Lloyd Danzig: Venture Capital in Sports Betting & Online Gaming (Full Transcript)

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Ronen Ainbinder 0:32

I'm honored to share the mic today with one of the leaders driving the disruption and innovation of the sports industry. His background is as solid as it gets. Economics at Wharton, Computer Science at Columbia, public speaker, podcast host, writer, guest lecturer, mentor, investor, and more. Today, he's the managing partner of Sharp Alpha Advisors – a venture capital firm focused on sports betting and online gaming technologies. He recently raised a $10 million fund through Sharp Alpha Advisors to invest in seed and Series A sports betting startups. Additionally, he's a mentor for Techstars and the leAD Sports Accelerator and an active advisor on multiple organizations building and ensuring best practices in developing artificial intelligence. As you can see, this guest is already a legend, and I can guarantee this episode will be absolutely epic. Ladies and gents, Lloyd Danzig!

Lloyd Danzig 1:28

Thank you very much. I don't know if I can live quite up to that intro, but I'll definitely try.

Ronen Ainbinder 1:34

Welcome to the Halftime Snacks. It's a pleasure to have you here. Let's kick it off with a fun icebreaker Lloyd, would you rather live a year in space or on a submarine?

Lloyd Danzig 1:45

Oh, man, that's tough. I like nice views. And I get the sense that on a submarine, you're basically down deep enough where it's kind of just pitch black if there even are any windows at all. And the claustrophobia of that also feels a little intimidating. Whereas in outer space, at least like you get these beautiful views hopefully. I'm also fascinated by space and by rockets, and the engineering side of it. So I absolutely certainly hope to go to space. And based on that, I would have to absolutely prefer space.

Ronen Ainbinder 2:18

Elon Musk. If you're listening to this episode, you must recruit Lloyd dancing. No, man, welcome to the halftime snack. You have an awesome background. And we're gonna get into it and in everything that you do currently. But let's first off start with you. Let's understand first what inspired you to pursue a career? I think their section of sports, finance, and technology, can you share with us your inspiration towards that?

Lloyd Danzig 2:46

Yeah. So there are many things that I'll point to that inspired my love for the academic and business side of the gambling industry. Although truthfully, I'd never thought it was a possible career path. I just thought it was cool and interesting. From a very young age, my dad turned me on to the concept that a roulette wheel has 38 spots but pays out 36 to one. And that even though over the short term, you don't know what will happen on any given spin. That guarantees that over the long term, the house always wins. That was a fascinating concept to me from a young age; I definitely would not have called myself a bookie in high school because that makes me sound way tougher and cooler than I was. But I was a person who used an Excel spreadsheet and acted in the house and took all my friends' bets. Almost because I felt an obligation to the mathematical gods that if I could take odds, bets at the same odds that multibillion-dollar casinos were if I could be the house. I almost felt like an obligation to my future finances to take those bets. I was the one who turned my friends on to fantasy sports. I was a fantasy baseball and or football Commissioner going back to 2001. And so that has always been a big part of my social life and my leisure time. And then in school, university, and undergrad business school, I took all sorts of sports, business sports, law, sports negotiation classes. Still, honestly, all of that was just for the novelty and because I thought it was cool and fun. I started my career on Wall Street, did some FinTech stuff, some engineering, I just happened to kind of be in the right place at the right time in 2018 when the legislation changed, and the combination of what I had studied in financial markets as an investor and what I had personally come to understand about the business of sports betting and in particular online sports betting is what led me to say okay, this is something awesome that I'm deeply passionate about that I see a massive opportunity in and why I kind of left the Wall Street and data science world For more of an entrepreneurial pathway in 2018, for sports betting,

Ronen Ainbinder 5:04

Lloyd, you and me, we have a lot in common. I mean, my background is also in finance. And I also love statistics and numbers and probabilities, a big fan of that. So I mostly understand what you do, or most of what you do, but probably most of the audience doesn't understand how exactly a VC works or what a VC is; at least not every country in the world has VCs, and that concept of investing in early-stage and risking capital, tons of capital in investments that can pay as symmetric are there there are asymmetric back bets that can pay a lot on the long term. But I wonder if you can explain to the audience what you do on Sharpe, alpha advisors, what is Vc? Or if you want to maybe get very specific, how does a regular week look like for you in sharp outside advisors?

