U.S.

DIGITAL
GAMBLING
Hardball: Addressing the
Key Questions on Daily
Fantasy Sports
 Introduction
We wrote about the daily fantasy sports category in our two 2023 industry primers, and given its relevance and
potential implications to the gaming sector, we think it warrants a special thematic discussion. In this deep dive,
we will unpack the questions we get daily from our industry clients as well as institutional investors to chart a path
forward in 2024. We remain very constructive on daily fantasy sports and see lots of interesting ramifications for the
broader gaming sector, likely yielding further consolidation, potential business pivots, additional product innovation,
and the spawning of even more dynamic businesses.

Fantasy sports have been around since the 1960s and have become increasingly popular in the modern sports
era. There have been many ways for Americans to play in contests and win money, with the current incarnation of
betting products commencing in the late 2000s, as initially popularized by DraftKings and FanDuel, as well as their
precursors. These businesses ultimately boomed before regulators cracked down on them in 2015. Unlike the mid-
2000s poker boom, which never came close to recovering from its zenith, sports betting has become a long-lasting
and growing phenomenon in the post-Professional and Amateur Sports Protection Act (PASPA) era.

With the legalization of online sportsbooks in 29 states since 2019 (37 states online or retail), online sports betting
(OSB) is now ubiquitous and widely accepted, generating an estimated $7.6 billion of revenue in the U.S. Beyond
traditional online sports betting and in the wake of the 2015 crackdown on daily fantasy sports that DraftKings and
FanDuel first popularized, a new generation of “plus” daily player fantasy or “pick-em” games have capitalized on new
rules and regulations that states have enacted to become a substantial business and product category.

According to a June 2023 report from the Fantasy Sports & Gaming Association, a key trade group, more than 81
million adults in the U.S. and Canada were engaged in or wagered on fantasy sports, with approximately 34% of
this group wagering. Entry fees for fantasy contests totaled $11.5 billion, as of its most recent analysis. While the
operator take varies by product offered, as there are different nuances by game, we conservatively believe industry
revenue is somewhere between $1.5 billion–$2.0 billion annually.

Although fantasy sports is a big business and has created many innovative companies in the ecosystem with
considerable skin in the game, it still pales in comparison to the real money OSB business as well as that of illegal
offshore books, which are a huge market that many seem to ignore. With that preamble, daily fantasy sports “plus”
(DFS Plus) has been chock full of headlines of late, given swirling headwinds and the threat of potentially negative
legislation. Please join us for a candid discussion covering the new era of daily fantasy sports in this special report.

1
Source: AmericanGaming.org, Statista.com.
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2
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4
Will the Leading Online Sportsbooks Enter the
Pick’em Space, and What Are the Implications?

As the battle over the pick’em space heats up, there are two sides squaring off, including the Coalition for Fantasy
Sports (Coalition), comprising PrizePicks, Underdog Fantasy (Underdog), and Sleeper in the pro camp, and the
Sports Betting Alliance (SBA), comprising BetMGM, DraftKings, FanDuel, and Fanatics in the opposing camp. From
our vantage point, it’s the new school versus the old school, with Fanatics being a relatively new player in the gaming
world, albeit one that is making quick waves in the category given the heft of its brand, consumer clout, and access to
capital.

We argue that the creation of the SBA is a validation of the legitimacy and heft of the Coalition, as PrizePicks,
Underdog, and Sleeper are the top three players in the sector. These scrappy upstarts have done an impressive job
building their brands, as well as delivering innovative products and user experience—tapping into the next generation
of bettors who have craved a different experience and are more focused on the stats of individual players versus
traditional betting types on teams, for instance. Once upon a time, in 2020, companies like Monkey Knife Fight
(acquired in 2021 for $90 million and now shuttered) were the leaders of this category. We think the DFS companies
are up for a fight and have staffed up with groups of lawyers, advisors, lobbyists, and PR teams that are prepared to
help shape the potential outcomes in their favor.

Given substantial legislative efforts by incumbent OSB operators and arguably regulatory capture, we struggle with
efforts against the pick’em business, particularly as much of their business comes from states where OSB is not
available, such as California, Georgia, and Texas, for instance. Other pick’em markets, such as New York, are quickly
being shuttered and were not likely cannibalizing OSB; rather, we see the biggest competition to these groups as
paying massive customer acquisition costs and taxes, and they are likely still having their businesses eroded by
offshore books and crypto casinos, which are still pervasive. We have said on many occasions that OSB and DFS
businesses, which are regulated, should be lobbying and/or pushing legislators to push for stricter controls on
offshore gambling.

