September 2015 could not have gone better for DRAFT. The daily fantasy sports company was on pace to eclipse 500,000 users as the NFL regular season began. Then came November 10, when New York State Attorney General EricSchneiderman declared daily fantasy sports to be a form of illegal gambling.
Despite DRAFT having working capital from a $3.5 million Series A round of funding in March, a strong team and a built product, the company was on its knees.
"It rocked our world," says DRAFT founder Jeremy Levine, referring to the New York Attorney General's declaration.
DRAFT took punches, but played a lot of defense.
Levine immediately made the decision to scrap all of DRAFT's marketing plans and terminated its two marketing employees. He did not know how long the beatings would last and whether other states would follow New York in declaring daily fantasy sports to be illegal gambling (they did), but he had an idea that the situation would get worse before it got better.
"We made the decision November 11 to get lean and make sure we had enough money to get through the whole year," says Levine. "The last 9 months have been painful. There was a two month stretch where it felt like every day we were closing another state."
Yet, today, just one day prior to the start of the 2016 NFL regular season, DRAFT is alive and a trending search query on Apple's App Store. Playing defense has allowed DRAFT to survive and be a sleeper in today's daily fantasy sports landscape.
Things got worse for DRAFT before they got better.
November's New York announcement was only the beginning of pain for DRAFT. As mentioned, other states would follow the footsteps of New York State's Attorney General, and some states still refuse to allow entry fee daily fantasy sports within their borders.
"I looked back recently to an investment update I had in January. I basically told a group of investors that there was a 50% chance that this is going to kill our ability to offer real money games," says Levine. "I had to determine if we still wanted to do it. I made the decision to stay the course. If turned out well, it would create an even bigger opportunity for us."
Levine says that everything has gone according to plan; however, he admits that he was scared when the first couple of states to expressly legalize daily fantasy sports required an up-front registration fee of $50,000. Virginia was the first, followed by Indiana.
"A $50,000 registration fee is not something we can justify," explains Levine. "A lot of smaller companies organized and there was some good movement by the Fantasy Sports Trade Association. We made sure regulators started to understand why that fee was bad not only for business but for consumers. It deletes innovation and provides no choice for consumers."
In New York, DRAFT's home state and main source for users, there is no registration fee. Daily fantasy sports has also been legalized, with DRAFT becoming one of the first companies to receivea temporary license to operate in the state.
Why DRAFT is now the underdog with a real chance at success.
DRAFT cut off marketing in November 2015 and did not resume such efforts until yesterday. It was DRAFT's biggest day ever in new depositors, with thousands of users registering. Today, many thousands more have registered for the daily fantasy sports service.
Levine and his team fell short of the lofty projections they made in September 2015. DRAFT ended up with just over 200,000 users at the end of the 2015 NFL season. But Levine is fine with the outcome, considering he enters the 2016 NFL regular season with momentum.
"Last year 4.5 million players played on FanDuel or DraftKings, many for first time," says Levine. "Since then, all they've heard is that people cheat to win and need to play hours to win. We were always built that you have a better chance to win and don't need to spend enormous time to win. If you want to play for money and not spend hours per day, you play DRAFT."
Differentiation is key for DRAFT in this environment where FanDuel and DraftKing dominate user share and marketing spend. However, DRAFT has also taken a page out of FanDuel's playbook and added a feature that allows users to create leagues with friends and draft a new team on a weekly basis.
"I have operated a business with many legal risks, which has made it harder to raise money and create partnerships," added Levine. "I said that I didn't want to raise money in that environment. Once a New York law passed, things changed and we started discussions again with investors."
Levine says that he is in the middle of closing a new round of funding, which will be similar to DRAFT's last round of $3.5 million. He also remains very bullish on the industry as a whole.
"I think we will look back and in a way think that things got stronger in the past nine months," concludes Levine.