DraftKings puts ‘pedal down’ to become one of Boston’s hottest startups

DraftKing founders (from left) Paul Liberman, Jason Robins, and  Matt Kalish.
DraftKing founders (from left) Paul Liberman, Jason Robins, and Matt Kalish.

In early 2012, three friends agreed to quit their jobs to start a fantasy sports company called DraftKings. One of them, Paul Liberman, had a spare bedroom at his condo in Watertown, and that served as the startup’s first office. Important meetings were held in the living room, when Liberman’s fiancée was out.

Today, DraftKings has 196 employees — 16 new hires showed up Monday — and offices in Boston and New York. The company, which last year inked marketing partnerships with Major League Baseball and the National Hockey League, said it generated $30 million in revenues in 2014.

DraftKings is by far the hottest consumer technology startup in Boston. And it got there by following a very un-Boston strategy. When investor money hit the company’s bank account, chief executive Jason Robins says he spent it all — and fast — on attracting players, rather than trying to grow its user base slowly and conserve cash.

It worked. A $250 million investment by Walt Disney Co., first reported by the Wall Street Journal in April, is expected to be announced within days, valuing DraftKings at nearly $1 billion. DraftKings wouldn’t comment on the investment.

While playing fantasy sports once entailed drafting players onto an imaginary team and then following their ups and downs for a full season, DraftKings and its main competitor, New York-based FanDuel, have adapted the hobby for an era with shorter attention spans. Assemble a roster of baseball players today, pay an entry fee, and you could collect a cash prize if your team performs better than others, based on stats from tonight’s games.

An upcoming DraftKings game linked to golf’s US Open this month costs $20 to enter, and will pay out $1 million as its top prize.

How is that legal? When Congress passed the Unlawful Internet Gambling Enforcement Act in 2006, it outlawed games of chance like poker and blackjack, but exempted fantasy sports, which were seen as requiring knowledge and skill to win. Regulations differ by state, but none of the daily fantasy startups has run into legal challenges.

Liberman, Robins, and Matt Kalish, the company’s third founder, had worked together at the Lexington office of Vistaprint, an online printing company known for its analytical rigor and operational efficiency. The Vistaprint name gave them some credibility, but Robins says it was still tough to find investors for their idea.

When Robins met with Ryan Moore of the Cambridge venture capital firm FKA Atlas, his pitch was DraftKings could get to profitability on $2 million of funding. FKA Atlas became DraftKing’s first outside investor, followed by Boston Seed Capital and several other groups, which all together gave the company $1.4 million. At the time, mid-2012, the company only offered fantasy baseball games, but the money prepared DraftKings for its first football season.

The founders decided to ramp up their marketing quickly. Robins says, “Obviously, you want to be smart about where you spend the money, but we wanted to be able to show impressive traction” — that is, lots of people creating accounts, paying money to enter tournaments, and coming back.

Or, as Moore describes the attitude of Robins and his partners, “Let’s put the pedal down.” (Earlier this year, DraftKings entered into a marketing deal with NASCAR racing.) That’s the polar opposite approach of many local startups — and their backers — who prefer the slow and steady approach to growing their businesses.

In terms of timing, DraftKings may have hit the equivalent of a three-pointer at the buzzer. Players were gravitating toward the adrenaline rush of daily fantasy games — and daily cash prizes. Peter Blacklow of Boston Seed Capital says that he initially thought daily games might appeal to some fraction of fantasy sports enthusiasts, but the “market size is much bigger than anyone ever could have imagined.”

Two main factors explain the booming market. First, the sites are attracting not just fantasy sports fans, but also gamblers — former online poker players and sports bettors, says Adam Krejcik, managing director at Eilers Research, a California research firm that follows the gambling industry. Second, the big leagues have indicated they’re ready to help promote fantasy sports sites, in exchange for cash and equity in the companies.

Professional sports sees the opportunity to increase their revenues, Krejcik says. When fans have money at stake in a player’s performance, as in fantasy leagues, it makes it more likely they will continue to watch televised games when less engaged fans might turn it off.

Every major sports league and team, of course, benefits financially from higher TV viewership because they can demand more money for broadcast rights and sponsorships.

Since DraftKing’s founders left VistaPrint in early 2012, the company has lifted off like a bottle rocket. But more competition is coming: Yahoo, which has long supported, promoted, and profited from season-long fantasy leagues, plans to launch its own daily fantasy offering this summer.

The fantasy sports industry has all the hallmarks of a land grab — as do many sectors of the tech world today, with players vying to become the Amazon or eBay or Uber of their particular universe. Robins says he doesn’t think that daily fantasy will go that way and become a winner-take-all market.

In the meantime, DraftKings is raising a lot of money and spending it just as quickly on eye-popping cash prizes and marketing deals like one announced this week with Madison Square Garden. Robins says that if daily fantasy does turn out to be winner-take-all business, he’d prefer to be the winner.

Scott Kirsner writes the Innovation Economy column every Sunday in the Boston Globe, in which he tracks entrepreneurship, investment, and big company activities around New England.
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