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Sports betting startups have a problem: The VC market is in a slump, making it harder to find early-stage funding, especially since the amount of capital needed by young businesses is often too small to justify the expense of hiring a bank to seek investors. Funds, meanwhile, are overwhelmed by a flood of entrepreneurs pitching half-formed ideas. Rob Heller believes he has a solution: an automated platform connecting gambling tech entrepreneurs with deep-pocketed investors, with Heller’s bank, Spectrum Gaming Capital, acting as gatekeeper.
“We’ve provided the sourcing globally, we’ve done the vetting, we’ve done the cleaning [of pitches], and we’ve created a presentation,” for startups, said Heller, co-founder and CEO of the registered investment bank, affiliated with the well-known research firm Spectrum Gaming Group. On the other side of the transaction, “VCs and family offices typically see so many ideas where it’s junk or doesn’t make sense, or is a great idea that [management] won’t be able to execute, that our vetting is valuable to them.”
A four-decade veteran of investment banking, Heller launched the Spectrum Gaming Capital Technology Exchange last month, which he believes makes it easier for tech startups to get their ideas in front of suitable investors, while making it quicker and simpler for venture capital funds to source ideas. Just three weeks old, the exchange is still building out its roster of participants, with four companies seeking capital and 35 investors on board right now, including the venture arm of a European gaming company and an American VC fund that has done many deals in sports and in gambling, according to Heller, who declined to name any participants. The potential market is large, however, with the U.S., Europe and Latin America digital gambling market all projected to grow at double-digit rates the next five years, according to a Spectrum pitch deck. The combined market cap of publicly traded sports-, gaming- and gambling-tech companies is more than CleanTech, FilmTech and Immersive Tech combined, suggesting a deep well of private and upstart businesses.
Startups apply for listing with Spectrum and have to meet a few criteria. One is that they have to be in the fields of gambling, sports or esports, or a closely related field. They also need to be generating some revenue already, seeking at least $2 million and up to $50 million in funding and have a path to profitability within the next two years. Investors also apply to be on the platform, with the requirement being that they are qualified buyers—meaning high net worth individuals who have $5 million in net investments or funds that have $25 million or more—and willing to sign NDAs to see pitch decks. Both parties agree to keep Spectrum updated on discussions throughout, with the bank collecting fees only if funding happens. Heller’s outfit charges 5% on the first $5 million, with 2% above that, or a 1% fee on a change in control, such as a merger or acquisition.
Connecting entrepreneurs with VC and family office investors on a tech platform like this isn’t a new idea—Axial, Republic and AngelList are three notable names in the funding space—but Heller believes his firm’s expertise in the often-Byzantine world of gambling gives it its edge.
“We’re relying on decades of industry knowledge and experience and judgment,” said Heller on a phone call. “Doesn’t mean we’re right, but it means we have a pretty good shot at being right more than the average banker. So we’re adding a lot of value.”
Heller has been an investment banker since the 1980s, where early work included helping create the mortgage-backed securities market at Salomon Brothers. Most of his experience, though, has been in the gambling sector, including arranging the financing for Borgata and Mohegan Sun, the merger of Penn National Gaming and Hollywood Casino, and the sale of Caesar World Resorts. After a tangential period founding and running Baha Mar Resorts in the Bahamas, Heller returned to banking by forming Spectrum Gaming Capital a decade ago. Since then, his bank has performed $50 billion in gambling M&A deals. Houston Rockets owner Tilman Fertitta is a frequent client, notes Heller.
It’s that experience that generates much of the value Heller says exists on his exchange. And most of it isn’t automated: To make sure investors are seeing quality opportunities, Heller’s group vets startups and works with them to refine their business plans and pitches to a level suitable for showing to investors. Spectrum has entrepreneurs provide specific details that result in an investment memorandum suitable for showing to an investment committee, as well as a pitch deck complete with financial figures and projections. Heller says the lack of any upfront fees is an advantage, and the back-end fees are much more affordable than the traditional route of hiring an investment bank to seek out investors and prepare paperwork.
For entrepreneurs, Spectrum vets potential investors beyond ensuring they have money, including doing a lot of the “know your customer” and investor legwork that is a frequent mandate from gambling authorities. It also makes allowances for ensuring competitors or unwanted parties can’t access privileged material.
The idea for the Spectrum Gaming Capital Technology Exchange came from the bank creating its own database of worldwide players in the gambling and gaming tech market. Because Spectrum specializes only in gambling-related businesses, Heller believes no institution knows as much about the world market, its players and the web of specialized regulation that companies and investors have to navigate. The database today has about 5,000 companies and about the same number of individuals the bank has mapped out in its relationship research. Heller believed this internal database could be leveraged to ensure both parties that everyone involved is reputable, while automating a lot of the investment process.
None of this means Spectrum endorses one deal or investor in the exchange, but the company does weigh in with thoughts on what it finds appealing as well as recommendations for where parties should focus their due diligence. For instance, an early applicant for the exchange sought funding at a valuation Heller felt was excessively high based on the other deals the bank was seeing. The business still met other criteria for listing and made it on the platform, but Spectrum’s investment summary noted the valuation as something investors should focus on. “The company, of course, isn’t going to like us writing that, but they don’t have to be listed. It’s very important to us that we maintain our integrity and our vetting. I have almost a 40-year reputation, and I don’t take that reputation lightly,” said Heller.
Even with the current slump in the VC world, which is retrenching after suffering portfolio losses and having more difficulty getting companies to IPO, the executive expects business to be brisk. “Everybody wants to do deals,” Heller said. “We’re creating a clearinghouse.”
