A Tale of Two IPOS: Betfair Is Seen As A BellWether For The European Tech Industry

When Betfair Group, the world’s largest online gambling platform, went public in October the stakes were unusually high.The London-based company’s £1.5 billion British initial public offering was not only scrutinized by investors and analysts as a measurement of the company’s prospects. Coming on the heels of the disappointing launch of online supermarket Ocado investors couldn’t help but view Betfair’s listing as a bellwether for the European tech industry and IPO markets.

“If Betfair had disappointed, it would have set the whole market back,” says David Wilkinson, head of the European IPO team at Ernst & Young in London. “There were big differences between Betfair and Ocado but people were watching Betfair’s IPO as an indicator of where the market was going.”

Ocado priced its IPO too high and shares fell below the issue price shortly after beginning trading. By comparison, Betfair’s shares lunged out of the box and surged about 20 % October 22, their first day of trade. By mid November Betfair shares were still trading about 15 % above the offer price of £13.

What did that mean for the broader market? Confidence was back.

“Companies that had been thinking about going public were reassured,” says Mr. Wilkinson. Betfair’s IPO was followed by a rash of new listings in London. The Luxembourg-based AZ Electronics Materials, which makes chemicals semi-conductor manufacturers, was so encouraged by investor demand that it raised the price of its offer at the last minute in an IPO that valued the company at £914 million at its launch on October 29. Another significant IPO was the $1 billion listing on Nov. 5 of Mail.ru Group Ltd., Russia’s largest Internet company that until September was known as Digital Sky Technologies. Mail.ru Group, which owns 2.4 % in Facebook and 5.1 % in Groupon Inc., was founded by Russian investors Gregory Finger, Yuri Milner and Mikhail Vinchel. Among its main investors are Russian billionaire Alisher Usmanov and South Africa’s Naspers Ltd.

Judging by the resurgence in IPOs, Betfair’s gamble to take the company public seems to have paid off in spades. With a market capitalization of about £1.6 billion as of Nov. 16, Betfair’s listing laid a solid foundation for the company to return to the market should it need cash for major investment or a strategic acquisition.

The successful listing also proves that for all of Europe’s disadvantages compared to the United States and Asia, it is possible for entrepreneurs to create innovative technology companies from scratch and grow them into billion-euro businesses.

Betfair was named “European Entrepreneur of the Year” at an awards ceremony in Copenhagen Oct. 14 attended by over 200 venture capitalists. The awards ceremony capped the Innovation Exchange conference co-organized by The European Tech Tour Association, Informilo and the European Private Equity and Venture Capital Association (EVCA).

Previous winners of the award, first launched in 2006 by the European Tech Tour Association to celebrate European success stories, include two Swedish firms: MySQL, an open source database maker, which was sold to Sun Microsystems in 2008 for $1 billion and Qliktech, a business software intelligence specialist which moved its headquarters to the US and went public on Nasdaq earlier this year. 

Betfair’s success is viewed as encouraging for Europe since it was both created and floated in the UK. The company, founded by Edward Wray, a former JP Morgan trader, and Andrew Black, a professional gambler, was launched in 2000. The idea was to create a robust trading platform to handle bets on events such as horse racing, soccer, or for playing poker. The online gambling platform gave players direct access to the events and pushed out the middle men, the bookies.

To be sure, Betfair’s business faces potential risks, especially from overzealous European regulators who could try to outlaw, tax or otherwise restrict online gambling and thwart Betfair’s growth potential.

By the time of its IPO Betfair had more than three million registered customers. For the business year that ended on April 30, 2010, Betfair reported net profit of €15.1 million British, down from £38.8 million. Revenue rose 13% to £340.9 million. Profit was down largely because of investments in marketing and technology while the weak economy slowed sales growth.

The company’s record is even more impressive when you consider that the founders nearly folded their hand early in the game because of the difficulty they had attracting financing to launch the company in 2000.

“When we were preparing to launch, we tried to raise money from institutions and failed miserably,” says Wray. “The situation in Europe has improved a lot since then.”

When Betfair launched, a rival British start-up Flutter.com, was already making the rounds in Europe and collecting funding from venture capitalists.“They did a terrific job marketing themselves,” says Wray. “When we went around to see people everyone was asking ‘Why should we support another gambling company?’”

Over a period of several years, the Betfair founders raised about £5 million British from members of their families and friends.  Wray would hit all his former trader buddies, timing his pitches for money to when London traders traditionally got their annual bonuses. “You had to hit them after they got paid but before they spent the money,” he says.

By the end of 2001, Betfair and Flutter.com were both building solid businesses, but Betfair appeared to have the better brand. Investors in Flutter.com pushed the idea of merging the two companies. Flutter.com founder Josh Hannah called Wray and said, “Let’s have a drink.”

Within a few months, Flutter.com was merged into Betfair, bringing its cash and network of financial backers,  including Balderton Capital, which calls itself Europe’s largest dedicated venture capital fund with $1.9 billion of committed venture capital, and Index Ventures, formed a decade ago by Neil Rimer and Giuseppe Zocco to bring Silicon Valley-style investing to Europe. Index invests globally in technology, biotech and clean tech. Other investors include Softbank Corp., the Japanese investment group, which acquired 23% of Betfair in 2006.

“Flutter had a better technical platform, but Betfair had the better brand,” says Barry Maloney, a partner at Balderton Capital, who recalls the discussions inside Flutter.com about a merger with Betfair. Balderton holds 3.95% of Betfair.

The idea behind the merger was to combine the strengths and resources of the two companies to create an industry leader. “No company in the online gambling industry ever really got to scale except Betfair,” says Maloney. Wray tells a similar story, explaining: “We wanted to create as unassailable a position as possible.”

Wray, who is chairman of Betfair, says the company is using the IPO to help expand its gaming business internationally and build new businesses. One major new development is the launch of LMAX, a financial trading platform for retail investors to trade in foreign exchange instruments, fixed income instruments, commodities and eventually in other asset classes as well.

The idea sounds familiar. Take Betfair’s technology platform, soup it up for a mission critical trading environment and make it available to ordinary retail investors, edging out the middlemen at the big banks and start making money.

Betfair, says Maloney, is a perfect example of what sets today entrepreneurs apart from the heady days of the dotcom boom: “Nobody is building ideas anymore; they’re building businesses.”

This story appeared in a print publication Informilo produced in partnership with Raconteur Media, which was distributed at Le Web in Paris December 8 and 9. The print publication is a beta version of a quarterly  on innovation, entrepreneurship and venture capital that Informilo and Raconteur Media plan to produce in the Times in 2011.

 

 

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