DraftKings raises $300m in frenzied fantasy sports land-grab

DraftKings founders Jason Robins, Paul Liberman, and Matt Kalish (L-R) in the Boston startup's office.
DraftKings founders Jason Robins, Paul Liberman, and Matt Kalish (L-R) in the Boston startup's office.

DraftKings has lined up long-sought funding from a major backer, with Fox Sports leading a $300 million investment that will help the Boston startup battle larger FanDuel in the booming online fantasy sports business.

In a deal set to be announced Monday, Fox Sports will provide about $150 million for an 11 percent stake in DraftKings, according to a person who has been briefed on the matter. Other investors include the Kraft Group, owners of the New England Patriots, Boston financial giant Wellington Management, and several sports leagues and franchises.

In a separate deal, DraftKings will spend $250 million on advertising over the next three years on Fox’s media properties, said the person.

Fox Sports, owned by Rupert Murdoch’s 21st Century Fox, broadcasts major league football and baseball games and Nascar races, and its national cable sports channel, Fox Sports 1, has about 85 million subscribers. DraftKings chief executive Jason Robins said the money will help the company quickly capitalize on the explosive growth of daily fantasy sports.

“Once you know that you’ve got something that’s working, and you know you’ve got a big market that you’re going after, you want to put your foot on the gas,” Robins said. “And that’s certainly what we’re doing right now.”

The new investment will also allow the company to build out its technology and expand into the United Kingdom later this year, Robins added.

For Fox Sports, the investment is a way to increase the audience of rabid sports fans watching its programs.

“The more you play daily fantasy, the more likely you are to consume our content,” Fox Sports president Eric Shanks said. “All of that is good for Fox from a strategic standpoint.”

DraftKings was under pressure to build its war chest.

Earlier in July, Walt Disney Co., parent of sports network ESPN, backed out of a potentially big investment. Meanwhile, FanDuel recently received $275 million from investors KKR & Co., Google Capital, and Time Warner Investments, while Yahoo said this month that it was entering the daily fantasy sports business.

The Fox Sports-led funding would value DraftKings at around $1.2 billion, according to a person with knowledge of the investment terms.

DraftKings and FanDuel have helped fuel the growth of fantasy sports games, in which fans assemble a theoretical roster of best-performing athletes, by creating many more contests that fans can play on a daily or weekly basis. Although some games are free, many contests award cash prizes that are funded by entry fees paid by players.

The number of fans playing daily fantasy games has more than doubled in the past two years to 16 million, and the amount they spend has increased from just $5 per year on average in 2012 to about $257, according to the Fantasy Sports Trade Association.

FanDuel has said it will pay about $2 billion in prizes in 2015, while DraftKings said it expects to award more than $1 billion. The companies typically keep around 10 percent of player fees as revenue, paying the rest in prizes.

DK bobblesBen Stepansky with his bobbleheads at the DraftKings offices on Summer Street. John Tlumacki/Globe Staff

Christopher Vollmer, a media analyst for a consulting arm of PricewaterhouseCoopers, said both DraftKings and FanDuel are racing to lock in as many customers as possible while the daily fantasy sports business is still in hyper-growth mode.

“You don’t know when the music stops,” Vollmer said. “But it’s a good time now for all of them because the category’s taking off, and it’s becoming more mainstream.”

Federal law bans most sports betting online, but fantasy sports contests for money are allowed if they meet several criteria. Among the most important is that they are a game of skill, reflecting the player’s ability to analyze statistics and assemble a roster, and not a game of chance, such as betting on the final score of a game.

Some states also have online gambling regulations that are stricter than federal law, and DraftKings and FanDuel do not allow players in Arizona, Iowa, Louisiana, Montana, or Washington to compete for cash prizes.

DraftKings and FanDuel say they have done rigorous legal analysis to ensure they are operating legally. But some legal experts caution that they offer prizes in states where the laws about winning money on fantasy sports are unclear, leaving the companies vulnerable to legal challenge.

Disney decided to back out of a potential investment in DraftKings in part because it did not want its brand associated with companies that have echoes of sports gambling, Robins said.

“ESPN is a sports brand and Disney is very much focused on children. And the reality is our product is not for the little kids coming home and watching Disney in the afternoon,” Robins said.

DraftKings was able to reach an exclusive advertising agreement with ESPN. A person familiar with the deal said DraftKings agreed to spend about $250 million on ESPN. The Fox advertising deal is not exclusive, meaning it can still accept ads from FanDuel and Yahoo, Shanks noted.

Legal questions have not kept the biggest names in sports and media from diving into the business. DraftKings’ investors include Major League Baseball, the NHL, and Major League Soccer, while FanDuel’s backers include NBC Sports, Comcast Ventures, and the NBA.

“All of those deals that we did, there were significant amounts of diligence done on this very topic,” Robins said. “And each and every one of them came away with a very firm conclusion that we were 100 percent in compliance with all applicable state and federal laws.”