Making Room for Start-ups in Online Gambling

The global online gambling & betting market was valued at US$58.2 billion in 2021 and is projected to approach US$145.6 billion by 2030, expanding at a compound annual growth rate (CAGR) of approximately 12 percent from 2022 to 2030.  This expansion is driven by advancements in technology, wider internet access and the legalization of online betting in various regions bringing as yet untapped markets onstream. What is often less the subject of comment is the number of enterprises that comprise that value which didn’t exist 20 years ago. Whilst there are some venerable names in the industry, the vast majority were startups in recent memory. They have attracted some of the most creative and innovative talent to the industry, individuals that have regularly gone on to file patents and found companies themselves. They have ridden technology waves and tapped into opportunities that continue to drive the industry’s success and excite customers and investors alike.

Challenges for new entrants

Despite the increase in the total addressable market, getting into the online gambling business has never been tougher. Robust regulations, high initial investment requirements and tough competition from established firms are only a few of the reasons. Securing a license in some markets can require an investment exceeding US$100,000, with recurring compliance costs adding to the financial burden. This is before any customers are recruited, a process which necessitates promotions and marketing budgets running into the US$ millions. Given that the online world knows no borders, it is very unusual for a gaming operator to stick to one jurisdiction as they gain scale economies from a broader footprint. However, the fragmented licensing systems across the globe make it extremely difficult, if not impossible for operators to establish themselves in different regions and comply with all local regulations. There was an opportunity for the EU and the US to devise a harmonised approach across all the states within their respective unions. It is perhaps too much to expect that to have become a reality and, for now at least, that ship has sailed.

Potential for startups

Despite the obstacles, specific segments within the online gambling landscape still present promising opportunities for new ventures. The incorporation of technology offers improved security and transparency benefits that address some trust-related concerns in the industry. Technologies, such as blockchain and artificial intelligence (AI) could give an edge to start-ups in a very competitive marketplace. Furthermore, it could make them extremely attractive as acquisitions by larger operators and groups that do not have the appetite to experiment or take avoidable risks themselves.

Although the hype around blockchain has subsided over the past years, many still believe it could be the gateway to one of the most significant evolutions the online gambling industry has witnessed since its inception. Certainly, payments represents a pain point for the industry and that must signpost an opportunity for a technology which can remove much of the friction. Much of the innovation in online gambling that we have seen to date revolves around the channel of distribution, particularly with the move from computers that are tethered to the wall to mobile devices. However, blockchain has the power to change the fundamentals of online gambling itself. We are already seeing some top-tier online gambling providers accepting payments in crypto-assets in certain jurisdictions. It will surely not be long before we see sizeable operators experimenting with gaming systems based entirely or partly on blockchain technology.

In the public consciousness, Artificial Intelligence is a very new phenomenon, but it has been deployed in the industry for a very long time, usually in the background of online gambling operations. With the success of ChatGPT, AI has been catapulted into the mainstream. It will not be long until we see more use of AI on the front-end, where it is more visible to users. and that will change the customer experience significantly.

For the utilisation of these technologies to become more widespread, regulators will need to accept their deployment and have confidence in their use. Gaining regulatory support will require persistence and creativity on the part of those promoting the new technologies and will not be easy. It will also depend on regulators be motivated enough to educate themselves and understand the risks associated with such technologies, to be able to address them in their policies and, where necessary, in the regulations they propose to their respective governments.

Think small

Whilst the whales of the industry may already be established (although that has been said before – Yahoo! and Kodak are just two who proved the future isn’t always as pre-determined as it appears), there are still plenty of underexploited niches. This could mean targeting particular age groups or focusing on innovative games and new betting markets.

Furthermore, there are still some regions that do not regulate online gambling and in which it is not illegal to offer online gambling services without a local licence. These jurisdictions and regions allow some breathing space for new operators to test their products and start to build market share. Over the years Malta, the Isle of Man, Gibraltar and Alderney were the main so called “.com” jurisdictions, offering a reputable licensing framework but having a balanced approach which is open to growth and innovation. However, as the market has grown, new .com jurisdictions have emerged.

Whilst many of these provide a useful and necessary service in different regions of the world, we have also seen a number of jurisdictions that do not inspire the same level of confidence. The challenges of accessing banking and payment services has made life difficult for start-ups: more difficult and more risky. Furthermore, a number of software houses have effectively withdrawn their products from these markets. They have stopped providing their services to operators licensed in some of these new jurisdictions because they lack confidence in the compliance requirements of their frameworks. It is vital that start-ups establish themselves in jurisdictions that strike a balance, finding space to grow while whilst also accessing financial services and the best software available on the market.

Success stories

New companies like DraftKings and FanDuel have successfully shaken up the sports betting scene by integrating it with fantasy sports and showcasing how innovation can capture a slice of the market. Stake is another success story that focused on the use of cryptocurrencies while attracting certain age groups that are less drawn to traditional online gambling. Decentral Games and BetConstruct on the other hand, are betting hard on blockchain technology and the metaverse. Only time will tell if these bets pay off. However, the life-giving energy of innovation is such a positive force, we can only hope they pave the way for other giants.