Addressing our question, we don’t see traditional online sportsbooks officially entering the pick’em space, particularly
in markets where regulated sports betting isn’t legal yet, to not upset the apple cart with their regulators or muddy the
waters (California or Texas) for future opportunities. When, and if, OSB or online casinos are legalized or opened to
full competition in places like California, Georgia, Florida, or Texas, we see the OSB operators that have built national
brands as well-positioned to compete with PrizePicks, Underdog, and Sleeper, which have organically built strong
brands and substantial databases.

Simply put, we don’t see OSB operators offering clones of PrizePicks, Underdog, or Sleeper, but developing products
that mimic these offerings within regulated sports betting markets, as evidenced by DraftKings’ recent “Progressive
Parlay” product highlighted at its November 2023 Investor Day. According to DraftKings, it will offer “over/under”
(versus more or less, seen from the pick’em companies) wagers against the house with as low as three and up to
12 legs. We think it’s best to give consumers what they want, and the thrill of winning multi-leg parlays is the “mega
jackpot” shareable winning experience where someone can tell their friends they made five figures on a two-figure
bet. It remains unclear when DraftKings will begin offering these bets, but we will be on the lookout for its product
and other improvements from the competition.

5
Tell Us About the Current Competitive Paradigm.
Why Are There So Many Options?

Pick’em and fantasy sports can be a great business with inherently higher margins and lower customer acquisition
costs (CAC) versus OSB, which explains the flurry of competition and the large number of competitors. Many of the
young tech founders we have gotten to know within this ecosystem are not necessarily lifelong gaming industry
people, but enthusiastic fans of sports and betting who wanted to put a different spin on the products previously
serving the marketplace. For such a relatively young category, the level of competition in DFS Plus is fast-moving and
dynamic.

Just a few years ago, even PrizePicks and Underdog were relatively small businesses (under $100 million top line),
and Sleeper, for instance, which long had developed a great brand and following for its community, news, and
information offerings for fantasy players, only has entered pick’em in the past 18 months. Some of the early market
leaders like Monkey Knife Fight exited, and even Betcha, which was acquired for $25 million plus up to $40 million in
earn-outs in 2021 by Vivid Seats, appears to be a niche player today.

The competitive dynamic within the category appears to be evolving rapidly with considerable momentum behind a
number of the middle tier with traction among players we follow, including Boom, Chalkboard, Dabble (an Australian
sportsbook that has entered the U.S.), FanUp, Hot Streak, and ParlayPlay, gaining momentum reflected by app
downloads and overall app store rankings.

Each of these groups has its own unique product offerings or nuances whether clean/slick UI/UX, viral marketing
and community, shrewd social media usage and marketing, and differentiated gameplay. Also noteworthy has been
the shift by regulated OSBs like Betr (Jack Paul/Joey Levy) with its Betr Picks product. For those like Betr, which have
already built or acquired a lot of tech, risk, and payment capabilities, it makes inherent sense to crossover into these
products to build scale, audience, and overall user metrics.

“The competitive dynamic within the category appears to be

evolving rapidly with considerable momentum behind a number
of the middle tier with traction among players we follow...”

6
Source: IndianGaming.com.
Why Are These Games So Popular, and What Are the
Demographics?
DFS Plus has become very popular for a number of key reasons. One of the leading reasons for this success has been
in attracting a younger male demographic that is native to mobile products and has wanted a different wagering
experience than that of their “dad or grandpa,” particularly apps that are easy to use and allow them to follow their
favorite players versus teams. According to the Fantasy Sports & Gaming Association’s 2023 survey, approximately
60% of these bettors are male, and 79% have a college degree.

We believe the leading apps have tapped into the ability to wager on sports well beyond the Big Four, and for users
trying the product, it’s clear that the ability to make picks on European soccer, MMA, and e-sports is well articulated
and addressed. Also, today’s sports fan is much more focused on following individual athletes, given personal
branding, and social media is far more popular than teams; all of the DFS apps do a great job of allowing consumers
to dig in deep on their favorite athletes. Based on our research, some of the leading players in the category have
built valuable and passionate customer databases in the mid-single digit millions (much generated organically from
referrals), and even some of the second and third-tier emerging entrants have usership in the hundreds of thousands,
which is not insignificant in relation to the size of online sportsbooks that are fighting for market share on a state-by-
state basis.

