As I approach Mayfair, an uncommon quiet hangs in the district. While London bakes in the middle of a summer heatwave, throngs of businesspeople have fled the area to take a break from the oppressive heat.
The few who remain are heading out for lunch with their collars unbuttoned and sleeves rolled high. One man, however, eschews the informal approach and emerges with a broad smile while dressed in his signature full suit and tie.
As CIO of the VC fund he founded in 2019, Australian-born Tom Waterhouse is used to keeping his cool – both in the extreme Antipodean weather, and in the often-turbulent world of finance.
Waterhouse sat down with iGaming NEXT to discuss the reality of navigating a VC fund through a volatile macroeconomic environment.
Conor Mulheir: There is a lot of talk around the current macroeconomic environment and doom and gloom for the economy. What has changed over the last few years, and how has this impacted gaming investments?
Tom Waterhouse: Well, up until October last year, you had a whole bunch of tailwinds for the gaming industry. You had the US opening up with the repeal of PASPA in 2018, and then you had each state opening up for sports betting, and sometimes for iGaming.
You had that, coupled with the fact that money was effectively free, with interest rates around 0% globally. Basically, people were trying to find a home for the cash, and one of the fastest growing areas was US sports betting and anything linked to that.
Then, everything changed. There were signals that there was going to be a significant tightening and inflation was no longer deemed to be transitory. This was magnified by the supply pressures caused by the war in Ukraine. As a result, interest rates have been hiked globally and quantitative easing has been curbed – money is simply far more expensive today than just six months ago.
This increased cost of money has negatively impacted business valuations, particularly for high growth businesses, which are more sensitive to changes in the cost of money. The valuations of some operators have fallen 70% to 80% from their highs. Considering the current lower valuations of high growth operators, raising more money today would be highly dilutive for existing shareholders.
Multiple operators have also rapidly reduced their marketing activities, with a stronger focus on profitability.
CM: What impact has the economic downturn had on VC funds?
TW: For us as a VC, even though we focus on B2B and not B2C, we’ve seen a very similar change in valuations – from over 10x multiples of revenue – to now seeing a lot of businesses valued at 1x or even sub-1x revenue.That’s because the ability to raise money in this market is much, much harder, and they obviously need cash to survive. Most people are saying that now is the time to be very wary because of things like a possible recession, increasing interest rates and inflation. People want to conserve cash.
It’s a very interesting and exciting time for us as a fund, because we’re still seeing businesses that we thought were terrific businesses with huge upside, but we’re able to go into them at a fraction of the valuation compared to six months ago. We feel fortunate for the timing that we’re able to find and see these opportunities in the market.
CM: What kind of businesses does Waterhouse VC typically look to invest in?
TW: Our focus is on technology primarily because of my past experience as an operator and CEO of William Hill Australia. I have realised that there are hundreds of technology services in the product pipeline for B2C operators. We want to invest in businesses that are good enough to get onto that product pipeline and provide them with the capital required to get integrated.
For example, maybe three years from now in the US, everyone will be making voice bets, or text bets, or doing it through their Twitter account or their Instagram account. That is very interesting, because it would completely disrupt the game. Unique pieces of technology are critical to the success of operators, and hopefully we are able to leverage our expertise to find those unique pieces and invest in them early enough.
CM: What specific areas of technology are you focused on at the moment?
TW: In terms of the customer experience, we want to be looking at voice and text companies, similar to Siri and Alexa, but applied to the betting industry. You’ve seen Google shift from drop down to voice and text – and we cannot see why this wouldn’t happen in the betting industry.
We also want to focus on the affiliate and marketing side, because we see that cost-per-acquisition is so high. We also want to focus on areas that supply extra product, such as horse racing, into the US market – because NFL, NBA and baseball are low margin products, and have gaps in between seasons.
Whether it’s iGaming, fixed-odds horse racing or esports, we want to be across those areas. We also see a gap in the market with exchange betting – there’s still no clear winner in US exchange betting, so we’re focused on exchange providers.
CM: When businesses come across your desk for consideration, how do you decide where best to allocate your capital?
TW: First, we have to be going in at an attractive initial valuation, such as the same valuation as the last money raised. They also have to be generating revenue – we tend to avoid pre-revenue opportunities because we like to see a strong proof of concept and some indication of unit economics. However, we actually spend most of our time assessing the underlying technology of the business through our in-house technology team.
We speak to other businesses in the space to assess the entire competitive landscape and ask: Who else is doing what they’re doing? What are they like? Why are they not better than this other company? What is unique about this company?
We then speak to the customers they supply their service to and ask questions like: How are they going? What’s the uptime like? How easy is it to integrate? How quick is it for them to respond?
We meet the team and ask: What do they uniquely build? What’s the skill set of the team? Why have they got a unique insight to this piece of technology? What contracts have they got that can’t be replaced?
If, after all those questions are sufficiently answered and we think there’s a need for the product from the operators, then we look to proceed with an investment.
CM: With plenty of opportunities left to explore, it sounds like it might not be all doom and gloom for iGaming investors after all! Thanks again for joining me.