Lloyd Danzig 6:00

Yeah, let me try to answer all of that together. It's a great question. It's an area of burgeoning interest, particularly in countries and regions that have not historically been VC-backed or focused on the venture capital world. However, especially with the growth of blockchain and how the Internet flattens the world, that certainly is changing. So an adventure capital fund, like my sharp Alpha fund, will hopefully be the first in a long series of venture funds and other types of investment vehicles. a venture capital fund goes out to limited partners, which are the names it gives to investors to solicit investment. Venture capital firms go to high net worth individuals, go to other venture capital funds, pension funds, endowments, large pools of capital, and ask these investors to put money into what is called a blind pool. And that pool of capital that has now been collected from in the Sharpe office case, over 100 different investors, is now under the control of the fund manager, which in the case of sharp alpha is me. And my goal and purpose for that money, just like any startup has a business plan and says, Give us your money, and we'll do X, Y, and Z, and then you'll get a lot more money back; I also had to do that. But I'm not building a product or a service or a piece of software; my goal is to take that capital and deploy it across many different startups that fit my thesis and fit the view of the world that I pitched my investors on. And then track those portfolio companies, try to guide them to a successful outcome, and eventually take all the proceeds of those investments and distribute those back to the investors. So there are funds on the smaller side, at the five $10 million level, there are funds all the way on the larger side, the Softbank Vision Fund is $100 billion. They went out to some of the largest institutions in the world, they collected $100 billion. And they are investing it in different startups. There are many nuances and how it works and how the capital moves from the investors pocket to the fund managers pockets and then into the startup pockets. But to answer your question about kind of what a typical week looks like, or maybe to answer some of the listener's questions about, okay, let's say you have this pool of money, what happens next, it's usually many things, all of which I consider to be a lot of fun, which I think is a key element in succeeding in the business because it's basically a 24-hour job. And if you don't find it enjoyable, it's going to run you down pretty quickly. A typical week will consist of a combination of things. I am constantly talking to new startups, new entrepreneurs that I've never spoken to; before that, send me a pitch deck or come by way of a warm introduction or through one of the many networks for which I am a mentor. And when I'm talking to those guys, I'm trying to understand as quickly as possible. What is their business? What does it do? What will make it successful? What will not make it successful? What are the top two or three accelerants that would take them to the next level if we add them to this company? And most importantly, the biggest question to kind of ask is, how big could this company get? Because of what a VC typically tries to do, you mentioned how you usually are going after asymmetric returns. And that's exactly right at the early stages at the pre-seed and seed stages. About 99% of deals will fail and eventually go to zero. And so, in the VC world, returns typically follow what's called a power law, where a very small number of the investments make up almost all of the returns. And so, to do that, you have to spread your bets a bit. You have to reserve some of your capital for follow-on investment. And the rule of thumb is you only make an investment. If you could envision that one investment, returning the size of your entire fund, so if I'm a $10 million fund, and I make an investment. I project that after future investment and dilution, I will own 5% of that company. I better hope that it can sustain at least a $200 million exit, in which case my 5% would be worth 10 million, which is the size of my fund. So that is one part of it. Once I speak with the entrepreneurs and filter out the ones that aren't a good fit or too early, too late, or out of scope, it's a very collaborative process with my limited partners with other VCs with key stakeholders. So if a startup pitches me and says, we will make a lot of money by selling this product to DraftKings, I'm going to talk to the person at DraftKings. They would be in charge of that decision and say, Do you know of this product? Do you like it? Is this a reasonable amount that you would fight if they're going to try to pitch Formula One that I'll reach out to someone at Liberty Media or Formula One, or McLaren racing, and say, Hey, are you the in the market for these services and things of that nature, then once you progress there, if you kind of pass all of those filters, there's a much more rigorous, but sort of legal and administrative diligence process, background checks, reviewing every document from the formation of your company till the current day, and everything in between all sorts of things of that nature. And then hopefully, if things work out, you get an investment, we sign the documents, we were over the money. Hopefully, it's part of an investment round with other VCs, and we will make a big announcement. And then we turn from investors to almost advisors, and make the introductions, figure out how can we be the manifestos of our own destiny here and kind of create the outcomes that we target,