Many of the leading apps also do a great job of building community across channels like Discord or messaging
capabilities integrated into their platforms; allowing players to share in the wins and losses ultimately drives
engagement, retention, and a sense of “team.” We believe the leading DFS Plus players have done a great job
efficiently building their robust databases with relatively low customer acquisition costs versus OSB operators by
driving a strong referrals business from existing members, land-based promotions, local advertising, more recent
traditional media (TV commercials), podcast sponsorships, and unique promotions that drive retention (e.g., offering
very achievable odds on certain players clearing thresholds that increase the chance of winning a multi-leg game,
Steph Curry more than 0.5 points for instance).

As Pick’em Games Are Curtailed, How Fast Will

Revenue Drop, and Where Will They Go?
DFS has traditionally operated under the Unlawful Internet Gambling Enforcement Act as a carve-out for games of
skill. Until recently, most states in the U.S. allow for some type of DFS game, with Nevada (preponderance of gaming
options), Idaho, Hawaii (typically opposed to gaming to protect tourism), Montana, and Washington (large tribal
gaming business) not offering these products. The modern era of DFS Plus began in March 2016, with Virginia
approving the Fantasy Contests Act that paved the way for more states to follow and the current generation of
pick’em products really gaining tremendous momentum during the COVID-19 era.

During 2023, the regulatory tide started to turn against pick’em games that allow players to enter multi-leg parlay
contests, with Florida, Wyoming, Maine (cease and desist), Alabama (request for game modifications), Colorado
(considering rule changes), New York (ban), Michigan (considering a ban), and California (AG preparing a formal
opinion on the legality of DFS) being some of the bigger headlines more recently. While there is a lot of press out
there in opposition to the pick’em business, we don’t see the ice cube melting rapidly, as we believe there is still much
to play out from a legal perspective in key states, and each jurisdiction is going to have its nuances.

7
We also see a long road to go before markets like California take any major negative actions, particularly as gaming
has long been a complicated topic in that state with so many hands in the proverbial cookie jar. For all of the negativity
around DFS, what baffles us is that none or very little of this is being driven by consumers, particularly as these games
have been around now for several years, and there are millions of players consuming them without major objections.
When and if the tide flips in places like California or Texas, the pick’em players will have very valuable data in our view
as well.

While it is easy to single out the “big three” of PrizePicks, Underdog, and Sleeper, there are many players of relevance
below this group that are growing quickly and have developed strong user bases and followings. Although cease and
desists could go out to the next 1–2 operators below the top players, or some operators will choose to self-exclude
from certain states or alter their games to comply with new rules, regulators could play whack-a-mole for quite
some time before bettors run out of options. We are already seeing a willingness to pivot into new product types,
particularly as PrizePicks, for instance, recently launched a free-to-play product in Michigan. We see free-to-play as
a way to retain some usership and preserve optionality for a future return to revenue-generating products, whether
iGaming or OSB, longer term.

It is important to highlight that while cease and desist letters are of some concern, it doesn’t necessarily highlight or
signal that action from AG offices is imminent, which means some players in DFS will choose to ignore these letters
until the threat of meaningful action becomes more certain. Having been involved in the gaming industry since
the late 90s, what we can be sure of is that gamblers will find any and all creative means to place a wager if there
are options. As a result, we expect that any revenues that leave the DFS system will find their way into alternatives,
whether it’s offshore/crypto casinos or back-to-black market (bookies) outlets. One potential beneficiary of changes
to rules around DFS could be the sports sweepstakes category, and we will be closely following the evolution of that
segment led by Fliff and Fortune Coins, and likely some fast followers, and perhaps some of the DFS companies over
time.

We do see a bright future, regardless of what happens to pick-‘em, for a number of emerging companies that can
provide peer-to-peer betting or pool-based offerings at scale and are closely following Splash Sports and FanUp, both
examples of groups that can go after more casual players with easy-to-use games and slick apps with good UI/UX.
According to the American Gaming Association, an estimated 56 million Americans participated in March Madness
brackets in 2022 and 13 million in Superbowl Squares contests. We see groups like Splash unlocking the peer-to-peer
category, particularly relative to betting against the house, as competing against friends, whether at work or in social
circles, provides an attractive alternative and attractive business economics.

