Recent scandals have put a dent in the fantasy sports space

Steven Loeb · April 19, 2016 · Short URL: https://vator.tv/n/44d3

After five quarters of activity, the space has seen only $400,000 invested in the last two quarters

Editor's Note: Our annual Vator Splash Spring 2016 conference is around the corner on May 12, 2016 at the historic Scottish Rite Center in Oakland. Speakers include Nigel Eccles (CEO & Co-founder, FanDuel), Andy Dunn (Founder & CEO, Bonobos), Mitch Kapor (Founder, Kapor Center for Social Impact); Founders of NextDoor, Handy, TubeMogul; Investors from Khosla Ventures, Javelin Venture Partners, Kapor Capital, Greylock, DFJ, IDG, IVP and more. Join us! REGISTER HERE.

For a while FanDuel and DraftKings were kind of inescapable. Their commercials ran constantly, and the two companies raked up huge amounts of money, with FanDuel coming out with over $360 million in funding and DraftKings with $445 million. They seemed unstoppable.

Until it all came screeching to a halt last year when a major betting scandal emerged in October. Since then numerous states, most notably New York, have launched investigations into the companies.

They are currently banned in five states, and more than 20 have either started the process, or have pending legislation, to regulate or to label these companies as illegal gambling in order to ban them.

It's all a big mess, and it's going to be a while until it's all settled. In the meantime, as you might expect, the fantasy sports space has taken a hit. 

After five consecutive quarters with some kind of investment, there was no activity at all in fantasy sports companies, according to data provided to VatorNews by the National Venture Capital Association (NVCA).

To be fair, fantasy sports has never been a space with a lot of companies getting funding; even in the best quarters there were only two or three companies getting funding. But things have been particularly dire since these scandals hit.

In the five quarters from Q3 2014 to Q3 2015, there was $438.9 million invested, or an average of $87.78 million.

In Q1, there was a single investment of $400,000, down 88.5 percent from the same quarter a year ago. The only investment was an expansion round from an undisclosed VC firm in DraftKings in February.

Fantasy sports by state

It can get a little confusing as to where fantasy sports are legal, and where they aren't. Luckily ABC created a handy guide just for that purpose.

There are six states that allow fantasy sports: Indiana, Kansas, Maryland, Massachusetts (where it is heavily regulated), Rhode Island and Virginia. There are also five states that have banned it: Arizona, Iowa, Louisiana, Montana and Washington. 

In 15 states there is currently some type of legislation to regulate, or ban, fantasy sports, including California, Florida, Michigan, New Jersey, Pennsylvania and South Carolina. 

And in 11 states, fantasy sports has been challenged, most notably in New York, where Attorney General Eric Schneiderman seemed to kick this whole thing off when he went after daily fantasy sports leagues in October, launching an investigation into whether the companies committed fraud after a DraftKings employee named Ethan Haskell inadvertently admitted that he had bet on FanDuel using insider information on NFL lineups before they had been publicly posted. He won $350,000 on the site.

He sent letters to both companies, asking both of them for internal data, as well as details, on how they prevent fraud. He also asked for details on any internal investigations that the companies have done into their employees.

Both companies responded by banning their employees from playing in daily fantasy leagues, along with creating advisory boards to help them sort through legal matters.

That was not enough, however, and in his press release announcing that he was seeking an injunction to stop the two website from operating in the state altogether, Schneiderman said that both FanDuel and DraftKings were “plainly illegal” and “nothing more than a rebranding of sports betting." 

A judge banned them in December, but that decision was suspended the same day. Both companies ceased operating in the state in March.

The fantasy sports space is in a very precarious place right now, and these issues are sure to come up when Nigel Eccles, Founder and CEO of FanDuel, sits down with Paul Martino, Partner at Bullpen Capital at Vator Splash Spring on May 12. 

(Image source: mensjournal.com)

 

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Hubdub Ltd is a VC funded start-up based in Edinburgh and San Francisco that aims to be the world’s largest developer of premium social games for sports fans. Its main product, FanDuel, transforms traditional fantasy sports ($1bn, 30m people market) into an instant gratification daily game where users win cash prizes every day. It is played on FanDuel.com, via white label partners such as Philly.com, and in future on Facebook and mobile.