Covering their bets

Open to the World, Winter 2006

Five years after the dot.com bubble burst, SportsDirect Inc. is growing and firmly in charge of its game plan

by Peter Moreira 

Sitting in his office, it's hard to feel sorry for Paul Lavers when he talks about having his heart broken as a teenager. Lavers is the founder and co-owner of SportsDirect Inc., a thriving, homegrown, dot.com business that provides sports information to gamblers. The company has been almost doubling its revenue annually since Lavers and his boyhood friend Joseph MacDonald started the business in 1995; this year it will rake in about $15 million in sales. Laver's office building, in the Bayers Lake Business Park in suburban Halifax, is expanding to accommodate the galloping growth.

Yet there is one sign that Lavers, 34, hasn't always been so lucky with sports. Above him, behind his desk, there is a colour photo of famed Miami Dolphins quarterback Dan Marino. Lavers, a lifelong Dolphins fan, becomes glum as he reflects on the wintry day in January of 1985 when his hero stumbled in his only Super Bowl appearance. Then 14, Lavers was crushed with the outcome: San Francisco 49ers 38, Miami Dolphins 16. "It broke my heart," he says, but from all appearances it was the only time he came out on the losing end with spectator sports. He has built a successful business, planning his moves carefully, learning from his mistakes, and avoiding the pitfalls of the treacherous world of Internet commerce.

Lavers is hoping that SportsDirect will book a few winning seasons down the road. "We're in a really good space right now," he says. "The online companies have rebounded in the past few years, and we're seeing some really strong growth by developing our publications." Lavers seems so relaxed that it's easy to forget just how vulnerable his line of work is. From the start Lavers and MacDonald have avoided the problems that tossed other dot.coms-many of them better financed than his company-into the cyber slagheap.

The seeds were sown when Lavers and MacDonald created the company a decade ago. Then a college student at Saint Mary's University in Halifax, Lavers identified two trends that he believed could be brought together to build a business. First of all, gambling was becoming more popular after having been confined to select locations such as Las Vegas, Monte Carlo, and Macau for so long. As casinos sprang up in downtown districts around the world, the gambling culture began to grow, and Lavers and MacDonald realized that an increasing number of people were gambling more frequently.

The second trend was the development of the Internet, which in the mid-1990s was moving from an arcane educational tool to a mass-market phenomenon. Lavers and MacDonald reasoned that if they could provide gamblers with the sports-related information they needed to win more often, they would turn a profit, so they started Covers.com.

From the beginning, the business partners avoided two pitfalls that could have sunk their business. First, they never tried to become an online gambling site, one on which people gamble directly. Certainly, you can make a lot of money from these sites; the largest is British-based PartyGaming plc, which has a market capitalization-the total value of all its shares-of $10 billion (U.S.). However, Internet gambling is illegal in the United States, blocked by a law that prohibits making bets over the phone. In Canada there is no legislation stating whether online gambling is legal or not, but Lavers and MacDonald have consciously avoided online gambling for fear of running into problems if the authorities decide to deem it illegal.

Lavers has done only one round of funding for his business, which came from "my dad's back pocket," he says with a laugh. It's true; the initial financing for the company came from Lavers' father, Eric, and ever since the business has been financed entirely from cash flow from its operations. The owners now are Paul and Eric Lavers, MacDonald, and the company's 100-plus employees. That means that the company has no debt, so it doesn't have to meet debt payments, which can be difficult during a lull in business.

What's more, SportsDirect has never brought on venture capital investors. Though VC investment has financed hundreds of successful Internet ventures around the world, the flood of VC money into startups in the late 1990s led to undisciplined growth, excessive hiring and spending, and businesses wandering into sectors they didn't understand and in which they couldn't survive. Five years after the Internet bubble burst, the Lavers team is still in charge of their venture and enjoying strong but realistic growth by focusing on their core business.

In the beginning, the company offered access to information on the big-ticket sports that attract gamblers, including football, baseball, and basketball. Over the past few years it has beefed up these products and has expanded its Halifax office as well as opened ones in Las Vegas and Galway, Ireland. The opening of the Irish office is part of one of the most difficult moves the company has made to date-cracking the gambling-crazy, sports-fanatical European market.

You would think that SportsDirect could waltz into such a market, if it wasn't for one particular problem: the Irish gamble on European sports. Fans of soccer, cricket, and rugby have different cultural habits than North American sports fans, plus they have a different vocabulary and tend to focus on the media buzz surrounding the games rather than studying statistics. "Everyone gambles on his favourite football [soccer] team, but at first we didn't fit into that market," says Lavers. "So we sought out people who do know that market." As a result, the Halifax executives don't get involved in running the European side of the business.

Lavers won't discuss profits, but he expects the business to book revenues of about $15 million, up from $8 million in 2004; he predicts another five years of 70% to 80% annual growth in revenue, which means that SportsDirect may have to outperform its underlying market. Christiansen Capital Advisors, a New Gloucester, Maine-based investment boutique specializing in the online gaming industry, predicts that global Internet gambling revenue in 2005 will reach $12 billion (U.S.), up 46% from 2004. By 2010 it predicts the global total will double again to $24.5 billion (U.S.).

When asked where the growth is going to come from, Lavers is evasive. He said the company plans to start covering sports such as golf, tennis, and rugby and is considering expanding into Germany. One possible expansion plan that Lavers won't discount is acquisitions, although he is realistic about the threats such a move pose. SportsDirect has some experience in acquisition; in January of 2005 it bought Denver, Colo.-based Wagerline.com for $1.2 million in a deal financed completely by existing cash. One of the benefits of that deal was that SportsDirect took over a website and some technology but didn't take on Wagerline's staff.

A bigger acquisition could involve bringing on board a target company's staff; Lavers is cautious about such a move because the new employees would have to fit in with SportsDirect's congenial culture. When asked to state his greatest concern for his business, Lavers replies: "People working well together. Our culture is about people working hard but enjoying their work, so I'm always worried about that."

As well as the risk of merging the cultures of two companies, SportsDirect would face another peril with a major acquisition-it might have to raise capital to finance it, and Lavers is too aware of the potential downsides of the various methods of doing so. For example, if he needed to raise $25 million for an acquisition, the company would probably choose to go with an initial public offering on the Alternative Investment Market (the part of the London Stock Exchange devoted to smaller companies), possibly with a dual listing in Toronto. However, that would mean that SportsDirect would have the burdens of filing regular earnings reports and meeting compliance requirements.

Another option is going with private equity or venture capital investors, which could have the added advantage of strengthening the SportsDirect board, but he feels he would have to ensure that his investors are people with whom he could work. The final option would be mezzanine financing, which would mean SportsDirect would maintain its independence but increase its debt or dividend costs.

Whether or not the company decides to raise capital, Lavers is confident that it will continue to grow organically, and he doesn't lose sleep about the possibility of it losing business from new competition. Every day about 500,000 people visit Sports-Direct websites, and a new competitor would have to be a strong enough brand name to draw clients away. "In terms of competing against us," says Lavers, "you would still have to acquire the eyeballs."