Ronen Ainbinder 11:53

it feels like a lot of your time also is focused on selling the perspectives or the plan of the fund to investors and then sell like selling to the best startups, the ones that you do want to invest selling to them on why you are the one that needs to invest on them, like, like being like the one supporting them, being an advisor being the one that can connect them with the most important key points. So it feels like it's a lot of love, relationships, and building trust and rapport with both investors. And also with intrapreneurs, which I find super fascinating. Lloyd, let's talk about that specific, latest 10 million funds that you just raised? What are the short, medium, and long-term goals? I know that you mentioned a metric return. So, of course, in the long term, you're looking for returns that will cover at least the size of the fund, as you spoke a little bit ago. But what about the short and medium-term? What do you say? What do you sell to investors to collect this money? I know it's probably not a lot; as you mentioned, 10 million may not be a lot even in the VC space, but what do you propose? What are the short and medium goals that you have in mind for this specific fund?

Lloyd Danzig 13:21

Yeah, so you're right. 10 million is not a lot in the VC world. But it sure felt like a lot to raise. Raising a $10 million fund from 100 investors is probably equally as hard and much work as raising a billion-dollar fund from 100 investors. So maybe I should have just raised a much larger one. And by the way, I just have to tell you now this interesting duality of the role that I'm in. Yes, it is completely a sales and relationship management job on the investor side. But also, when it comes to the best deals, you have to invest in if you want the best returns. And if you want to back the best entrepreneurs, those guys, even the investors, have to; they don't sell to the investors if their results and their team and their product speak for themselves. Their rounds will be oversubscribed; they will get to pick and choose which investors they want. And so you are absolutely right about what a big part of my day, especially when it comes to the top deals, is me trying to convince someone to take my money rather than them trying to convince me to give it to them. And it's a privileged position as an entrepreneur to be and if you can build a great company. You're absolutely right. I would say the medium to long-term plan is to deliver incredible returns and world-class service to investors. The long, long term is to have a whole series of funds and investment vehicles that invest across the capital structure across stages and allow investors of any different size and risk profile to use my in my networks expertise and access to make money off the growth of sports betting and this broader category that I refer to as competitive entertainment, of which sports betting is one part. Still, there are many others over the shorter term. Part of what I think some investors are looking for right now is something like a sports betting fund, probably the same as a crypto or cannabis-focused fund. These are hot new emerging industries that are not very well understood by many, both mechanically and in terms of who all the players are and how the puzzle pieces fit together. So over the short term, many of my investors are also hedge fund managers that invest in companies like DraftKings and FanDuel, and Caesars and MGM. And so, a lot of them are looking to extract the information and wisdom, and domain expertise from the fund and extrapolate that out to where they invest. I have many other investors looking to use the fund as a technology or deal funnel for whatever suits them. So, for example, some of the presidents and CEOs of the publicly traded sports betting companies are investors in my fund because they want their companies to purchase the hottest, most cutting edge innovative technology companies. I have other investors who specialize in providing short-term high-interest credit revolvers. And once I have portfolio companies that are at the stage where they need that type of financing, I will be able to hook them up with that part of the network. I'd also say over the short to medium term. The overarching goal is to continue building the Sharpe Alpha brand while simultaneously working with the absolute best entrepreneurs and founders. And those things kind of feed into one another. As you work with top entrepreneurs, other entrepreneurs want to work with you. And as you have a better, more established brand, you attract more of those top entrepreneurs. And so if you can get yourself into this, moving up into the right flywheel, it's a very attractive place to be such a short term, medium-term and long term. It's all about, it's all about investors and investor relations. But it is a mix of strategic initiatives and goals they and we are trying to accomplish over those periods.

Ronen Ainbinder 17:26

Okay, so 10 million, and you want to invest, is there a specific amount of like limit that you're planning to invest?