8
 Will the DFS Companies Make Substantial Business
Pivots, and if So, What Will They Do?
We believe there are many paths for DFS companies to choose over the next few years. Some may choose to go
full throttle into the wind and ignore the potential risks, opting for as much growth as possible, much as DraftKings
and FanDuel chose to do so in 2015, or many disruptive tech companies like Uber and Lyft or Airbnb did so in their
respective categories before becoming mainstream. Some may also choose to hedge their bets (pardon the pun) and
move into OSB or adjacent gaming products if they are comfortable with running the regulatory traps, which are not
insignificant and expensive.

Crossing over from DFS to OSB is easier said than done for a number of reasons, including acquiring regulated
gaming licenses and related skins, developing a workable betting platform (or renting one from a B-B provider at
risk of having a very commoditized product), having related PAM and risk management trading capabilities, not to
mention going head-to-head with the mega-brands, such as DraftKings, FanDuel, BetMGM, and Fanatics, as well as
all of the other 1%–5% players fighting for relevance. Given the scale of their brands and reach, as well as having a
large customer audience and top-line revenue that could be converted into OSB in addition to great tech, we believe
many of the leading DFS players could transition with some levels of success.

Clearly, market access costs are going to be a fraction of what they were historically, particularly in oversupplied
markets, and there are a number of betting platforms available in the marketplace that could speed the path to entry.
In the instance of a group like Underdog, which acquired its own OSB tech (GOAT Gaming acquisition), or groups like
Betr that started with free-to-play, then OSB, and now are in DFS that have built or acquired a lot of the capabilities to
have a viable platform. With Kindred, a major European gaming operator, announcing its fully exiting of the U.S. by Q2
‘24, this further signals that skins and other assets will remain available, likely on the cheap end.

What the DFS companies have done very well is brand building and being a hub for avid sports fans. Should they
choose to pivot, some that are better capitalized or have access to capital have the potential to move into adjacent
verticals that leverage their brand and audience within media and entertainment (podcasts, content), gaming
affiliates, and adjacent gaming products. It wouldn’t surprise us to see DFS companies ultimately enter social gaming,
online lottery, or iGaming, as these brand extensions would seem fairly likely paths for success.

Given that the regulation of DFS varies state by state, we can only begin to guess how regulators will change the rules
in these jurisdictions, potentially modify games, and perhaps open Pandora’s box further to new game types that only
a few have just started to think of. There will always be a game of whack-a-mole, perhaps where the product stays
ahead of the regulation, at least for a brief period.

Perhaps DFS Plus moves back to a “1.0” game format or more peer-to-peer focused offerings; the key takeaway from
our perspective is that gaming, whether land-based or mobile, has always been fast-moving and innovative, invariably
we expect new form factors will pop up over the next 12–24 months that will further shift the narrative. As noted
earlier, we wouldn’t be surprised to see some DFS players shift into sweepstakes with similar products to Fliff, which
has become a phenomenon in that category; with that said, sweepstakes could ultimately see incremental regulator
pressure over time, making it perhaps a shorter-term safe haven.

“What the DFS companies have done very well is brand building
and being a hub for avid sports fans.”

9
Source: Betfirm.com.
Is This Sector Investable for Institutional Capital?
We believe the answer is yes based on our regular discussions with venture capital and private equity. We caveat that
gaming and/or media-specific funds have invested in the category historically, including high-net-worth types that
are comfortable with the regulatory environment around the business. Given that some of the leaders in the category
are substantial businesses that are throwing off meaningful cash flow, we have fielded inquiries from private equity
investors increasingly. While there is still plenty of uncertainty right now, some of these businesses could be capable
of distributing meaningful capital to shareholders over time. One only needs to look at a group like Sleeper, which was
funded by Andreessen Horowitz during the 2021 boom, to see that the potential size/scale of the DFS ecosystem
is compelling, and we believe a group like this would still put additional capital to work in the business if needed.
We believe the types of investors that have put money to work in social media businesses and are able to navigate
regulatory scrutiny, plus understand how to lobby properly, can add a lot of value to the DFS category. Ultimately,
investment into DFS will first center around valuation and the path to exit over the proceeding years, whether to a
strategic, through an IPO, or other types of transactions, and assuming the regulatory environment becomes more
clarified (to the positive) in coming years, this will aid the investment case for the group. Once upon a time in the mid-
2010s, investing in a company like FanDuel was considered risky, and for private equity that stepped in during the
most challenging days, the rewards were substantial.

