Online betting is big business. It’s an industry worth US$3bn, in fact. It’s one that Mark Pincus, CEO of FarmVille creator Zynga, called a “natural fit” for his company. And it’s also one that the Daily Mail recently wrote is causing Britain’s gambling addiction epidemic. Both perspectives demonstrate just how ingrained the industry has become to modern digital life.
But Jason Trost, the American-born CEO and co-founder of Farringdon-based start-up Smarkets, says online betting has some way to go before it realises its true potential. But that’s exactly what he’s planning on realising with his firm. “There’s a lot of money in betting and not a lot of innovation. That means there’s a lot of room to play,” he says.
Smarkets launched in late 2007 as a dedicated online betting exchange that allowed users to be more flexible and creative with their bets than most other gambling outlets, such as at your local bookie. An initial round of seed funding, mainly from friends and family, came in March 2008 and the company has now raised more than £1.1m in its quest to topple the likes of Betfair and Bet365.
“What we offer is like stock market betting – if you want to buy Apple stock, there’s a bit in the offer price where you can buy at this price and sell at that price, and if you want something better you can put the order into the market and wait for it to get to that price – or not,” says Trost.
Smarkets is based in a three-floor open plan office space just off Farringdon Road in White Bear Yard. Passion Capital, which became Smarkets’ first institutional investor in 2011 after leading a US$1m funding round, owns the complex, which also houses multimedia design group Ideo and a host of other start-ups. General Assembly, a company from New York that links start-ups together and offers classes on best practice, is moving in soon.
Trost moved to the UK from the US to launch the company with co-founder and fellow American Hunter Morris, who had made the trip across the pond before. The pair had noticed how “big a phenomenon Betfair was and how much money they were pushing through the system,” but Trost, who worked in finance in New York and has a degree in computer science, felt there was still plenty of opportunity to improve the model.
“From my financial training and computer experience (point of view), Betfair wasn’t living up to the experience it should be offering and that’s what motivated me to get involved in this industry,” says Trost.
This had been a long-festering feeling for Trost, who had similar misgivings about another betting site, Tradesports, while training in finance. “Trade Sports was another type of betting exchange of which I thought the interface wasn’t set up properly. I thought they could be borrowing a lot more of the principles of the financial world and applying them to betting.”
And so Smarkets came to be. In principle, the website works similarly to its rivals – you sign up for a free account, load money into that and begin betting. Winnings can be re-invested into new bets, or cashed out.
“What we’re doing is called a betting exchange. You can think of bookmakers as a simple betting exchange, where there’s only one seller and you can’t negotiate the price. Our exchange allows you to be on both sides of the bet at whatever price you want.”
Smarkets also allows punters to work on the ‘lay side’ of the bet. This means allowing them to offer odds against something happening – ie a much-fancied horse losing a derby. Should the horse lose, those who went against the bet will pay out.
However, neither horse racing nor any other sports is among Trost’s true passions. Though he follows sports teams from his alma mater Northwestern University and the New England Patriots American football franchise, he’s much more interested in technology, presidential politics and the electronics markets. “I love numbers whizzing by on the screen,” he says.
“To be honest the thing that really got me passionate about [online betting] was when I first saw Tradesports were offering odds on US presidential elections. I started checking the betting market every day and found it was a much better indicator than the polls. It was real time and I trusted it more.”
And though he’d love to run a politics-focused odds site, he’s since discovered “there’s almost no money in political betting. All things being equal, I’m most passionate about election and geopolitical markets but that’s just a fraction of the money that comes from sport.”
Though Smarkets is a relatively small firm – two staff working on website front end, two on transactions at the back-end, one looking after servers, Trost on quality assurance and six more on business development – the intention is to grow, grow some more and eventually compete directly with the market leaders.
“The question of growth makes me laugh,” says Trost. “Start-ups are always looking for funding, so we’re going for another round of funding. And we’ll do another after that. You basically keeping raising money until you get acquired or become big enough to do an IPO. I would like to start challenging the hegemony of the big betting companies, and that’s what I’m gearing Smarkets up for.”
But for many, talk of acquisitions and IPOs throws up memories of the dot-com bubble of the late ’90s, which burst so dramatically in the earl 2000s. With start-up culture emerging not just in Tech City but also around the world in cities such as Trost’s hometown of New York, the threat of a similar market crash lingers.
Trost is philosophical about where this current boom is headed, but does note some there have been some warning signs. “It’s hard to tell the future and I hear a lot of people talking about whether there’s a bubble or not, and you understand it when you see things like Instagram being bought for $1bn. I mean, are you serious? They have eight staff – that’s fewer staff than us.
“That stuff is ridiculous, but on the other hand it’s really hard to predict what’s going to be successful in the future. When I first saw Twitter I thought it was awful and now it’s probably valued at US$5bn, so it is hard for me to sit here and pick winners. If you can, you’ll be a billionaire along with the big companies. There are characteristics to look for but you can’t predict anything. It’s hard to say if the current crop of start-ups are going to make it or not.”
However, start-ups and investors now have the benefit of hindsight and that this reflected in funding rounds, says Trost. “There is a lot more emphasis on business models than there ever was before. In general, to get funding beyond the early seed stage, you have to have revenue. That’s a lot different to the first bubble, where people would just throw US$50m at a company to see if it would work.”
Trost says the process has become more “iterative” and opportunists are unlikely to entice savvier investors. “Back in the late 90s and early 2000s you could get $10m to $20m for a power-point presentation, and now you get $100,000 to $200,000. The funding environment is a lot different this time around.”
However, he is willing to take a punt (excuse the pun) on one probability. “The problem with the industry is very much that it’s going to start imitating Hollywood a lot more, where a few companies make it huge and the rest end up being waiters. The internet is going to start being like that with Facebook, Google and a few others and everybody else scratching to get to that level.”
The answer for Tech City companies, it would seem, is to stick together and form close relationships. Trost says: “In the betting space there aren’t a lot of start-ups because the barriers to entry are quite high: you have to get a licence and that scares a lot of people away. But I socialise with the baulk of the better-known internet start-ups in the area.”
He cites Mind Candy, the Shoreditch-based company behind children’s online world Moshi Monsters as a favourite, and says he’s impressed with controversial quick-fix loans website Wonga.com. “I disagree with the monetisation of Wonga but the principle of offering people credit in a very easy manner is very powerful and that’s cool,” he says.
But, ever the product of his past, says Wonga and its peers should look at be more dynamic to avoid more global economic toil. “Banks are getting away from credit, which is horrible. I would like to see a lot more innovation around the financial services industry.”
But before rescuing global finances, Trost has a tough enough job on his hands with Smarkets. “Anybody that takes a bet is a direct competitor to us, but we offer better odds than almost all of them,” he says.
“There is billions of dollars bet every day around the world on sport but it’s very inefficient and betters are the ones paying the bill. I love the idea of creating this platform that can give everybody awesome value. You won’t need bookmakers anymore and the world would be a better place without bookmakers.”