Regulation and risk hampering funding

Investing in startups is risky and those who do so know that there will be failures and losses. Investing in unproven ideas driven by new technologies is among the riskiest bets going. Then there are gambling technology startups which deserve a risk category all of their own. Not only do innovators bet on an uncertain future and untested technology, they do so in a highly regulated industry. To compound the challenge, the rules are changing constantly. Licenses are required for an ever-greater number of activities, consumer groups needing protection only ever increase and taxes can render a segment unviable almost overnight. Adaptability and resilience are core requirements for all entrepreneurs. Gambling startups also have to great timing and a large
measure of luck.

Fortunately, there are still people out there prepared to take the risk, but investors also have to be convinced. For the reasons outlined and the reputational risk that also comes with gambling, VCs can be a tough sell. Many early-stage investors are gambling industry entrepreneurs themselves. They know the risks, but can also see the potential. Their presence on a board can also provide a degree of reassurance to others who would otherwise look for opportunities elsewhere.

Future trends

The future of gambling depends on innovation. AI and machine learning will deliver personalized gaming experiences and manage risk. The regulatory environment will continue to change, potentially
unlocking markets and segments which enable innovation to continue. Keeping up with these shifts will be essential for new companies looking to enter the market.

Although entering the gambling sector comes with its share of obstacles to be overcome, new businesses have plenty of opportunity to thrive. It will be fresh ideas and the discovery of as-yet-un-thought-of business models that contribute to growth, and new companies will provide them. By utilizing technology and pinpointing overlooked customer groups, start-ups can establish a position in this fiercely competitive field. The industry’s growth outlook and the achievements of newcomers highlight the benefits of creative and well-planned market entry strategies.

Without start-ups and innovation, the industry cannot survive. It is in everyone’s interest to foster an environment in which start-ups can thrive and provide us with innovation in our industry.

Case study: Sightline Payments.

Sightline Payments was founded in 2008 with a single vision: to reduce the number of cash transactions in brick-and-mortar casinos. CEO + Co-Founder Omer Sattar told the IMGL conference in Tampa that the rise of the company from startup to unicorn to ubiquity was never guaranteed.

“Successful entrepreneurs are in the fortunate position to be able to tell their stories with hindsight. They will often claim they had a fully realized vision and a detailed plan, because they’ve had to hone their story over time to get it across to investors. But I’m always suspicious. That is certainly not true in Sightline’s case. People say to me, ‘it’s ok for you, you’re Sightline’ but it really wasn’t always this way. I’d say our success is at least 50% luck, then there’s a lot hard work over years, adapting and pivoting to a success point.

“When we started, the first iPhone was less than two years old. Apple Pay was launched a few years later, and we tend to forget it really struggled with adoption. Mobile tech really had to be well established in the wider world before it could be adopted into gaming. In the early days of Sightline, I worked out of my house for two years, I drove a car with over 280,000 miles, and I ate almost the same food every day for 18 months. Our big pitch was for bi-directional, two-way payments in slot machines, which no one had ever done before. We would go to meetings and people would look at us like we were insane. We tried to license through PayPal, but they didn’t return our calls, so we had no choice but to build it ourselves. Now we’re deployed in almost 100% of the US market and connected to about 95% of all US slot devices. We’re proud of that, especially because when we started,  not many people other than our team believed it could be done.

“Back in 2012-3, apart from a handful of visionaries like Anna Sainsbury and David Briggs from GeoComply, no one predicted mobile digital would be so big.  We were fortunate that at that time, we had a team member, Charlie Kelly, who challenged our trajectory. He said, ‘What do you mean you’re building a payment system that’s not integrated into mobile?’ It was a great question, and he was right. We listened to him and went back to the drawing board. It seems such an obvious thing to do now, but at the time, that was a big deal for us. We also had great clients, like the legendary Thomas Winters from Golden Nugget in NJ, who challenged us to better and to do mobile.  I look back on a decision like that, and the thing I learned is always to be curious, ask questions, be prepared to listen to the answers and acknowledge if you are wrong.

“it’s interesting how opportunities can arise. For example, the repeal of PASPA was a milestone, then came the Pandemic, which was a real gamechanger. In May of 2020, we started getting calls from operators who suddenly needed to switch to digital payments, and the field has mushroomed ever since.

“From when we started until now we have raised around US$450 million, but all our initial rounds were really small. A few years ago, I would have said raise as much money as you can. Today I would say go for the minimum you need to get where you want to go. Minimise dilution and keep as much control as possible because those VCs are going to squeeze you for every penny. Be tight, be stingy and do your diligence on potential investors. Take your time and be patient when it comes to fund raising. The investors you get are going to be in your business for years to come with lots of different characters so get to know them and, if you can, go for strategic investors.”