New York Attorney General Eric Schneidermann is launching an inquiry into two major companies: New York-based FanDuel and Boston-based DraftKings are the top dogs in the daily fantasy sports industry. That’s where people create virtual teams of actual pro sports players, and try to outscore other people’s virtual teams. And they do it for money, weekly or even daily.
“Most people, when they talk about us, frankly, they start with: ‘Oh, your business is all about the money,’” said FanDuel’s chief financial officer Matt King last week, before the scandal broke. “It’s actually not about the money, it’s about making sports more exciting.”
But now FanDuel and DraftKings are getting a lot of questions about the money, after industry website Daily Fantasy Sports Report revealed that a DraftKings employee posted company data online, information that could give players a better shot at winning cash prizes. The same week, that same employee won a $350,000 jackpot at FanDuel. The question is, what access do company employees have to data that’s valuable on the fantasy market?
“When there is a lot of money that’s involved, there’s always the risk that something can go wrong, people can see an opportunity to make some quick money,” said Roger Abrams, law professor at Northeastern University in Boston.
DraftKings says there’s no evidence the employee misused the information. The 3 1/2-year-old startup teamed up with its chief competitor FanDuel and released a joint statement. They said that employees with access to valuable data are rigorously monitored by internal fraud control teams. But both companies agreed to ban their workers from playing daily fantasy sports for money at each other’s sites. Until this week, workers had been banned from playing only at their own company sites.
Abrams said the crisis will bring increased scrutiny from government regulators.
“How far they go with it will depend on what else is on board and whether it becomes simply the first of many scandals, or whether these two companies have been able to stop it right from the beginning,” Abrams said.
But a Boston venture capitalist is not surprised that DraftKings and FanDuel have landed on regulators’ radar. Maia Heymann, senior managing director at CommonAngels Ventures, is not an investor in either of these companies. But she says the problems they’re having are common at fast-growing startups.
“Everyone is focused on fast and rapid growth,” Heymann said. “Sometimes internal processes, internal controls don’t keep pace. It happens. And oftentimes companies go back and fix it, and then they’re stronger. They’ll figure it out.”
Even so, the crisis comes at a particularly bad time for the companies. DraftKings and FanDuel have spent tens of millions of dollars over the past month on advertising to sign up new customers.
Those customers might not stick around if they feel like the playing field is uneven.
This segment aired on October 7, 2015.