Editor's Note: Inc. Magazine announced its pick for Company of the Year on Monday, November 23. It's Slack! See which one Inc. readers chose as their favorite company of 2015. Here, we spotlight FanDuel, one of the contenders for the title in 2015.
"It's been a crazy year," says FanDuel CEO Nigel Eccles. "A crazy year."
At the time Eccles said this, during an interview with Inc. on Nov. 3 at the company's New York City headquarters, it was already an understatement. Then things got a lot crazier.
On Monday, New York's attorney general, Eric Schneiderman, ordered FanDuel and its major rival, DraftKings, to shut down operations in the state, calling daily fantasy sports "a multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country." FanDuel responded by calling Schneiderman's move a publicity stunt that ignores settled law. Consider it game on.
For better or worse, the six-year-old startup has gotten used to living on the front page. A year ago, almost no one who didn't actually play fantasy sports had ever heard of FanDuel, a site that lets users win money in one-day contests that hinge on real-life athletes statistical performance. While fantasy leagues were already popular among sports fans, daily fantasy accounted for only a small piece of that.
Twelve months later, it's a very different story. FanDuel and DraftKings are both valued at more than $1 billion by their investors. Battling for market share, together they've spent hundreds of millions of dollars on advertising to make their brands ubiquitous on television and at live sports events.
Daily fantasy has become the sort of topic presidential candidates get asked about onstage during debates, their answers watched by tens of millions of people. It's an industry that has inspired congressional hearings, an FBI inquiry, and new laws in places like Las Vegas and Chicago.
In other words, FanDuel is generating both a lot of business and a lot of scrutiny. The former is due to the fact that daily fantasy is much easier to play than the old season-long variety, which required a commitment of several months; because the companies offering it have paid out hundreds of millions of dollars in winnings; and because their advertising is truly inescapable. Eccles won't say exactly how much FanDuel spends on it, but the budget is three times what it was a year ago. "You may have noticed it if you watch any sports," he says wryly. "Sorry about that."
The scrutiny began in earnest after an incident in late September in which an employee of DraftKings named Ethan Haskell posted proprietary data online showing how users were selecting their player rosters in that week's competitions. Haskell's action raised questions about how often employees of both startups were participating in daily fantasy leagues themselves and whether they were using their access to internal data to obtain an unfair advantage and win jackpots for themselves at the expense of ordinary users.
Eccles had foreseen that protection of user data was going to be increasingly crucial as the daily fantasy industry burgeoned. In 2014, he wrote a charter for the Fantasy Sports Trade Association that called for self-governance and safeguards. Still, the furor touched off by Ethan Haskell caught him off guard. "I'd never really visualized what a crisis would look like," he says.
By the time FanDuel got off the blocks with its containment strategy, the crisis was spiraling. Eccles's first order of business was to make sure the bad headlines didn't undermine users' trust in the site. "That was my biggest fear," he says. His concerns on that front were quickly allayed: The weekend after the scandal hit, FanDuel did its highest volume of business ever. To further reinforce trust, he imposed a ban on FanDuel employees playing for money on other daily fantasy sites. (They were already prohibited from playing on FanDuel. Since it's a reasonable inference that users behave similarly on both platforms, data from one can yield an advantage on the other.) He also hired former U.S. attorney general Michael Mukasey to audit the company's practices.
The next priority was to keep the backlash from spilling over into new laws and rulings that hurt FanDuel's ability to do business. There, the containment effort has been somewhat less successful, obviously. In addition to the New York AG letter, Nevada's Gaming Control Board has banned daily fantasy sports and Illinois legislators have announced plans to regulate the industry in that state with a new bill.
To grapple with those and other developments, FanDuel hired Tusk Strategies, the lobbying firm that helped Uber win its standoff with New York City mayor Bill De Blasio by enlisting consumers to its side, and which has also crafted strategies for Google and AT&T. While Uber CEO Travis Kalanick has generally approached his company's regulatory tussles as death matches between good and evil, Eccles is taking a more conciliatory approach, his fighting words to Schneiderman notwithstanding. "We think it's good there's consumer protection, but we're concerned about regulation that's overly heavy-handed on the industry," he says. "If the regulation's smart, it will protect consumers but not kill innovation."
Eccles is sanguine about the prospects for workable rules, but until the issues have been worked out, he doesn't expect investors to open their checkbooks again. That's fine with him. FanDuel can and should, he says, be able to reach profitability on the $363 million it has already raised. "Whenever I've raised money, I've always said this might be our last," he says. "We're well funded through next year. We don't need to raise any more."
In fact, a shift in focus from growth to profitability may be good for FanDuel if it's across the board. When DraftKings raised $300 million from 21st Century Fox and other investors in July, it also agreed to spend $250 million on advertising. FanDuel, by avoiding such hefty commitments, has left itself more room for maneuver. "For us this year we wanted to be aggressive but disciplined," Eccles says. "I think their philosophy may be different."
A philosophical approach may be just the present moment demands. From competitors to regulators, there are no shortage of parties gunning for FanDuel, but with more than a million paid users and a fat war chest, it's well positioned to beat the odds.