The Importance of Responsible Gaming to the industry — and to society
I have been investing in very early stage companies for more than 20 years. Most of this time was spent investing in businesses that leveraged large amounts of data to solve problems (The Trade Desk, Recorded Future), brought scalable approaches to inefficient markets by driving transparency, speed and fairness (Wise, The Trade Desk again) or gave the enterprise tools for interacting with customers in more appealing, effective ways (Buddy Media, January). One thing I copiously avoided was all things betting — sports book, daily fantasy, lottery, infrastructure, whatever. One reason is the fact that IA Ventures didn’t really have a core competency in the field and was not interested in developing one given our more geeky, technical orientation. Another reason is that my perception of these types of businesses was that they were effectively either catering to the very rich or a regressive tax on the desperate but hopeful. Please note that virtually the entirety of this time period was before the repeal of PASPA, so the notion of widely available, regulated, recreational sports betting was off my radar screen.
My education and the development of a more nuanced philosophy really started to crystallize after I left IA in Fall 2021. This also coincided with working more closely with my sons, both of whom were experienced and active sports bettors, and showed me how they bet and how they bet in conjunction with their friends. They would compete with each other. They would share information. They would size their bets differently depending on their individual capacity to lose — not how much money they hoped to make. Sure, the leverage and excitement of a 7-leg parlay is great, but obviously the odds of winning are very low. So the guiding assumption was if — and likely when — I lose my bet, how does this fit into my betting budget? I had a ringside seat to see how a bunch of 20-something guys with real day jobs and a love of sports used sports betting as a way to add excitement to live sports, compete against and along with friends and to do so in a responsible way that was more akin to entertainment. It was from this observation that I codified my thesis around the Entertainment-ification of Sports. And this has great importance in how I think about the world of sports betting, it’s impact on society and our portfolio today.
Sports betting in the US, meaning regulated sports betting, has been coming under a lot of heat. All you need to do is search Sports Betting Gambling Problems and you’ll see a ton of articles, all of them very recent, on how people are increasingly getting into problems by betting beyond their means. In the same way that a bartender is responsible for cutting off a problem drinker, and bears a measure of liability if they don’t and allow someone clearly intoxicated to drive, there is no true analog to this role among US sports books. This, to me, is not ok. It is also unrealistic to think that self-policing will do the job. Either a sports book needs to embed Responsible Gaming principles at its core (e.g., credit card deposit bans, age thresholds, no more bonus credit for financially stressed gamblers, etc.) or the rest of the stuff is window-dressing, e.g., posted help lines, warnings like those akin to the Surgeon General on packs of cigarettes, etc. If the objective function is geared towards single-player value extraction, well, it’s pretty easy to intuit operator behavior. It’s what the late, great, straight-talker Charlie Munger said in 1995: “Show me the incentives and I’ll show you the outcome.” It is clear how this works for today’s US-based sports books: find the LTV (Lifetime Value) maximizing strategy (the incentives) and apply it to each customer based on experience (the outcomes). For those who become gambling addicts, the Lifetime is fairly short because they lever themselves and spread their debts across multiple books until they blow up. But the Value is exceptionally high in a compressed period of time due to high levels of activity and dollars wagered and lost. This is great for short-term profit maximization until the social costs of problem gambling become so large that either Federal regulators step in and place painful, ham-handed rules on operators or state-level crises, like the quashing of Juul, cause regulators to act aggressively and, most likely, by killing the truly good parts of the sports betting landscape. It is this dynamic that turned me off from investing in sports betting companies, but there are tools and technologies that exist to stop a public health crisis from happening (see: the UK), but must be implemented through legislation and force of will.
It is also worthwhile to note the dynamic between regulators and industry. This is not at all confined to the gaming industry; many industries, most notably Wall Street, have a revolving door between modestly-paid regulators earning their stripes and their future payoff as highly-paid industry-side professionals managing relationships with their former colleagues! Now, there are clearly benefits to having in-house regulatory expertise if you’re an operator. There is nothing wrong with this in principle. However, there is a problem if the potential for conflicts isn’t clearly acknowledged and addressed through legislation, rules around transition time between regulatory bodies and operators and the like. This is why Governors and state legislatures should really be on the vanguard here, focusing on common sense laws that facilitate tax revenue for investment in schools and public infrastructure in a manner that doesn’t require all of those operator tax dollars to be recycled into mental health services for addressing a public health crisis. Some legislators who didn’t take the risks of a public health crisis seriously are already having regrets.
But what if operators had rules, promulgated by in-state regulators or state legislatures, which focused on two different areas:
- Pooling of cross-book transaction data, with each customer having a unique identifier so their betting behavior could be tracked in a safe and anonymous way across all regulated sports books in the state. In theory this identifier could apply to customers betting across state lines, but we have to walk before we run. For regulators (empowered by state legislators) to compel operators to provide this data in order for them to be licensed in their state would be a powerful tool for really understanding a sports bettor’s aggregate exposure, not just within one book in single-player mode.
- Use of something akin to a FICO score for sports betting, kind of like a measure of “safe to spend” that taps into a bettor’s bank account, fixed obligations, salary, etc. Think of it as a score a bank would use to size a credit card line or a mortgage repayment obligation. If someone needed to share this information as part of the sports book sign-up flow, similar to the flow of every financial app, and rules related to changes in the score, e.g., a drop of 100 points over a defined time period that would stop a person’s ability to continue betting in the state until their score recovered, were implemented, this would be the second essential piece of the puzzle for providing powerful guardrails to deter problem gambling.
At Eberg Capital we have backed two companies, idPair and Wager Score, that seek to address each of these critical areas of risk mitigation. As one would expect, solutions to these problems need to originate in the regulatory domain; no LTV-maximizing sports book would voluntarily do these things. Who is going to put a governor on their short-term profits in order to “do the right thing?” Answer: nobody. Betr’s embedded RG principles get us part of the way there, but common sense rule-making by state-level gaming regulators, as urged by elected officials seeking to get out in front of a mounting public health crisis, is the only way to apply rules with force, with fairness and with public safety in mind. This brings us back to the original point: betting, when done within one’s means and as a form of entertainment, is a fun, social, exciting addition to the live sports viewing experience. We should have the ability to shape smart, effective regulation; it’s not rocket science. My belief is that this is truly the long-run profit maximizing step for operators — but it is very difficult to get managers to focus on the long run when they are evaluated and compensated in the short run. Perhaps we can change this for the good of sports book customers, public health officials and society itself. Now all we need are some brave, forward-looking states to get the ball rolling.
NB: It was just announced today that Underdog Fantasy’s GuardDog RG Innovation Fund just made their first investment — in idPair, the aforementioned RG company where Eberg Capital is lead investor.
