Venture-capital firms investing in gaming and betting want to see start-ups with innovative solutions to the industry’s perennial problems, such as frictionless KYC or compelling social-gaming ideas.
Waterhouse VC Chief Investment Officer Tom Waterhouse and Bettor Capital founder and CEO David VanEgmond told the SBC Barcelona Summit on Thursday that they were investing in niche areas of growth.
“The Emerging Tech & Blockchain – Where Should The Money Flow” panel was missing two panellists, but Waterhouse and VanEgmond provided a concise summary of which markets were still ripe for investment, despite the turbulent macro-economic backdrop.
Both panellists agreed that, in the U.S. particularly, the critical drive now was to move from acquisition to increasing the lifetime value of existing customers, hence the interest in suppliers that can help operators achieve this goal.
“The key to working with operators for a start-up is to provide that level of product innovation that maybe they can’t do internally or resource constraints prohibit”, VanEgmont said. “So when we invest in software companies that are innovating in this space, we say to them, ‘Hey, we’ll take you to operators, help tell your story of why you’re a product innovator, why you can help them drive better retention and increase LTV, and help you partner with them.”
Waterhouse said if he were a start-up, he’d focus on growth areas, such as the U.S. and crypto, then speak to a head of product in those areas to identify their “pain points”.
“Find a product that’s needed, get integrated, and at least get revenue generating. These businesses impress when they’re lean and have revenue-leading costs, rather than ‘we have an idea and we need X million dollars of funding to get going’.
“It’s very hard to back that type of business. But if they already have a contract and they’re already generating revenue, it’s much easier to have follow on”, Waterhouse added.
Both investors admitted that securing investment is harder than it was a year ago, even in the growth areas of the industry. Waterhouse said that while last year, businesses might secure 10 times their revenue, now they’ll be doing well to secure two times.
It’s a climate in which understanding the needs of the industry, the compliance and regulatory gaps that need filling, or the product innovations that operators are unable to develop themselves are the best routes to funding.
From an investor’s point of view, the increased regulatory burden faced by the industry has also had a knock-on effect to its appeal, according to VanEgmont.
“It’s a robust investment environment, or it certainly was a year ago. As more and more people saw sports betting and online gaming growing in the U.S., they said, ‘How do we we get a high-growth industry?’ I think what you found, though, is that when it comes to owning more than 5% of the companies, you become highly regulated. There’s a regulatory burden for investors and a lot of casual or sector-agnostic investors don’t want to go through that”, he explained.
However, he said for a specialist investment firm like his, there is still a lot of opportunity as it is willing to tackle the regulatory burdens. “The macro backdrop now has brought valuations down and certainly dried up some of the capital on the periphery that was looking to participate”, he said.
Pinpointing the investment opportunities they’re seeking over the next year or so, VanEgmont said he was looking specifically at the North American market. “Who are the next Evolution, Pragmatic, or Play’n’Go?”, he said.
For Waterhouse, social gaming is high on his agenda, having identified an appetite for innovation in that space among operators.