Will M&A Activity Accelerate, and What Are the Likely

Outcomes?

The short answer is yes. With a number of DFS platforms generating meaningful positive cash flows with no debt, we
believe these groups can pursue complementary acquisitions that improve their diversification into adjacent verticals,
as noted earlier, and/or potentially acquire other industry players. We would see it relatively unlikely that the largest
players in DFS would acquire similar companies, given the likely overlap in their player databases and limited synergy
potential. As we have touched upon before, DFS companies have built substantial player databases and a valuable list
of gaming-oriented, younger customers.

We also see overlap in the types of users who play DFS and those who engage in short-term trading, such as on
Robinhood. We believe financial market platforms that resonate with Gen Z could eventually find themselves in
gaming longer term; however, clearly a lot would need to be sorted out from legal and regulatory perspectives to find
this outcome.

Given their distinct knowledge of potential OSB customers in big markets like California, Florida, Georgia, Texas, and
other large geographies, once these markets flip to traditional sports betting, there is considerable value in what
they have built, in addition to having created substantial, dynamic, and innovative cultures of technology. The race
to secure strong tech talent is still substantial despite the fallout in the broader tech industry and layoffs; gaming, at
the end of the day, is still a very discrete and niche vertical, and the awareness of the ins and outs of the product, plus
regulatory nuances, means that many of the platforms could be plug-and-play to broader organizations. Bottom line,
there will be consolidation as OSB players scoop up DFS, and DFS potentially scoops up subscale OSB teams and
tech. We look at valuation for DFS businesses typically as a multiple of revenue simplistically (at a discount to OSB,
given regulatory overhang) and/or a multiple of value per customer, as these players have shown strong lifetime value
and retention.

10
Sources: Legalsportsreport.com, Bonus.com.
The Betting Tools Space Has Been a Key Beneficiary
of DFS; Is There Any Spillover Effect?
As a “recreational-plus” sports bettor, hey, you can’t be an investment banker in the digital gaming sector if you
aren’t playing with the product. We have been fascinated by the rapid transformation of (i) bet recommendation
services and (ii) the broader sports betting tools space. Starting first within the bet recommendation services
ecosystem, the world has changed a lot since the days of Jimmy Snyder, otherwise known as “Jimmy the Greek,” one
of the first sports betting touts and now the modern incarnation of picks services like BetQL, Action Network, and
Sportsline. With the modern OSB era and growth of pick’em DFS games, we believe these businesses have grown
with the opening of new jurisdictions, primarily benefiting from their tight relationships with sportsbooks through
affiliate relationships and reliance on monthly/annual subscription revenues as primarily retail (low stakes or less
sophisticated) gamblers use these services for individual or multiple sports until they churn out and realize that
perhaps they might not be generating a lot of alpha.

Where we see the tools business further evolving over the next few years is toward mobile-first products that
leverage rich data, have a strong element of community, provide pick tracking at scale to see where money is flowing,
potentially leverage AI (assuming it’s not hallucinating that the New York Jets can win the Super Bowl as a suffering
fan), and provide insights without explicit recommendations. Overall, we remain constructive in this new generation
of tools, with good examples being Outlier, Props.Cash, Pikkit, Juice Reel, and Unabated addressing this opportunity.
OddsJam has also been a fast-growing market leader on the premium side of the business. In a nutshell, the potential
for slowing growth or a curtailment of pick’em games is not a major concern for the picks or betting tools space,
particularly as overall sector TAM is expanding; and, as the consumer gets savvier, they are inherently going to crave
more intelligence and information analogous to the investment markets; whether retail or professional, there are
many services that cater to this demand.

