Peer to Peer Betting Takes Off

NEW STARTUPS

Startups that you can invest in with as little as $100 right now:

🍺 Rikki’s Bar - San Francisco’s women’s sports bar (only $4k remaining in the round!) (LINK)

☕️ Yummy Future - Oof. A direct competitor to one of my favorite investments, Cafe-X (LINK)

🪁 CounterDrone - Drone-agnostic docking station for the next wave of tech (LINK)

SPORTS BETTING ON A METEORIC RISE

There’s growth, and then there’s extreme growth.

I’d wager to say that sports betting falls into the 2nd category. Here’s a couple of assets and how much they’ve grown between 2018 and now:

• S&P500: 119%

• Amazon: 276%

• Bitcoin: 541%

Now during that timeframe, the amount of money wagered on sports in the US went from $6.6B → $125.7B. 

A 1,803% increase!

A wave of state legalizations, surging demand, and an embrace by major sports leagues has propelled sports gambling into the stratosphere.

There’s little to no signs that the growth will slow anytime soon.

Demographically, sports betting still skews young - 75% of all bettors are under 45. Likely, this cohort will age while continuing to wager - potentially at higher amounts as their incomes increase.

Sports leagues and television broadcasters are further integrating their programming with betting, ensuring that younger cohorts will continue to pick up sports betting.

At this point, the sports betting industry has gotten so large that the time is ripe for smaller companies to carve out their own niche within the space.

PEER TO PEER BETTING EMERGES

One of those niches I’ve been following is Peer to Peer betting, which I’ll explain below.

There are two sides to every bet… let’s say you take one side.

• With traditional sportsbooks (DraftKings/Fanduel) the sportsbook themselves are taking the other side of the bet - you’re playing against the house.

• With Peer to Peer, another user on the platform is taking the other side of the bet. You’re wagering against other users.

There are a couple players in this space - ProphetX and Rebet are two of the leaders at the moment.

According to ProphetX’s website, $250M has been wagered on their platform to date. This is a small slice of the overall industry, but still a sizable amount that a business can be built on.

Some users prefer Peer to Peer (also known as exchange betting) for several reasons:

• Better Odds - With no bookmaker margin, bettors can find more favorable odds. (This is a good marketing spiel but a little misleading because the odds advantage is typically diminished by a transaction fee that the exchanges use)

• No Conflict of Interest - Traditional sportsbooks are playing against you, they want you to lose. Exchange betting removes that conflict of interest.

• Stronger Community - Traditional sportsbooks are a 1:1 relationship between sportsbook and user. Exchange betting is community driven and users compete & team up against one another

KUTT VIES FOR THE PEER TO PEER CROWN

One of the key players jostling for Peer to Peer dominance is Kutt. Fueled by $1.3M from VCs & angels, Kutt has rapidly made inroads into the P2P betting space.

After ramping to 14,000 users and $521K in revenue this year, they’ve opted to raise on Republic at a $9.5M valuation cap.

Their round has largely gone under the radar, but given their traction I deemed it was worth checking out.

Kutt is pitching a new vision for Peer to Peer betting - one where the majority of bets are made amongst friends, rather than strangers betting against strangers.

I saw some striking similarities to this concept and another startup I reviewed (and invested in!) called Bepo. Both of these startup concepts are challenging the notion of “Why not just use Venmo? It’s free!!”

I currently don’t bet with my friends, but for those that do - there’s a huge risk that the friend simply won’t pay, or that you have to chase them to get your money.

It puts you in an extremely awkward position and can ruin a friendship. With Kutt, all bets are pre-funded with Kutt releasing the pot to the winner at the conclusion of the bet.

It de-risks the transaction, while providing a seamless interface for the users. The app is also chocked full of social features so you can chat, plan wagers, and much more inside the app.

It saves you from having to do this:

Friends can make wagers on sports, but Kutt has also opened its book to politics, entertainment, and even custom user-made bets that have a definitive outcome.

As Kutt gets a foothold and establishes an active marketplace for bettors, the majority of its bets are traditional exchange bets (strangers betting against strangers).

However, Kutt aims to make friend-to-friend wagers a larger part of its platform moving forward. There are neat features included to help spur the social elements of wagering - for example friends can see each other’s wager history to see who’s gotten the upper hand (another thing you couldn’t easily track with Venmo).

KUTT’S CUT OF THE BET

For providing its services, Kutt takes a 3% transaction fee on both sides of the bet. So if each person puts up $100, Kutt receives $3 from both bettors = $6.

Kutt took home $187k in 2023 and is on track to rake in over $500k as they close the books on 2024 (187% YoY growth).

Kutt’s marketing costs did increase in 2024, but the revenue generated per marketing dollar improved. Whereas in 2023 each marketing dollar resulted in $2.15 in revenue, Kutt is now getting closer to $3.00 thanks to a surging top line.

Kutt remains unprofitable, but their overall loss appeared to lessen in 2024 based on financials obtained from the founder.

Because Kutt is a marketplace, it’s encouraging to see overall wagers on their platform increase. This improves betting ‘liquidity’, resulting in a better product for users.

I can foresee growth actually accelerating once they hit critical mass, since at that point the product is more usable for the bettors.

SOME RISKS TO CONSIDER

1. Legality Concerns

   • The legal framework around Peer to Peer betting, particularly around non-sports wagering is…murky. Kutt has obtained a legal opinion that they are permitted to operate within this framework. However, states have the option to challenge this legal opinion, which can result in a legal battle. This has happened in 4 states since Kutt’s inception, and Kutt has ceased operations in these states rather than enlist in a costly legal battle. If they had more funding & manpower they would defend their legal opinion, but that is unfortunately not the case. This risk pertains solely to their sports offerings (your Golden Bachelor wagers are safe).

   • RISK LEVEL: HIGH

2. Liquidation Preferences

   • Kutt’s previous funding includes a $750k investment from Lightning Capital. LC has a 2x liquidation preference (explained here), meaning they are entitled to the first $1.5M (= $750K x 2) in the event of a sale, then whatever is left over will go to common shareholders. The liquidation preference will only impact shareholders if Kutt sells for far less than hoped, so that would be a larger issue than the liquidation preference

   • RISK LEVEL: LOW

3. Profitability

   • I was surprised at how high the Cost-of-Goods-Sold (COGS) was for a company that’s merely charging a 3% transaction fee on software. In 2023, the COGS exceeded revenue $256K vs $187K. It’s because COGS includes everything from promos/bonuses, fraud/chargebacks, processing fees, and a few other incentives. The founder credited an abused incentive program as the main reason COGS were so high, and the program was halted in August. Looking at 2024 financials, the company’s gross profit has exceeded COGS in every month since May which is an encouraging sign. However, the company is still unprofitable when factoring in Marketing and General & Administrative costs.

   • RISK LEVEL: MEDIUM

SHOULD YOU INVEST IN KUTT?

Kutt’s top line growth is impressive, and its marketplace dynamics are improving with every increase to betting volume.

With enough revenue growth it’s clear that Kutt can turn a profit, especially once they have an active user base and can roll back some of the expensive promotions.

I am concerned that they do not have enough financial firepower to defend their legal opinion with states that challenge it.

It’s fine if they have to pull out of Alaska, but what happens if they lose California? or New York? This is a real risk that I am accounting for in my calculus.

Overall I am strongly considering an investment in Kutt and should come to a decision in a few days.

For any interested investors - go on and check it out for yourself!