In this episode of Industry Focus: Wildcard, DraftKings (DKNG 3.93%) CEO Jason Robins and host Nick Sciple discuss the founding of DraftKings, how the business has changed since the Supreme Court's gambling decision three years ago, the collision of gambling and content, and more!

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This video was recorded on May 19, 2021.

Nick Sciple: Welcome in, everybody. I'm Nick Sciple. My guest today is DraftKings' co-founder and CEO, Jason Robins. Jason, thank you so much for joining me today.

Jason Robins: Thank you for having me.

Sciple: I'm excited to talk to you. I'm 28 years old, big sports better, but also someone who loves business and following business history. DraftKings, I think, is a fascinating story. A lot of folks think about this brand as a 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?

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, Matt and I worked at, and 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, so you can figure out how that went. Finally, the next time around, it was early 2010, 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. So 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 as I was like, "This seems really good." I went home and I thought about it, and I was just excited all night. The next day, it came in and I said all three of us have to meet up after work. So we did, and that night, we decided this is the one we're going to go for. From there, it's just like a lot of really working nights and weekends, we go after work about seven o'clock to Paul. He had a spare bedroom in his Watertown, Massachusetts house. We'd 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. We don't have any customers or anything yet, but we did have a general plan, an idea of what we are doing that we said, "Look, it might be time to put a little money." 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 a form of corporation. He starts pushing us, "You've got to go raise venture capital." At the time, there were others that were pursuing a similar idea, we weren't the only ones. We realized we probably did go, you need to go raise venture capital. We set out to do that, got told no, probably about 50+ times for a guy named Ryan Moore at Accomplice Ventures put some money in, followed by Peter Blacklow, Boston Seed, a few others, and we put together a $1.4 million seed round. That was the beginning of the business. 

Lots 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. Ultimately, what we found was the product and the customer experience which is 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 the game. We are matchmaking among people who want to play. 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 that I wanted to talk about it is, in that in that growth period in 2016 or particularly, there was this period where you 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 [...] TV business, so very important. A lot of our product and technology investment is in infrastructure, including great data-science, great analytics, automated bidding, it helps us optimize our tax, but 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. Also really 2019, I guess it was late December 2018, we launched iGaming. As we've expanded our product portfolio, we've seen dramatic rise in LTV. That's obviously in states that allow them, we've 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 LTVA of our customer rise. So we're really always concentrating on both sides of that. How do we find the most efficient ways to bring customers onto the platform? Then once they are 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?

Sciple: Absolutely. I'm sure some of those existing daily fantasy relationships have been very helpful in building out that customer base. You mentioned that the Supreme Court decision in 2018, we just passed the three-year anniversary of that. How has the business changed in these past three years?

Robins: Well, it's really changed a lot. At its core, it hasn't changed. We always were a consumer product and technology company. We always had a heavy internal reliance on having great products and tech, great data science and analytics. The core way we operate our business and how we look to optimize our LTV to CAC hasn't changed. But as we've expanded into online sports betting and iGaming, the focus has really shifted a lot toward those products. We still do have a great DFS product. We have a team that's constantly working to improve it. We've added a lot of features and social stuff over the last year or two. But so much revenue and so much customer growth is coming from the sports betting and iGaming products that that naturally is the place for focus. The way we kind of look at it as daily fantasy sports is that steady, reliable way to engage millions of customers, churn out revenue, has nice growth, but not below your socks off growth. 

Then the hyper-growth is coming from the launching of sports betting and iGaming in new states. Even in the states you mentioned, the three-year anniversary, New Jersey launched just under three years ago and we're still seeing tremendous growth there. I think much like what we saw in daily fantasy, it was nationwide, so it's a bit different, it's one state-by-state. You're going to get several years of growth as you introduce new products into markets when there's very large TAM like there is for sports betting and iGaming. We haven't seen that slow down at all, which has been amazing, and that's really what's driving us into that triple-digit growth as opposed to fantasy, which is high single-digit, low double-digit growth at this point.

Sciple: We see some of these numbers, New Jersey is right up there with Nevada when it comes to total handle. Have these numbers surprised you? How does it compare to your expectations?

Robins: Absolutely surprised me. I knew that this was a big market, but I didn't realize how big it was. It's bigger than we thought. I think the iGaming side in particular is just orders of magnitude bigger than what we thought. But sports betting is too. I think what's really been interesting is over the last couple of years, we've seen a bit of an acceleration too, somewhat due to the effects of the pandemic. I think more states are in need of revenue and more people are engaging with online products as opposed to in-person products given the stay-at-home nature of the pandemic. But there's also just been a tremendous amount of momentum in the industry. I think people weren't paying attention when their state opened up because it was just one or two or three states and it wasn't getting as much overall national attention, now everyone's paying attention and we're getting more and more inbounds from customers all over the country saying, when is this coming to my state? I think there's just a lot of excitement around the industry. 

