4 March, 2021

Check your ego at the door

Tekkorp Digital CEO Matt Davey, one of the pioneers of online gaming, speaks to Tim Poole about starting his career with a regulator, his time at NYX Gaming and his hopes for the online market

As an electrical engineering undergraduate in Darwin, Australia, Matt Davey's younger self would have been surprised to hear he'd end up in the gaming industry. One thing he always knew, however, was that he wanted to be in the boardroom, making the decisions. Davey always wanted to build businesses and help craft a company, though gaming itself wasn't on his radar until he took a job with the Australian Government back in the 1990s.

As Davey reflects on his career so far with Gambling Insider, there are two points of note that may surprise readers. One is the initial fact the Tekkorp Digital CEO, who has to a large extent helped shape the online gaming industry today, only really found his way into the sector by chance. The second is that, when he joined the Government in Darwin, his first job was actually with a regulator. With the Government being the area's largest employer, Davey joined the racing and gaming authority, allowing him to gain a unique perspective before later entering the industry on the supply side. Davey worked on a small team he believes put forward the very first regulations for a first-world government regulating online casinos. It was some way to cut his teeth.

"It definitely gave me a deeper appreciation for the value of regulation," Davey explains. "Online gaming and sports betting, you almost have a licence to print money the business product and model is structured in a way that's incredibly profitable, no matter how you run it typically. So if you don't have the integrity of both the system and operators, you can really destroy trust with the consumers. There's quite an opportunity and scope for bad actors without a regulated environment. I'm not saying regulations are a panacea for everything, but they do really help give trust and credibility back into the industry, so I had a much deeper appreciation for that."

That experience also taught Davey how to really run a business, as he learned what an ICOP was (Internal Controls and Operating Procedures) and looked at how regulations can help strengthen a company. It was an interesting intellectual journey, he remarks, as he examined how regulation needed to stretch to handle a digital world with no natural borders. Taking his learnings to Sydney, he joined a small content studio named NextGen Gaming, an experience Davey enjoyed and prompted him to set up his own vehicle at the age of 28, Tekkorp Consulting Group.

In 2005, he took over NextGen Gaming as CEO, the moment he earmarks as when his journey to today really began. The venture capital-backed company ran out of cash and Davey had to restructure the business, taking it from 40-strong to just five employees. Revenues doubled three years in a row to 2008, the year Davey says the Australian Government changed regulations to put a "moratorium on online gaming".

Relocating to London, Davey spent the next four years building out the business and duly acquired a small Swedish company, also venture capital-backed that had run out of cash. The emphasis here can be ironically applied to the word "small" because the firm in question was NYX Interactive, prompting Davey to rebrand to NYX Gaming Group in 2011, one of the most influential firms in online gaming's modern history. "That effectively gave us a platform for content, which allowed us to really start to control the distribution of content in the gaming space," he says. "At that time, there really weren't very many paths to market for content. You had to go through one of the top three suppliers, and that was a somewhat time-consuming and tedious project we really changed that. That kicked off the innovation around our content aggregation product called OGS, which is in my mind still the largest in the market. But that didn't exist before."

Davey's next strategic decision was to target the US. Advising his board that the "big guys" like Playtech and Microgaming could not be beaten head on in Europe, the CEO sought to "skate where the puck is" in more regulated markets. Relocating NYX's focus, Davey acquired a company in Las Vegas - where he still resides today - from Ernie Moody, a fellow industry name Davey describes as "an entrepreneurial guy". As Davey's ventures into the world of M&A continued, mid-2014 saw an event he believes transformed the investment nature of online gaming, when David Baazov and Amaya acquired PokerStars. Sensing an opportunity, Davey sought a meeting with Amaya CEO Baazov.

"I met up with David at the time and said, "You guys are shifting to become a B2C business, we're interested in acquiring your B2B assets." he recalls. "We were quite small at the time but we took the company public in Canada at the end of 2014, with the first right of refusal on his B2B assets and we ended up acquiring those. We did six additional acquisitions, including OpenBet in 2016. And right in the middle of that, the UK in its wisdom decided to vote to exit the European Union, the pound collapsed and our stock came under pressure. We were happy with the company, it was performing well and the OpenBet asset was performing incredibly well. But our stock price was under pressure." The rest was history, with Scientific Games offering to acquire NYX and Davey negotiating "a good result" - approximately a 115% premium on its trading price at the time.

Talks began in 2017 and the deal itself closed in the first week of 2018, with Scientific Games acquiring the company for around $630m. At the same time, the US Supreme Court chose to hear the case for the overturning of PASPA, which was voted through in May 2018. During this favourable climate, Davey completed integrating the company, as NYX's 1,500 employees joined up with Scientific Games' 8,500. It formed the fourth division of the organisation, SG Digital, and won Davey Chief Executive of the Year at the 2018 Global Gaming Awards London.

Once SG Digital's management team was structured correctly, Davey left, setting up his current ventures, Tekkorp Capital and Tekkorp Digital, in 2019 and 2020 respectively. As he reflects on his time with NYX, he has the following advice for aspiring executives who share his ambitions to become decision-makers from an early age: "Always be open-minded, curious and check your ego at the door. One of my early mentors gave me very good advice. I was a young, up-and-coming star in the company and I complained about two other guys making more money than me. He said "Matt, the world's unemployment lines are filled with indispensable people." Not forgetting that timeless, Davey urges would-be-leaders to "look for where you can add value well beyond what you've been asked to do."

