Last week, Chinese holding company Tencent invested $100MM in Indian fantasy sports company Dream11.

Dream11, founded just 6 years ago by Harsh Jain and Bhavit Seth, is India's largest fantasy sports platform (and a source of an incredible amount of YouTube videos). What these YouTubers, or most of us don't know, is that Dream11 is a virtual monopoly in the market. The number of fantasy platforms has grown rapidly, moving to 70 from just Dream11 in the last few years - yet Dream11 claims to account for 90%. Many sports watchers would have seen the "Dimaag se Dhoni" ad during the IPL. All this speaks volumes as to why Dream11 was a highly searcheditem during the IPL, rivalling well-known unicorns such as Swiggy. But what really is the business of fantasy sports, and why does it exist?

Most basically, fantasy sports involves being a virtual manager/selector for sports games and scoring points basis of the performance of your team players. The better your players perform, the higher is your team score. A lot of people participate in contests or leagues, that tend to involve cash, and the winners make money. The core human feeling this appeals to is making money based on some external events, where you have a view on the likely outcome of the event. From stock picking to sports betting, this is the core feeling that is driving enormous industries. There is a spectrum of skill involved (debatable, and we will get to it), and some games could have more skill. So, what do you do when you're not allowed to bet on sports from a regulatory point of view? That's exactly why Fantasy Sports exists, and there is good precedent globally.

Betting will exist for events that a lot of people watch and are interested in it, and there are no better marketed events than sports. The United States is renowned for its highly televised and watched sports, be it American Football, baseball or basketball. Yet, for these well-marketed events, there are no legalized betting outlets, because betting is "illegal" as it is a game of chance (remember the spectrum of skill?). Fantasy Sports companies argue that their games are a game of skill, and this argument resulted in a $7Bn market in the US, with mega unicorns like Draft Kings and Fan Duel. These companies have also modified traditional fantasy sports (season long) to daily fantasy sport (per match). Markets where betting is legal (like UK) have resulted in exits and failures for fantasy sports. This is exactly the reason why Fantasy Sports companies in the US need to worry when betting is legalized. They exist because betting can't, and another market where this exists due to this reason is none other than India.

The most popular sport in India, cricket, is watched by ~700MM people every year (with frenzies during the IPL). The sport is a very large business, with huge amounts of money spent on eyeballs ($2.6Bn for televising rights!). It is clear it is a well marketed and watched sport, and it doesn't take a leap to see that people are going to be interested in betting. Illegal betting is a massive market in India (some estimates put it at ~$150Bn), and the source of many Bollywood movies. How does the pent-up demand for the "common" man get satisfied, if you can't access betting? Through fantasy sports platforms like Dream11. The metrics tell exactly the story you would expect - the company has grown from ~2MM in 2016, to ~8MM users in 2017, further to ~40MM in 2018 and is likely to be ~100MM users in 2020. This kind of growth is classic network effects showcasing pent-up demand. This is an incredible user base that puts in one of the largest customer group for an internet company in India. That is pretty large for a company that has largely operated in a grey area and owes its legitimacy to the Punjab High Court ruling. The fact that the platform becomes more attractive as more people get added (larger contest == large prize money), it becomes easier and easier to acquire consumers. 

The company had a revenue of INR 60Cr ($8MM) in FY1617. Its commission-based model of taking 10-15% of transactions is a the casino business model, whoever wins or loses - the house makes money. The business is highly seasonal, with a large portion of revenue and users coming during the IPL. Given a large amount of business and customer acquisition happens during the IPL (April-May), the 2016 user numbers are basically likely to be commensurate with FY1617 revenue (April16-March17). Therefore, the average revenue per user (ARPU) is $8MM/2MM = $4 (as per above user numbers) .This is likely to remain stable or sligthly decrease as more users come in.

The CAC is a little hard to work out given it falls over time in such businesses, as network effects make it easier to acquire more new users. The company spent ~75% of its revenue ($6MM) on customer acquisition in the same year, growing the user base from 300K to 2MM. For that growth, it is a CAC of $6MM/1.7MM = ~$3.3. The $22MM round from Multiples in 2018 grew the company from 2MM to 8MM. Assuming 60% of the raise was in marketing puts the CAC at $13MM/6MM = $2. The company intends to grow by another 60MM users by 2020, and assuming 60% of this week's $100MM raise is deployed in marketing, my sense is the CAC they project is around $1 (the beauty of network effects!). As it is a platform, the company makes pure margin on its commissions (no cost of delivery), thus its ARPU is entirely gross margin. For a $4GM and $1.5CAC, the company makes $2.5 in the first season (profitable "first order") - everything beyond that is pure profit. 

Let's assume the customer just transacts once on Dream11, for 40MM one time customers the company makes a $100MM post marketing. But what if these customers transact a second time (without any promotions)? The company makes a neat $160MM of gross profit with 0 marketing, and this is where you see the evolution of a potential giant. The seasonal nature of the business might make it hard for consistent revenues, but also likely results in high retention. This is because competitors can only compete during "peak season", and due to the large customer base + marketing dollars, incumbent customers are likely to not move to new players. While other companies could offer better economics, the moat due to the network becomes harder to break. The daily nature of Dream11's offering (per match) also increases engagement and increases stickiness. All of this could result in lower churn rates. At an annual churn (AC) of 50% every year, the LTV (lifetime value) is $9 at; at a 30% churn the LTV is $15! (calculation here: put monthly churn (MC) using (1+AC)^(1/12)=MC). The opportunity to cross-sell is also interesting - other sports could very well increase ARPU.

All these are indicative that the business is a business that will be huge at scale. That will boil down to three things - acquiring more customers, retaining old customers and upselling. That makes this business solidly focused on marketing and product, and its success will boil down to that. I see great potential for the company to increase its ARPU by adding "whales" who do huge transactions, as well as cross-selling. The business does not need to add too many employees as it grows, the platform will scale quickly without human intervention. This implies that fixed costs per customer added will fall drastically with scale. The LTV/CAC coupled with the platform scalability will ensure this business is net profitable at scale. If done right, Dream11 could be the giant (mostly) nobody was looking at. 

Dream11 could likely be the next mega unicorn, and profitable to boot.