Clearly, it's a big market and we're looking forward to continuing to hopefully see that momentum build. We're still in the very early days. To use a sports analogy, we're in spring training and the regular season hasn't really started yet. It's still very early. The good news is that, if we just continue to see more and more states open up and we continue to just do what we're doing, we're going to see incredible growth over at least several more years. But we have bigger ambitions than that. We would like to be one of the next big tech giants. I think to do that, we're going to have to really win in our market for sure, but we're also going to have to continue to expand our product portfolio. We're going to have to expand geographically. What excites me the most is, if we just did what we're doing now, we will be seeing fantastic growth for probably the next three, five years, at least, just on the basis of new states opening up if they were to continue to do so, as well as continued growth in some of the states that recently launched. But what excites me is that's just scratching the surface of what I think the company can ultimately achieve and there's things like I mentioned here, new product expansion, geographic expansion, which I think only they're being contemplated by a lot of the equities market right now. I think a lot of people are so focused on the US sports betting and iGaming opportunity.

Sciple: Well, I was going to ask about this, but yeah, so what are some of these other markets where you see potential to expand into maybe outside of sports betting? When you think about international markets, a little bit more mature when it comes to betting. How are you thinking about that?

Robins: Well, certainly, geographic expansion in our current product portfolio, that's an obvious one. I also think we can expand into new product lines and revenue lines. We've recently made some moves to start to explore the content business. I think that could be a very interesting expansion point for us. It's not really, I think a controversial point-of-view that media and content intersects greatly with online gaming. It's clearly very synergistic. I think there could be an interesting opportunity there. Simple way to put it is, the customers on our platform, as they do more gaming, they increase their appetite for content. Then as they consume more of that content, they increase their appetite for the gaming. So it's really a flywheel that gets created. 

Right now, we're only partaking in one part of that flywheel and I think we could partake in the media and content side as well. That will be both through things that we do organically, but also through relationships that we build and deals that we do externally. We have a lot of deals right now, including companies like Turner, ESPN, and UFC, NFL, many others that, I think really, are our content companies and licensing companies at the core. Lots of interesting things to do there. I think there's other types of products in the gaming space we don't currently offer like poker. I used to be a big poker fan but I still am used to playing a lot of poker and have a strong understanding as well as a lot of survey data to backup that there's heavy overlap between that product and the sports products that we offer. Then I think there's other products that are completely outside of content or gaming that we can get into. They just overlap really nicely with our customer based, and that's really what we get excited about. I think we obviously have a long way to go, but Amazon started just selling books and look where they are now. We have similar ambitions to just continue to expand product and really all centered around and making sure that anything we do is focused on creating a great customer experience and putting the customer first and at the center of every decision we make.

Sciple: That makes a lot of sense on the content side, and you've seen the relationships that you've entered in [...] as well as some others. I think that the natural follow-up is one of your competitors, Penn National, their relationship with Barstool Sports seems very much along those same lines, that kind of collision of content. With sports betting, what do you make of their approach and what they are doing?

Robins: Well, I think it's based on a very similar view that there is tremendous synergy between the content, media side of the business, and the gaming and I think Penn figured that out. Then there is the way they're approaching it as do Barstool. Obviously, Barstool and Penn have gotten some traction, so there's something to it. I think that they're really just pursuing the same strategic view around those synergies that we are. They did it a little bit earlier in that regard in terms of making a big move, most of what we had done was relatively small scale until recently, but I think you're going to see us get much more aggressive now we just hired a Chief Media Officer guiding Brian in July that was at Verizon and we are planning on making a more meaningful move in space.

Sciple: Yeah, it's interesting you're from Boston, you have Barstool from Boston kind of a history there. You look at IAC has made a relationship with MGM. You have history there with a draft street acquisition. Does it feel like the competitive landscape is small to a certain extent the players and the faces.?

