Dream Sports is aggressively pushing its diversification strategy in a bid to become a sporting conglomerate, as its core business grapples with the country’s new taxation regime introduced for the online gaming sector in October.
The company, which draws more than 90% of its revenue from the fantasy gaming platform Dream11, wants to expand into other adjacent streams through acquisitions to help protect its revenue and profit.
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“We want to pick up a significant minority stake of at least 26 %, and then work with the founders. And if both parties get along in the next couple of years then we may even look to take a bigger position. Anything we will do will be founder-driven. But they will need to align themselves to Dream Sports and to the overall company,” said Harsh Jain, CEO and co-founder of Dream Sports, in an exclusive chat with ET.
Dream11 is expected to see its revenue decline 30-40% and earnings before interest, depreciation, and tax (Ebitda) shrink about 80% following the introduction of 28% goods and service tax (GST) on the face value of bets placed in casinos, online gaming and horse racing, according to people in the know.
The company, among a few profitable venture-backed new-age firms, posted a net profit of Rs 142.86 crore on revenue from operations of Rs 3,840 crore in fiscal 2022. It has yet to file the financials for FY23.
Jain said that the company will make strategic bets on sports and allied sectors like sports commerce, content, experiences, fitness and healthtech to broaden its revenue pool. It is also bulking up its in-house corporate development team to back startups at growth stages, moving away from its early-stage investing focus via the now-disbanded corporate venture arm, Dream Capital.
“We’ve taken this up with our board members and aligned everyone on this. We made VC-style investments but learnt that the waiting time for startups to scale is very long and the value we can add is actually not so much at this stage,” he said.
The Mumbai-based company rolled back Dream Capital following a failed bet on cricket non-fungible token (NFT) platform Rario, and due to the burden of coughing up a 28% GST going forward and potentially a retrospective tax demand of over Rs 25,000 crore, ET first reported on October 13.
Online gaming companies are liable to pay 28% GST on the full face value of bets placed – meaning the tax is levied on the total amount a user deposits to play games on a platform. This tax is not levied repeatedly on entering every contest. Previously, companies were paying 18% tax on the gross gaming revenue (GGR). GGR is the fee – typically between 8-12% – charged by an online skill gaming platform as service charge to facilitate the participation of players in a game on its platform.
Jain said the idea is to cut cheques in companies at the series-C stage and onwards by taking a minimum stake of over 26%. Raj Rathi, who was previously a part of Dream Capital and had worked as an investment banker at JP Morgan, will spearhead the team. Jain confirmed that Dev Bajaj, who was overseeing Dream Capital, has moved on. ET reported about Bajaj’s departure.
Jain said they are rerouting the investment strategy. “Our earlier investments were financial investments and that’s what we are flipping completely to a larger vision, deal size, and team. We are looking at it as strategic investments,” he said.
In 2019, Dream Sports began re-investing its profits by incubating startups and set up a corporate venture arm two years later with a corpus of $250 million. Since then, it has invested $170 million in fintech platform Dream X and content and commerce platform FanCode, acqui-hired a gaming studio, and taken minority stakes in Fittr, Elevar and SoStronk. None of the investments so far has meaningfully contributed to the company’s revenue.
Betting on new revenue streams
Dream Sports will finance the new set of investments through a combination of cash from its balance sheet and the company’s stocks. It last raised $840 million at a valuation of $8 billion in 2021 when new and existing investors led the financing round, including Falcon Edge, DST Global, D1 Capital, Tiger Global and Redbird Capital. TPG and Footpath Ventures also participated. Jain said as Dream Sports is debt-free, writing large cheques won’t be a strain. It can also rope in its shareholders for big investments, he added.
Of the $170 million deployed so far from Dream Capital, almost 50% was in Rario. “Rario was a big bet for us to see whether Web3 fantasy gaming is going to take off. If our Web2 fantasy business was going to get cannibalised or evolve into Web3 fantasy, we obviously needed to be a big player there… Even though that investment failed, we’re trying to help the community and get management in place. Rario’s chief financial officer, Priyesh Karia, has taken over as the CEO. We are hoping that we can help them restart,” he said.
CXOs as operating partners
Rathi said as part of the new mandate, Dream Sports’ CXOs will act as operating partners for its portfolio companies. It will also double the corporate development team from the existing seven. “The idea is to add more arms and legs and capabilities to the team. We are setting up a portfolio success framework. So, in a typical private equity setup, you’ll see there’s an investing team, and there are operating partners; we are trying to mirror the same structure,” he said.