regulations – which are inevitable in the daily fantasy sports industry – that suit us.

[1] https://entrepeneurialjourney.wordpress.com/2015/10/06/what-do-martha-stewart-and-draftkings-have-in-common-turns-out-lots/, https://entrepeneurialjourney.wordpress.com/2015/09/18/why-bloomberg-businessweek-is-wrong-and-shark-infested-waters-are-safe-anyone-can-win-at-daily-fantasy-sports/, https://entrepeneurialjourney.wordpress.com/2015/09/03/i-think-my-water-just-broke-were-having-a-closed-beta/

[2] Sign up here: http://huddlehive.io!

[3] Really excited about our podcast. The link is to our first episode. We are going to cover daily fantasy sports from a non-pro prospective (someone that doesn’t play with hundreds of thousands of dollars, but hundreds). We talk about tools to use, strategy and player data.

[4] Yes, I just made a Game of Thrones and a Lord of the Rings reference back to back.