The DFS Trough of Disillusionment

By September 29, 2015Uncategorized

Unless you’ve been living under a rock, you’ve heard of Draftkings and FanDuel. Hell, with the ad budgets they’ve been throwing around lately, you’re probably sick of hearing about Draftkings and FanDuel. My contention is that we’re about to enter the “trough of disillusionment” on daily fantasy sports, and that that’s perfectly okay. But first a little context…

I honestly can’t remember when I started playing fantasy sports. A long time ago. At least 20 years. I still play “traditional” fantasy leagues (where one drafts a team for an entire season), but, increasingly, I spend most of my “fantasy time” on what’s known as “daily fantasy sports,” (“DFS”) or the above mentioned Draftkings/FanDuel (where you draft a new team every week). In addition, we’re investors in the DFS space over here at SKV — having now had 2 portfolio companies acquired by FanDuel (numberFire and Alphadraft), with existing investments in several other startups in the space (unannounced things).

But what I really want to focus in on is what it means to be a “player” in the DFS space, as I think that tells the current tale on where the space is headed both short term and long term.  So, when I say I “play” DFS, what does that actually mean?

Let me speak in some specifics: last week, I played 67 different lineups in college football (that ran from Thursday to Saturday), and 25 different lineups across the NFL slate. I’m guessing I spent upwards of 20 hours between Monday and Saturday with my head gleefully buried in spreadsheets looking at sports stats (this is in my “off-time” from work — i.e., at night). Does that sound like a lot of time invested and lineups played? Because here’s the big secret: it’s not.

This Bloomberg piece did a nice job of laying out the “scary story” of playing DFS against the “sharks,” but here are the two salient takeaways: a) daily fantasy sports is absolutely a game of skill (that’s played by some of the best players walking); and b) most people completely underestimate how much time and effort goes into acquiring any real proficiency at any given skill.

While my 92 lineups and 20 hours last week may sound like a lot, it’s nothing compared to what the known “pros” are putting in this on a weekly basis (and I’m an above average player). And therein lies the crux of this piece. The gap between the “amateur” player and the “professional” player is so large, that crossing it is a Mad-Maxian exercise in wasteland navigation (there’s a reason the pros call it “grinding”).

What all of this means in the near-term (and by “near-term” I mean this NFL season) is that we’re about to slam headlong into the “trough of disillusionment” around DFS. I’d expect dozens of media stories to hit with the tales of woe about those amateurs that were having so much fun and then just got disgusted, or worn out, and quit.

The DFS industry is, of course, acutely aware of the problem, and trying to take steps like segmenting contests into “beginner” and non-beginner. But I’m not sure that’s really the answer. It’s why one of the things that we’ve been acutely interested in investing in are tools like numberFire (which we did invest in; now owned by FanDuel), or Fantasy Labs, or Swish Analytics, or Rotogrinders, that can help the amateur get the slightest leg up on the pros. The DFS sites will have to encourage the “content side” if they want to keep the amateurs playing.

But, even further, we can envision a future where a “derivative market” on DFS takes shape. And, instead of picking my own team of players, I’m picking a team of Draftkings pros (and their underlying players) to put up against your lineup of pros (side note: several industry insiders don’t think this concept is tenable).

Either way, we’re about to experience the trough on DFS. And that’s perfectly okay. From an investment standpoint, we’re comfortable in the idea that most VC’s have completely underestimated how big the DFS wave is. It’s one that we believe has legs on a much, much, much longer timeframe than the immediate trough future (and we’ll keep investing accordingly).

And from a player standpoint? Well, don’t think you’re going to consistently win by watching ESPN and doing a few lineups on Saturday morning. 😉