Robins: It's a very tightly knit community, if you will. Everybody knows each other. Everybody is generally in contact with each other and the thing that's nice about it, although, yeah there are some that don't agree with this, but the vast majority agree that right now on the most important thing is to make sure that the legislation, the regulations and the expansion of the categories state-by-state is done in the right way. That allows for a healthy market to develop. I think there is such a strong alignment among industry leaders on that now, like I said there's one or two or three that don't necessarily follow those types of views but most by far are the best majority of the industry does. That's really nice to see. I think it's a recognition that if we all see good legislation and good kind of healthy markets being created state-by-state, then it's going to be good for everybody in the industry. Eventually, there will be a point in time at which people will turn more to, how do I figure out, how to get an edge on that competitor in a way that maybe creates less of a relationship than exists now. But right now there's just such focus on making sure things are done right, that everybody is in communication and everybody is collaborating very well on that front I think.

Sciple: That makes sense. You mentioned state-by-state several times. Do you think of this as 50 different markets? Or each different market has its own or do you think of it naturally? How do you break things down within your own business?

Robins: That's a great question. So, I think it's both. There are definitely in many ways you look at it, 50 different labels. Let's see if there's 50, but each state is different. There is a little bit of a difference in the regulations in many states. Obviously and when we're in this earlier phase where there's mostly localized marketing, the local landscape for marketing and how to reach customers and acquire customers is different state-by-state. You have different, I think, state-by-state rules of the road on the regulation side, so in some states there's ways that you can deduct certain types of promotions from taxes and in other states it's a different type of promotion. So, being able to be very sophisticated and I think we have a leg up in this area and that we have a very strong automation, a very strong level of automation and what we do, I think it's very helpful. So in that regard, it is state-by-state. But really in the end, I think it will be a national market and it's already starting to kind of get there in terms of the customer and the marketing. 

Obviously, national marketing is less expensive on a per impression basis than local marketing. But in the early days, it makes sense to really primarily concentrate on local marketing because there's not enough of a footprint to make national makes sense even though on a per impression basis it's cheaper. But I think you're going to see that threshold crossed and the next 12-months or so, maybe sooner. I think as we get more and more states adopting sports betting, you will see more and more of a national approach from companies like DraftKings. I think that's a leg up that we in small groups others will have the fact that we are so present in so many states, we're in more states than any other online operator. So many, most of the industry are in like one or two states, which I think is at this stage where there's so much local focus isn't the biggest disadvantage. But I think as it gets to a point where there is that national scale and that national marketing efficiency to be gained and it'll be a tremendous advantage to being in a lot of different states.

Robins: So it's lots of different directions. I can go ahead running short on time, so it may not be able to go with all of them. But one of the points you mentioned is automation and one of the points of difference with DraftKings as the SBTech acquisition during the process of integrating that, how does that fit in with DraftKings differentiation and maybe you mentioned data earlier benefits of scale. Does that generate benefits to scale as you build out a nationwide brand?

Sciple: Having control of our vertical product, tech stack or trading. We realized pretty quickly that that was a critical thing for us where we're at the core product and technology company and we have a great relationship with our third-party that provides those services now, but it just wasn't something that we felt made sense long-term to take such a big part of the customer experience, the product, and have so much of it done by a third-party where we didn't have full control over what we could do. We have a very ambitious product roadmap once we complete the migration, which we expect to be at or before the end of Q3 this year [...] proprietary technology, SBTech. We have lots of things planned over the coming years that I think we wouldn't have been in control before as we had made this acquisition. I think that was really important, and it also stems from a belief that it's not just who we are, but it's important in this market into this customer that the customer will demand the best experience, and that, ultimately, it's a viral enough market and people talk enough that if you're providing a superior experience, then that's going to be what keeps the best stickiness and draws the most new customers. There's also a monetization component, if you offer more ways to bet, your LTVs will go up. I think that then has a reinforcing thing where you can continue to be more aggressive on the marketing side because you have higher LTVs than the competition. 

For all those reasons, I think it's really important to control your entire product and technology staff if you're going to be a major player in this market. We realized that pretty quickly early on, and this is a move that we've been contemplating since really late 2018, early 2019. It's been a long time coming, and we're pretty excited that we're coming up toward where we're going to be fully migrated and finally be 100 percent in control of our own destiny.

Sciple: To go back to the other thread, you talked about marketing and we're about to flip to this point where it makes economic sense to do national scale marketing, as well as increased LTVs based on your back-end data. That tells a story of, "We can press more and more on the marketing side and acquire more and more customers, and we zoom out several years down the road, and there are just fewer players in this industry." Is that accurate? If that is, how many players are in this industry five, 10 years down the line?

