Investors are wagering big money on fantasy sports companies, fueling a battle between two fast-growing startups and an old-school Internet giant that suddenly wants a piece of the action.
FanDuel Inc. said Tuesday that it raised $275 million, bringing the New York-based company’s total venture capital funding to $363 million. Its closest competitor, DraftKings Inc. of Boston, is in the process of tapping investors for what analysts say could be an additional $300 million.
It looks like they’ll need the money. Last week, Yahoo Inc. plunged into daily fantasy sports, bringing a large roster of fantasy players to a new variety of sports-fan contest that speeds up the number of games and awards players millions of dollars in prize money.
While it’s getting a late start, Yahoo brings an established brand name and a fantasy sports audience that it says numbers in the tens of millions. FanDuel, the largest of the daily fantasy sports startups, claims more than 1 million paid active users.
Meanwhile, DraftKings and FanDuel are competing relentlessly with each other, spending heavily on advertising and partnership deals with sports leagues, stadiums, and TV networks in an attempt to lure more players.
Their ballooning marketing budgets are a sign of an overheating market, said Adam Krejcik, a partner at analyst firm Eilers Research.
“It’s the advertising companies that are making out like bandits in the industry now. They’re taking all that VC money,” Krejcik said. “I’m bullish on this industry, but I just think that it’s getting a little crazy, to be honest. It’s harder and harder to justify these huge spends.”
FanDuel’s new investment round was led by private equity firm KKR & Co. Google Capital and Time Warner Investments also bought shares in the company, FanDuel said. Its previous investors include NBC Sports Ventures and Comcast Ventures.
DraftKings has been raising a new round of venture capital for weeks. It had been in discussions with Walt Disney Co. about a possible investment, but that failed to materialize and it settled for an advertising deal that made it the exclusive daily fantasy game of Disney’s ESPN subsidiary.
PitchBook, an investment research service, said recently amended corporate records in Delaware and Massachusetts indicate that DraftKings is raising up to $300 million in an equity sale that would value the company at $750 million before including the new cash. That research was first reported Monday by the Boston Business Journal.
A person familiar with the deal previously said the three-year-old startup was raising about $250 million. DraftKings didn’t respond to messages seeking comment Tuesday.
Daily fantasy sports is a faster-moving cousin of traditional fantasy sports contests.
In both cases, players can act like virtual general managers, assembling a roster of players from different teams — Seattle Mariners’ ace Felix Hernandez on the same team as Red Sox designated hitter David Ortiz, for example. The team that compiles better statistics scores more points.
Companies like FanDuel and DraftKings offer contests that last for a day or a week, rather than an entire season as in traditional fantasy sports. That means more games can be packed into a single season, increasing the number of chances for players to spend money on entry fees.
The speed also increases the prizes at stake. Fantasy sports have a specific exemption in federal online gambling laws, essentially making them a legal way of betting on sports. Forty-five states and the District of Columbia allow players to place bets on fantasy games.
The Fantasy Sports Trade Association estimates that nearly 57 million people play fantasy sports in North America. The trade group says there are about 16 million daily fantasy players in the US and Canada, a growth of 9 million over two years.
Daily fantasy companies make money by keeping a percentage of player entry fees, typically about 10 percent, Krejcik said. Most of the money is recycled as prizes: DraftKings has said it will pay $1 billion in prizes this year, while FanDuel says that it expects to pay $2 billion in prizes.
Krejcik said he would be surprised if either company continued to raise investment cash at the same pace. “They’re selling big chunks of their companies to begin with, and one of them is going to have to turn the spigot on — go public, or start generating some meaningful profit,” he said.