Lloyd Danzig 17:33

Yeah, so the way we're an interesting type of vehicle because even though we are a small fund, we're backed by some of the world's largest investors and financial institutions. If I'm being honest, they wrote checks into my fund that they will never notice missing. And even if I give them 100x return, they won't notice that either. And so what that means is, they invested so that they can put more money into the deals that they like and lead some of the series B's and C's and future rounds. And because of that, because I have such a large investor base composed of large check writers, many of whom usually write checks larger than the size of my entire fund, we also have a $10 million fund. And then, we also have a co-investment vehicle, which facilitates select deals, our investors, putting in additional capital. We pull that all into one single vehicle and SPV a special purpose vehicle; they are all properly shielded from liability, it's nice and clean. And there's only one line item on the cap table. It's only one vote added for the founders and the board to consider things of that nature. So depending on whether we are allowing investors to put capital into a deal through the CO investment vehicle or not, we tend to target initial allocations between 250,000 to a million. And then what we hope to do is write between a four to a larger check in the next round for the companies where things are going well. And so that's pretty much how we view it and size the positions and look to construct the portfolio; we'll do about 25 initial allocations into companies, and then once we're done with that, the remainder of the capital in fund one will be used to fire on in subsequent rounds of maybe the four or 567 of those 25 that are real home runs.

Ronen Ainbinder 19:32

Okay, so I understand now. I understand that you are mostly investing in sports betting fantasy sports collectibles, probably AI as well. I want to talk a little bit about that. So let's talk about fantasy sports and sports betting. First, I know that you're very bullish. I know that you have this in your DNA since you understood the lead, and I know that you raised this fund because you believe in it. But I wonder if you have a bearish case in your head, meaning a reason why sports betting and fantasy sports may fail? I feel like listening to that side can give us an idea of why you're so bullish. But is there any bearish case that you can share with us about that specific area?

Lloyd Danzig 20:25

I can definitely share factors that I believe can significantly limit the growth and or profitability of sports betting, particularly online sports betting in the US. Part of my bullishness on the industry is based on the unique set of factors that make it almost impossible for a total failure to be the case; there are two main ones. First of all, the regulatory changes occurring are very much toothpaste cannot be put back in the tube situation. In the US, the Supreme Court decided that it was unconstitutional for the federal government to decide on behalf of each state whether or not sports betting was allowed in that state. And so what changed in 2018 is now each state in the US, New Jersey and New York and Florida and Pennsylvania and California, are deciding individually to legalize sports betting. That's not a reversible process. So we are certainly moving every day toward more and more people being able to bet in a legal, regulatory, regulated, and safe ecosystem.

The other thing is that similar to the cannabis market, for example. Still, different from most markets, there already was a built-in gray or black market. In the US, people were betting about $150 billion annually on offshore or unregulated sportsbooks. And so it's not as if we are guessing here that people want to bet on sports. It's more just about capturing that business. On behalf of the DraftKings and FanDuel from the Bovada are a sportsbook dot a GS and my bookies of the world. So those are real macro reasons why it's not possible that sports betting revenues will be $0.10 years from now. But a couple of things come to mind when I wonder just how quickly the growth will be? And how profitable will it be?

One thing in particular to note is that right now, every US sports team is in the process of signing a partnership or sponsorship with a sportsbook. They're putting sportsbooks in the stadiums and venues themselves. They're putting the logos on the team jerseys, all things like that. In Europe and the UK right now, everything is moving in the opposite direction. Italy has a nationwide ban on gambling advertising; I believe La Liga banned gambling companies from sponsoring team kits. The EPL is doing the same thing. And so those markets have been around about 15 years longer than the US market. And you have to wonder, with the onslaught of advertising and all that, are we bound for similar frictions with the regulators because of the similar fate that the UK and Australia and other European markets fell into.

Another on that note is responsible gaming in other markets. Concerns over the ill effects of deviations from responsible gaming behavior led to a lot of activism, which led to many regulatory measures that made operating as a gaming operator much harder. For example, it is now legally mandated that a slot machine poll online cannot be for more than two pounds in the UK. And that is done at the governmental level. There are many markets like Sweden, for example, where there are what are called affordability checks. If you lose a certain amount of money, they make you prove how much is in your account before you can lose more. So people must keep an eye on the oversaturation of advertising in the US and on responsible gaming and things of that nature. But those are only factors. I would also add that there is some uncertainty as to exactly how quickly states like New York and California, and Florida, in which many people, will legalize sports betting and the tax rates in those states. But in my view, these are all kinds of short-term things. These might impact whether revenues are realized in 2023 or 2025. Over the long term, there isn't much existential risk to the sports betting industry. It's just about kind of fine-tuning, toeing the right lines, and making sure that you deliver an entertainment product and don't harm communities or individuals in any way because it's not even good for business, let alone on the social side.

