Editor's note: This article is part of Inc.'s 2015 Best Industries report.
A professional sports season usually lasts five to eight months, depending on the sport. Why does a fantasy sports competition need to be just as long?
That simple insight has catalyzed what was already a booming business, giving birth to FanDuel, the fastest-growing fantasy sports platform and soon, very likely, the biggest. After five years of gradual growth, the New York City- and Edinburgh-based startup achieved escape velocity in 2014. More than 900,000 new players signed up--a fivefold increase from the previous year--and handed over more than $600 million in entry fees for the chance to win cash payouts in daily tournaments.
In fantasy sports, participants act as general managers of imaginary teams, "drafting" real-life players into ideal lineups and then competing with one another based on the statistics their players produce. Fantasy has been around since the early 1980s, but it became big business when it migrated to the internet, with Yahoo, ESPN, and CBS hosting free baseball, football, basketball, and hockey leagues as a magnet for website visitors. Some 42 million Americans now play, according to the Fantasy Sports Trade Association.
Between advertising and premium content--e.g., expert analysis and recommendations available only to subscribers--U.S. fantasy sports sites collectively bring in about $1.4 billion in annual revenue, according to research firm IBISWorld. That figure is projected to grow at an impressive annual rate of 7.3 percent over the next five years, fueled by steady growth in digital ad spending.
Entering the game
FanDuel started in 2009 in Edinburgh as Hubdub, an online predictions market where users could win virtual money for correctly forecasting news events. As Hubdub ran out of runway, its five co-founders, led by CEO Nigel Eccles, decided to refocus the company on American sports, the one area in which it seemed to have significant traction, and to replace the play money with real cash. The Unlawful Internet Gambling Enforcement Act, while crushing online poker and blackjack, had established a safe harbor for fantasy sports in the U.S., legally defining it as a game of skill, not chance. But the big fantasy league operators remained content to leave money collection and disbursement to the players themselves, deeming the opportunity too small to be worth getting into the messy business of payments.
Eccles and company believed the market for fantasy could be much bigger if entering a league weren't a season-long commitment. They renamed the company FanDuel and started offering one-day leagues just as a number of other small sites were trying out similar models. "It's 'Here's a product that will take the next six months of your life' versus 'Here's a product that will take the next 15 minutes,'" says Eccles, a former McKinsey consultant and native of Northern Ireland. For the hardcore player, meanwhile, daily fantasy meant hundreds or thousands more competitions to enter per year.
Venture investors make bets for a living, but on this one they were risk-averse. FanDuel pitched 85 VCs before hearing a yes from Piton Capital. "It was yet another case of people looking at something as a hobby and underestimating the fans' willingness to spend money," says CFO Matt King. Those days are over. FanDuel has raised $88 million from investors including Bullpen Capital, Shamrock Capital, and Kravis Kohlberg Roberts. "We had the benefit of being Series D and seeing what the company had already achieved," says Shamrock's Alan Resnikoff. "It was very compelling and the story was very clear."
Also invested are Comcast Ventures, NBC Sports Group, and the NBA, a sign of just how strongly the leagues and their TV partners have come to embrace fantasy-based gambling. That wasn't always the case. As recently as two years ago, none of the major networks would accept FanDuel's advertising. They warmed up after seeing how big an impact fantasy has on ratings: FanDuel says its players consume 40 percent more sports media after they join. They also benefit more directly--FanDuel is now one of ESPN's 10 biggest advertisers.
The company's revenue comes from the 10 percent commission it takes on entry fees; the rest it pays out in the form of prizes. In the fourth quarter of 2014 those revenues more than quadrupled to $36.8 million, and this year the company expects to generate more than $180 million.
Within the daily fantasy market, FanDuel, with its million-plus users, has an 80 percent share of revenues. Number two DraftKings has almost all of the remainder, and Eccles doesn't expect many serious challengers to come along. "It's a chicken-and-egg problem: You need the player pool to guarantee the prizes, but if you don't have the prizes, you can't get the player pool," he says. "That's what you find in this market. It's very easy to launch but very hard to scale."