Gaming Companies Cautious About Internet Gambling Legislation in the US

Rep. Barney Frank is proceeding with moving HR 2267 forward, hoping to replace the Unlawful Internet Gambling Enforcement Act (UIGEA) with a licensing and regulatory structure for online gambling. However, companies that would benefit are keeping a cautious stance and avoiding becoming too public in the discussion.

A Wall Street Journal report discusses the public positions and opinions of three gaming companies that would benefit from liberalization of internet gambling within the US. The consensus opinion is that if this moves forward, it is likely to happen no sooner than a year from now, near the end of this congressional session.

From discussion panels at the Global Gaming Expo, their consensus is that if any game is legalized online, it would be poker, followed by traditional casino games. No one is foreseeing the expanded legalization of sports betting online in the US anytime soon. However, given the estimates that only 1% of sports betting in the US is legal ($2.5B in Nevada casinos), that implies that $250B in illegal sports betting occurs each year. That's a lot of money not being regulated and taxed. I don't think many can make the logical argument that keeping something illegal is somehow going to make that $250 billion of illegal sports wagers disappear. It's still going to occur.

As a trend, the approach to legalize poker and other games of skill, then move to legalize other traditional casino games and slots makes sense. Don't make too much of a change at one time. Start with these games, learn how the regulatory structure responds, improve the process and then consider expanding the available games. Ultimately, people should be able to spend their money for the entertainment they desire, as long as it doesn't impact others. The US the last I checked was supposed to still be a free country, with a constitution that recognized the people's God-given rights to life, liberty and the pursuit of happiness.

Should regulations be instituted to keep minors from wagering? Absolutely. Should programs be in place to help problem gamblers? Sure. Reputable online gambling firms in other countries have been doing this for years. There isn't a reason that the same kind of protections wouldn't be effective here. There has been online wagering on horse racing in the US for almost 10 years and they don't seem to have an issue with gambling from minors or from problem gamblers.

Fantasy Sports Attracting Investment

A good sign an industry is "hot" is when venture capital investment flows into it. The Fantasy Sports industry is one such industry. Fantasy Sports can be considered a subset of the Media and Entertainment industry. With over 15 million Americans participating in fantasy sports, and major players like Yahoo, CBS and the major sports leagues involved, the industry is hot - and venture capitalists are zooming in faster than cheetahs on motorcycles, and have been for a couple of years.

Venture deals involving fantasy startups such as Atomic Moguls, Rotohog.com and Yardbarker attest to the attractiveness of the industry to venture capital firms. In addition to VC funding of fantasy sports sites, related sports-themed sites, such as PicksPal, NBX, FanIQ and PROTRADE also have obtained funding.

Knowing that the space is hot is a good thing, but VCs operate in a herd mentality, and what is hot and fundable can change in a heartbeat. As someone who back in 2000 founded a startup and received a $14+ million Series A from a Sand Hill Road VC, I know well the spectrum of emotions and machinations that take place when deciding, pursuing and obtaining venture funding. My startup got its funding right before the tech bubble burst. A couple months of delay and no funding would have been available.

If you decide to pursue venture funding, be aware that it will be very similar to applying for credit. The more you need it, the less available it will be and vice versa. The more you need it, the more expensive (i.e. more ownership percentage and control) you will need to turn over to the venture capitalist or angel investor. However, if you've done a good job, and your need for investment may in fact be better served by a loan, you will be in much better shape to negotiate a good venture capital deal, if you decide to go that route.

With my new startup, I am not looking at venture funding first. In fact, I'm not looking for it at all. So far, the progress to date has been done by bootstrapping. That's not to say that no money has been required. So far, easily $100K+ has been spent, similar to moving up to and through an initial Angel round. The more you can do on your own, you'll be in a better position.

There are some that take VC money because they need to ramp up fast to capture market share in their particular space. That may be a very legitimate approach. My personal bias is that if the industry niche being pursued has low barriers to entry and the winners may be determined more by marketing "carpet bombing" to reach critical mass quickly, I'd be looking for something else to pursue. All else being equal, VCs prefer companies that have sustainable competitive advantages. I agree with that perspective. In a gunfight, what do you prefer to have - a pistol or a tank?