The DraftKings Origin Story: From Idea to Market Dominance in 8 Years

DraftKings (DKNG 4.96%) has established itself as a leader in online fantasy games and gambling, but the company was not an overnight success. 

On this clip from Motley Fool Live, recorded May 19 , DraftKings co-founder and CEO Jason Robins tells Industry Focus host Nick Sciple the story of how DraftKings came to be, and how he used marketing to build the brand. 

Nick Sciple: DraftKings I think is a fascinating story. A lot of folks think about this brand, leading company in sports betting and daily fantasy sports. But a lot of folks might not realize the company started in 2012 and wasn't always the leader in its industry. Can you talk about the founding of the company, what led you to start the company, and how did you take it from an idea to one of the leaders in the space?

Jason Robins: I had worked for almost a decade in corporate America, middle management jobs, my two co-founders same. We've worked together, Capital One, [DraftKings co-founder] Matt [Kalish] and I worked at. Then all three of us worked together at a company that was called Vistaprint, now called Cimpress. We always had this entrepreneurial pull but never had good timing. I graduated college shortly after the bubble burst. When I was thinking about leaving Capital One, Matt and I discussed doing a start-up and it was about mid-2008 at that point. You can figure out how that went. Finally, the next time around, it was early 2010s. We started having the bug again and talking about it. This time, the timing was right. The only thing is we didn't have an idea. We spent about six, 12 months just going out for drinks and dinner, batting around ideas. One day, Matt sat me down and said, "Hey, I think I got it," and he told me the basic idea of DraftKings. It took me about two, three minutes to process, and I was like, this seemed really good. I went home and I thought about it and I was just excited all night. The next day, I came in and I said all three of us have to meet up after work, so we did. That night, we decided this is the one we're going to go for. From there, it was just a lot of really working nights and weekends. We go after work about seven o'clock to [DraftKings co-founder] Paul [Liberman]. He had a spare a bedroom in his Watertown, Massachusetts house. We go there and work till about 1:00, 2:00 in the morning. Weekends, we'd wake up around 5:30, 6:00 and do the same thing, work all day.

Finally, we had enough of a prototype, and we didn't have any customers or anything yet but we did have a general plan, an idea of what we were doing that we said, look, might be time to put a little money in, so we decided to put some money in ourselves and we said, well, we might as well get a lawyer. We said, "All right," so we got a lawyer, mostly just to form the corporation, and he starts pushing us, you got to go raise venture capital. At the time, there were others that were pursuing a similar idea. We weren't the only ones, so we realized we'd probably did need to go raise venture capital. We set out to do that and got told no probably about 50-plus times before a guy named Ryan Moore at Accomplice Ventures put some money in followed by Peter Blacklow of Boston Seed, a few others, and we put together a $1.4 million seed round. Now, it's the beginning of the business.

A lot's obviously happened since then. That was February of 2012 when we closed the first money. It really was a lot about just trying to build the market and figure out what it would take to lead, and ultimately, what we found was the product and the customer experience was just critically important. It was something where people were going for entertainment. They were looking at fun. If you could create a great product, a great user experience, and provide people with the fun and entertainment they were looking for, then that was the secret. We also found in daily fantasy sports that having user liquidity was a huge thing. It was basically a marketplace as well as a game. We were matchmaking among people who want to play, so having a lot of users who are playing actively was really important and it created tremendous network effects along the way.

Sciple: That was one of the things, I wanted to talk about it, is in that growth period in 2016, and particularly, there was this period we couldn't help but see DraftKings and FanDuel ads all over the place. You talked about user liquidity. The customer acquisition, part of this business, how important is customer acquisition and the marketing strategy? How important was that to success?

Robins: It's really a CAC [customer acquisition cost] to LTV [lifetime value] business, so very important. A lot of our product and technology investment is in infrastructure, including great data science, great analytics, automated bidding that helps us optimize our CACs we think in a way that's superior to some of the competitors out there. On the LTV side, we started with Daily Fantasy, but as you know, in 2018 we launched sports betting, really for 2019, I guess it was late December 2018, we launched iGaming. As we've expanded our product portfolio, we've seen dramatic rise in LTVs. That's obviously in states that allow them we launched those products. There's some states that have yet to legislate. But as we see more and more states do that, we've seen the overall LTV of our customer rise. We're really always concentrating on both sides of that. How do we find the most efficient ways to bring in customers onto the platform, and then once they're on the platform, how do we get them to engage as much as possible both within the product that they came in on, but also, crossing into other products and spending as much time with us as we can get them to do.