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By JohnWallStreet

On Monday, Underdog Fantasy announced it raised $10 million from a star-studded collective of celebrity investors, including Mark Cuban, Kevin Durant (via Thirty Five Ventures) and The Chainsmokers (via Mantis Venture Capital). The Series A round comes in the wake of Bally’s $90 million acquisition of Monkey Knife Fight and Caesars’ investment in SuperDraft ($CZR has the option to increase its limited position to 100% over time).

Considering at least half of the U.S. will have access to legalized sports betting by the start of the 2021 NFL season, it seems like an odd time for investors to be backing DFS startups. Remember, the assumption has been that once DFS players can legally wager on matches they will abandon the no-stakes games of daily fantasy.

But Underdog co-founder Jeremy Levine (who also founded and sold Draft.com) and Eilers & Krejcik Gaming partner Chris Grove (who is invested in Underdog Fantasy) say there is now enough evidence (see: rising DFS handles in N.J. and Pennsylvania) to suggest that, as Grove says, “fantasy scratches a different itch” than traditional sports betting.

Levine and Grove pointed to the flood of money looking for a home within the sports betting ecosystem and DFS’ rich history of success stories to explain why there has been so much interest of late in the space. “[DFS] has produced two top-tier operators in the sports betting space. The fantasy route has also produced some significant exits for early stage companies, like Monkey Knife Fight,” Grove noted.

Our Take: It wasn’t long ago that daily fantasy sports was the apple of investors’ eyes. DraftKings and FanDuel alone combined to raise more than $1 billion between 2013 and 2017. The market was particularly active prior to October 2015, when former New York attorney general Andrew Schneiderman declared DFS to be illegal gambling within the state (which caused investment interest to cool and many smaller operators to eventually go under). By the time PASPA was struck down in May 2018, few competitors were left and even fewer were able to compete with the two market leaders.

DraftKings and FanDuel—along with the investment community—largely turned their attention and resources toward legalized sports betting in the wake of the Supreme Court’s ruling. While that explains the drop-off in capital invested into DFS companies in the late 2010s, it created an opportunity that’s now being seized by a new generation of operators. “If you look at the DFS companies having some success right now, these are all companies that didn’t really exist prior to PASPA being overturned,” Monkey Knife Fight president Nic Sulsky said.

On a macro level, the momentum behind sports betting has certainly helped reignite investor interest in DFS. “There’s a tidal wave of money coming into sports betting. So, it’s natural that the wave would find its way to just about every part of the ecosystem and the extended universe,” Grove said. And now that some of these new-age DFS companies have received validation in the form of funding from bigger, more traditional sports betting names, it reasonable to assume we’ll see even more interest in and around the space.

Like Levine and Grove, Mavericks owner Mark Cuban believes there is room for DFS alongside sports betting. “People play what they want to play,” Cuban said. “Different skill sets for different games.” If he’s rights, that bodes well for the future of daily fantasy sports (even in a world where mobile sports betting is available in all 50 states).

The question is, will the new generation of DFS companies continue to operate on a standalone basis or will they get swallowed up by a larger gaming enterprise? “The companies that will [ultimately] win in the space will have multiple pieces to the platform and daily fantasy—and fantasy in general—is a core piece to that platform,” Levine explained. Grove agreed that operators with “the ability to offer consumers the widest array of ways to interact with sports predictions, risk and reward as possible, once they have been acquired,” will be best-positioned long-term.

DraftKings and FanDuel are currently the only companies that offer bettors a sportsbook, igaming, betting games (think: survivor pools) and a real-money fantasy platform, so it’s no surprise they are each among the top three operators, in terms of market share. “If MGM or Caesars has a customer and they want to play fantasy sports content, well they are going to go to FanDuel or DraftKings to do that, and obviously FanDuel and DraftKings are smart enough to try and get them to stay,” Levine explained. That dynamic—along with their ability to drive new users—makes this new class of DFS companies logical acquisition targets for domestic, land-based casino and European gaming operators looking to put themselves on an even playing field with the market leaders.

Daily fantasy has proven to be “the best real-money gaming customer acquisition tool that exists,” Sulsky said, pointing to the success DraftKings and FanDuel have had. And with fewer than 20 states currently offering live mobile sports betting, there is a great opportunity for DFS companies to pre-acquire customers for a gaming operator (particularly in valuable markets like California, Texas and Florida). But Grove said if Underdog were simply pitching investors on building a database of users in states that have yet to launch, “It might be a little too thin [from a narrative perspective] to warrant the types of valuations they are getting.” Underdog commands a premium valuation because it has managed to build games that sports fans enjoy playing, while developing a unique and memorable brand identity.

For what it’s worth, Levine made it sound as if his company intends to compete with DraftKings and FanDuel down the line (as opposed to align with a competitor). “We’re on pace to be worth about a billion dollars by the end of next year,” he said, “and at that point we’ll have the access to capital to go into other verticals.”