At NYX, Davey believes his team was effective in understanding the need to scale within the gaming industry. He is not afraid to admit where NYX overreached, however, such as when it acquired poker platform Ongame. "We just didn't operate fast enough with that asset," Davey reflects, "It was effectively a melting iceberg." In hindsight, he says he would have made decisions quicker to scale that business.

No track record can be perfect, though, and Davey's journey to date has undoubtedly made him one of the pioneers of online gaming as we see it today. Yet as CEO of Tekkorp Capital, which invests in both private and public companies, and Tekkorp Digital, a $250m Special Purpose Acquisition Company (SPAC), Davey still has plenty of influence on how this industry is being shaped. SPACs, in fact, are becoming increasingly popular within gaming. "SPACs have been around as a product for about two decades or so, so they're not brand new. But they've become really popular recently, really in the last two years or so,"Davey explains. "A gentleman called Chamath Palihapitiya floated Virgin Galactic and that really kind of set the US market on fire. Obviously, it was DraftKings merging into Diamond Eagle Acquisition Corp that got our industry focused."

Davey discusses SPACs with Gambling Insider from two perspectives: one as an acquirer looking to buy a business and the other as a business owner looking to sell. "I've been in the acquiring business for the better part of the last two decade, we've acquired over 10 companies. You have two challenges here. One is you have to negotiate a great deal with the company you're looking to buy and then you have to negotiate access to all the capital. Either you're a public company and you can raise money in a public environment, or you're a private company and you have to go to private equity shops and debt providers. Those are two quite cumbersome processes, and a SPAC effectively allows you to raise the capital first, then acquire the business so it's a cleaner, more efficient process from an acquiring perspective."

On the flip side, if you're looking to sell your company or take it public, SPACs particularly appeal to fast-growing businesses whose value is in their future growth, Davey says, not their historical position (DraftKings certainly comes to mind here). IPOs, by contrast, restrict what you can discuss in your public documents regarding future forecasts.

Time-wise, the process of merging with a private company into a SPAC is also far more efficient, in Davey's eyes, than going through a 9-12-month IPO. If you're facing competitive pressures and need access to capital for quick growth, SPACs can instead take 3-6 months. From this perspective, Tekkorp Digital will specifically look at companies that are scaled, worth roughly $1-2bn, and are looking to go public. The only key, Davey says, is that they must have some kind of nexus with the US market, ensuring they are meaningful for US investors to get behind. With his broader Tekkorp Capital hat on, Davey is targeting investments in sustainable gaming segments. "Examples are companies like BetMakers, which has built out a great position in the horse racing industry, and Scout Gaming, which has approached the daily fantasy sports market in a way we think scales," he says. "We're looking at those markets, currently considering investments in the esports industry, along with data, AI and analytics."

There is much to reflect on generally during such a fascinating time in the investment and M&A spaces. For Davey, scale really is the key differentiator within the online sports and casino industry, a sector he feels was born in the early 2000s despite its early remnants forming in the mid-to-late '90s. "You can see the enormous benefits Google, Amazon and companies like that get from scale, it's very difficult to beat those kind of ecommerce-orientated businesses when scaled," he remarks.

"Online gaming is the same and benefits from a similar approach. All things being the same, having a bigger marketing budget allows you to out-compete everybody else. The industry is very much in early-growth mode and one of the largest high-growth markets happens to be the US. We've seen companies raise hundreds of millions, billions of dollars to invest in scaling up in probably the fastest-growing, largest market in the world. That said, at some point, you can't keep doing that. At some point, the easier way to grow is through acquisition."

While the sector is seeing acquisitions driven by technology, products and services, Davey thinks gaming is still trying to figure out the right vertically integrated structure. By this he means whether it is best to own your brand and management team, outsourcing everything else, or owning data sources or the underlying platform and technology. Here, he doesn't believe the market has spoken and that there are "a number of innings left to play out over the next decade or two".

As we chat with Davey over Zoom, an inevitability brought on by the COVID-19 pandemic, Davey notes that the pandemic may be acting as an extra driver for M&A. The pandemic has not fundamentally changed consumer behaviour, according to him, but it has accelerated the adoption of digital entertainment - an adoption he believes is permanent. So much so, in fact, that Davey sees the current 80-20 gaming revenue split, in favour of land-based versus online, changing significantly. Bearing in mind gaming hubs such as Macau, Atlantic City and Las Vegas account for large portions of land-based revenue, digital adoption is already way ahead in many other markets worldwide. In June 2020, Evolution CEO Martin Carlesund told Gambling Insider the "online evolution has just started," and that 50-70% of future casino revenue will be digital.

In Davey's opinion, this figure might swing even harder the same way, leaving him - it has to be said - perfectly placed to capitalise as Tekkorp Digital CEO. "I wouldn't be surprised to see the industry go from the current 80-20 split to greater than 50-50 it might end up 20-80 the other way," Davey projects. "I think we have $400bn wagered a year on lotteries, poker, sports and casino, and I think at the moment we're only on $60bn or so coming from the digital format. I wouldn't be surprised to see that being north of $200bn over time. I think one of the areas slowing that down is the adoption of regulation and gaming regulators being comfortable with that. But in my mind, the digital product is the preferred channel and the physical product will be secondaryin the future."

"Online gaming and sports betting, you almost have a licence to print money. The business product and model is structured in a way that's incredibly profitable, no matter how you run it typically"

"One of my early mentors gave me very good advice. I was a young, up-and-coming star in the company and I complained about two other guys making more money than me. He said 'Matt, the world's unemployment lines are filled with indispensable people"