Robins: Well, I think what you'll see is on a national basis, the majority of shares concentrated among very small number of players -- you can count on one hand number of players -- there may be still a long tail, and that might be because if you're a local casino and there's, I think, 30-plus casinos in Colorado, for example, you want something in market in Colorado. Do you necessarily have ambitions to expand all throughout the U.S.? No. I know you're going to capture a ton of share locally. Probably not. But you might as well have something. You have a license, you have customers that are visiting you on the brick-and-mortar side. I think that's going to be the structure of the market. You'll have that count on one hand number where the vast majority of national market share is concentrated. Then, you'll have a long tail built up by some who are smaller players on a multi-state basis, but mostly, one or two state players or three state players for casinos that are in one or two or three states and want to have some presence where their physical structures are.

Sciple: That makes sense. Let's have a little bit of time left. One thing we haven't talked about this whole time here is the stock, as you're down, you have 40% from the highs, you feel 40% [...] after that. Jeff Bezos, what's the environment like around the office?

Robins: We don't really pay too much attention to it. I think people obviously want to understand how we report great earnings and don't see a reaction there. But once you explain, it's mostly macro. People move on. We're very focused on what we can control, and what we can control is creating a ton of value over the long term by providing great customer experiences and having a really well-run company that's efficient in everything we do. I think if we do that, then the stock price will take care of itself over the long term. But there's obviously so many short-term things that while it's fun to speculate. I used to like when I was younger and have more time to trade. That was fun for me, but I think outside of just curiosity, there's really no value to try and figure it out. We're figuring out [...] there'd be people that were telling us all how it worked. No one really knows. I think what you do know and what you do see is that companies that perform over the long term, their share prices go up. That, we do know. As long as we focus on ensuring that over a long period of time, we're consistently over-delivering, we're constantly creating great customer experience, we're constantly growing our top line and we're consistently moving toward path to mega profitability, I think our stock will be great.

Sciple: When you walk into work today, what's the problem that you're most excited to solve?

Robins: I think it depends on day-to-day. If you're specifically asking today, we actually have some pre-planning meetings for our strategy sessions we're going to do over the summer, which will then result in our 2022 plan. That's a pretty important thing today, but it depends on the day. Every day is a little bit different.

Sciple: Awesome. Thank you so much. If you have a couple of minutes until you have to go, I have a couple of non-DraftKings questions that I'd love to ask you about. We mentioned earlier DraftKings has been an incredible market. You are going from zero to a nationally recognized brand. What's a company that's a brand that you admire today in life?

Robins: I mentioned them earlier, but Amazon I think is one. I think that they have just managed to take something. They were selling books online. I remember Amazon started in the mid-'90s and early to mid-'90s. It actually started, "Jeff Bezos went to my rival's high school in Miami, Florida," and I remember hearing about it, which is a school called Miami Killian. I went to Palmetto. Palmetto [...] graduated and went out to start an Internet company, and he is going to put Barnes and Noble and Borders out of business and selling books online. Now, look at what they've become. I think it's just such an amazing story of sticking to a strategy, having a long-term view, even when others around you are not totally understanding what you were doing and building something that was incredibly scalable and building an incredible consumer company. I think that's really admirable and there are so many lessons in there. That's what I point to that I think has a very great and inspiring story. Also, it's built a special brand and special company.

Sciple: What do you think about Mac Jones on the Patriots?

Robins: I like it. I think that with Belichick, you got to just trust them. He tends to know what he's doing. I don't pretend to be an NFL scout. I did watch some college football and I thought he was a good college player. At the same time, it was very hard for me. There's professionals to get paid a lot more than I do to be able to predict who's going to do well on the NFL but still don't get it right. I think he looks good, but really, I trust Belichick, he's been pretty good about making smart picks, at least in his key positions over the years. I think he is going to do a good job with Josh Daniels developing him, so I like it but we'll have to see, still hasn't played it down in the NFL. So hard to say.

Sciple: That's true. I've known a guy so, I'm rooting for him, maybe the last one you mentioned college football. We have these changing name, image and likeness rules in college football. You have thoughts on that and how it may affect sports more broadly?

Robins: It's very interesting, I think that my personal opinion is that the college athletes, the ones that are generating so much money for the schools should get some reward. It seems a little unfair that small violations can result in them having their careers in college destroyed. It's good to see some reform happening there. There's a lot of ripple effects to think about and I know that everybody who's involved as being thoughtful about that. But I think that we live in a capitalistic society and people are able to generate value by things, skills and things that they bring to the table then they should be compensated for them.

Sciple: Awesome. Jason, thank you so much for spending this time with me. I hope we can stay in touch, we'd love to have you on again in the future.

Robins: I would love to do that. Thank you for having me.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. For Jason Robins, I'm Nick Sciple. Thanks for listening and Fool on!