Ronen Ainbinder 24:50

It seems that the bearish case is not as strong from what I'm seeing and when I'm listening to your opinion. I also understand why you are so bullish on sports betting. Now in terms of collectibles, this is something that I want to touch on quickly. The recent boom, you know NBA Top Shot f1 delta time, all these companies out of the south in 2021 had this impressive boom and put an increase in popularity, do you think it was real? And do you think it is sustainable? Or is it just sort of like a process that you see happening in the industry? And that will just continually grow gradually and gain more popularity and users along the way? What are your thoughts on that?

Lloyd Danzig 25:36

Yeah, obviously, the numbers are impossible to ignore in terms of NFT sales sports-related first half of this year versus last year; any way you slice it. My take is that it is still very hard to say whether any particular digital collectible set or project, especially those purely artistic and collectible in nature, lacks some game-focused utility. It's very hard to say which will be successful and which will not over what time frame. Certainly, it seems that if you are the digital collectible that has the official license from the league, or the movie or whatever it is that you're working on, that's a huge leg up. The much more important takeaway that I think is unquestionably transformative here is adopting these types of user experiences and technologies. So I think the biggest impact of this will be comfort, awareness, and familiarity with the use of NF T's as representations of digital ownership. You will also, I think, start to see a lot more interoperability. DraftKings has an NFT marketplace, and they have a partnership with Tom Brady's autograph platform. I bet they'll roll out a game where you use the autograph moments as the entry to create a fantasy lineup from which you can win money. And so, without a doubt, in my opinion, you're going to see a lot more tokenized fantasy sports and sports betting products, you're going to see a lot of growth in the play to earn gaming space. And all of this, I think, will hopefully be nicely cohesive and interrelated. And whether that's as part of the metaverse or whatever the future of virtual reality is. So, in summary, my answer is there definitely will be people who continue to become millionaires by buying JPEGs and things like that. And if you buy into the right collection at the right time, I'm sure you can make a lot of money over a longer time horizon. My bigger bet here is how important and integral NFT's smart contracts and the underlying infrastructure will become to the world of sports, sports, tech, and gaming. And I think that's the real major takeaway, especially from a 10 plus year investment horizon.

Ronen Ainbinder 28:05

Wow, Lloyd, this has been an absolute master class on everything related to finance and sports and sports betting. And you and your fund. I appreciate the time, and I have so many questions left, but I guess that we're gonna leave them for our next snack. You're always welcome to come, Lloyd, the man I can't live without asking you a more personal question. And that is, what is the best piece of advice you ever received?

Lloyd Danzig 28:29

Oh, man, the best piece of advice I ever received probably comes from an investor and an advisor to my fund. But who gave me this advice previously, when he was more just like a mentor. And again, maybe this is more investment advice, but I think it extrapolates to life advice as well. And you'll hear people who do a lot of poker and Daily Fantasy probably echo similar sentiments. When I was asking him his thoughts on making a particular investment, he advised on the investment front. And it was an investment that was in a hot space but maybe had a few red flags associated with it. His advice was to assume that there is some omniscient investment committee that will grade me on the quality of the structure that I use to make my decision. And that that's what I am trying to optimize for, rather than the specific investment outcome, and that I should make my investments so that such a committee would always give me the best grade on my process, regardless of what the outcomes were. And I think whether it's investing in poker, sports betting, or life, for example, focusing on the process, the process and making decisions deliberately, and being open to the fact that there's a lot of exotic factors and noise that could cause any particular outcomes to occur over the short term, but that if you're doing things in the right way, over the long term, the expected value will be positive and accreted. That is probably the best advice that I take from the life perspective and then especially on the investment front.