Contacts
Joel Simkins Brian Riley
Managing Director Vice President
New York San Francisco
+1 646.886.8256 +1 415.310.0581
Joel.Simkins@HL.com Brian.Riley@HL.com

11
Fantasy Sports
Total Raised Employee App
Company Description
($M) Count Ranking(1)

Operates a direct-to-consumer micro-betting sports platform and daily fantasy sports games. $90 ~105 16

Developer of a next-generation gaming platform designed to launch and promote custom gaming experiences. The
$32 ~35 102
company specializes in online sports and casino games, including both for money and free-to-play.

Operator of a sports messaging and daily fantasy sports platform intended to offer sports betting and score tracking.
$2 ~25 25
The company’s platform provides seamless bet tracking, score updates, and social interaction.

Operator of an online racing and sports bookmaker platform and daily fantasy sports platform. The company
$24 ~95 4
provides a platform for consumers to interact, engage, and share social sports experiences.

Developer of a fantasy sports and pop culture contest platform. The company’s application offers a variety of
$5 ~15 N/A
features, including free-to-play and daily and season-long fantasy cash contests.

Developer of a sports prediction platform designed for social and sweepstakes games. The company’s new social
$15 ~25 21
sports betting segment gives fans a risk-free opportunity to play in its virtual sportsbook.

Offers a social casino with sweepstakes elements, dedicated to providing high-quality, free casino-style
N/A ~25 N/A
entertainment to players in the United States and Canada.

Developer of a gaming media platform designed to engage players with fantasy Formula 1 games online. The
$9 ~20 N/A
company’s platform lets its users join the race and compete against family, friends, and strangers.

Operator of daily fantasy sports games—the company offers the most projections to choose from, advanced
$9 ~10 95
research tools, and fast payouts.

Operator of a sports bet tracking platform. The company’s live screen shows how bets are performing in real-time, as
N/A ~10 106(2)
well as analytics on bet performance over time.

Developer of a peer-to-peer sports gaming platform. The company’s platform helps to stake money in a variety of
$12 ~20 N/A
skill-based activities, such as sports, yard games, drinking games, board games, and video games.

Developer of a sports, entertainment, finance, fantasy, and online betting platform. The company offers a licensed
$91 ~150 N/A
and regulated sportsbook with bets that act like stocks.

Developer of a betting news and data platform intended to provide actionable betting insights. The company offers Total Raised Employee App
Company Description N/A ~25 136
betting tools and data covering every major league, including the NFL, the MLB, the NCAAB, the NHL, and the NBA. ($M) Count Ranking(1)

Operator of a sports betting platform that provides users with a suite of tools to do research and trends and team
N/A ~15 48
and line movement analysis.

Developer of the first weekly fantasy sports platform using strategy and social engagement. $2 ~45 N/A

Developer of social sports prediction platform intended to create a sports projection arena for modern fans; offers a
N/A ~10 64
daily fantasy sports platform.

Developer of a social sports betting application designed to sync legal sportsbook accounts in one place. $9 ~10 14

Operator of a daily fantasy sports platform intended to facilitate playing against estimated projections. $2 ~340 1

Developer of software that allows users to quickly analyze thousands of lines on the phone, tablet, or computer and
N/A ~10 74
find the props with the greatest value.

Developer of a sports platform designed for holding various fantasy leagues and connecting to other fans, creating a
$67 ~85 12
community of people across the country.

Developer of a real-money gaming platform for games of skill with peer-to-peer contests, content/community
N/A ~50 N/A
management tools, and an integrated payment platform.

Developer of a fantasy sports platform for prop bets designed for the casual user who wants to be more engaged
$8 ~20 N/A
with sports.

Developer of a daily fantasy sports platform with user-versus-user contests, enabling users to simply swipe left or
$1 ~5 N/A
right on their favorite players in matchups.

Developer of an online platform for sports fans to bet with peers, along with betting calculators to make intelligent
$1 ~10 N/A
bets and track the performance of the players.

Operator of a daily fantasy sports platform intended to facilitate playing against estimated projections. $45 ~295 5

Developer of a fantasy sports platform offering over/under, matchup style games, and more real money betting with
N/A ~10 N/A
a social element.

Sources: PitchBook, LinkedIn, Appfigures.com.

(1) Represents iPhone sports app rankings in the U.S. as of December 7, 2023.
(2) Represents grossing iPhone sports app ranking in the U.S. as of December 7, 2023. 12
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sation that is affected by overall firm profitability.

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Corporate Finance
Financial Restructuring
Financial and Valuation Advisory

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