Few start-ups will have emerged better from the dotcom meltdown than Betfair. Launched in 2000 by Britons Andrew "Bert" Black and Edward Wray, the London-based online betting exchange has since grown into the world's largest. Rather than play house, Betfair matches bettors with odds offered by other users, its whizzy technology handling some 300 wagers a second. The small cut the firm takes from the bettors' winnings these days adds up to big profits: Betfair pocketed $39 million in net earnings last year. And in refusing wagers from the U.S. where online gambling is outlawed Betfair has dodged a recent clampdown on rival Internet operators. Here is their story, as told to TIME's Adam Smith.
Black: I was working as a software contractor for the [U.K.] government, but prior to that I had been initially working for a hedge fund, and in that time I spent a lot of time looking at Internet start-ups. And prior to that I had worked for companies that built trading software for a variety of stock exchanges around the world, so I was very, very familiar with general stock-exchange-type technology. I've always been a punter [bettor], all my adult life, and very, very interested in sport. So this was a reasonably natural area for me to find an idea because I had an awful lot of knowledge in the right places, just through coincidence really.
I wasn't specifically looking for an idea, but I was somewhat dissatisfied with the way that betting was moving to the Internet; it wasn't happening in the way that I would have expected it to happen, or that I would have hoped it was going to happen. You could basically see a lot of bookmakers moving their offerings from the High [Main] Street, and recreating exactly the same offering on the Internet. That just didn't feel right, it wasn't giving any extra value to the punter. It wasn't maximizing the value of the Internet. And I just thought, there's got to be a better way.
The mechanism for making it happen was my original idea. I guess I would say it was a reasonably straight-forward idea, the idea of person to person betting there's a lot of person to person stuff going on and I guess it was fairly easy for anyone to identify that if you could create a person to person business on the web, and you could crack that particular space, you had a big hit on your hands. But I think it was visualizing how it would work, rather than that the space existed, that was the innovative part.
Ed's brother [Jeremy] is a long-time best friend of mine, going back to when I was probably 21, 22. I spoke to [Ed] at one of Jeremy's garden parties in the summer of 1998, and I discussed my views on where I thought Internet betting would go. I'd spoken to a number of people, and I'd said, "I want to do this, one day I'm going to do this." I'm not sure whether I really believed it or not. Ed seemed interested, but I didn't speak to him again on the subject for quite a long time. And then, he sort of called me out of the blue, about nine months later, to say that he was in a position to do something and "was I interested?," and he could still remember the conversation very well so it had obviously made an impression, I guess.
Wray: I remember sitting there having the conversation in the garden. The idea seemed very straightforward, and I came up with lots of ideas why I didn't think it would work, and I said "it won't work because of this," and Bert said "no, no, you do this, you do that" and it appealed. Although, as he said, I was working at JPMorgan at the time, and I didn't really think a lot of it until probably March the following year, when I decided to take a break from JPMorgan.
So I rang Bert up. I was working on a trading floor at the time, so a lot of the mechanics, if you like, made sense to me because that's was what I was dealing with on a trading floor in a slightly different format.
We started work on it, I guess, in July of 1999. We took a little office in Wimbledon, and Bert carried on developing the software, the product, the prototype, and I started putting a business plan together.
You've got to remember, this was the time when, if you didn't have a dotcom idea, there was something wrong with you. It seemed you could raise money for any dotcom idea, and so to be honest I thought it was going to be very straightforward just to go out and raise money. Probably because we thought it would be very easy, it was a bit hit-and-miss the way I put it together. We went to a few institutions at the end of '99, and basically, they said "thanks, but no thanks." We subsequently found out one of the reasons was that Flutter, a company we subsequently bought, had obviously done a very professional job about raising lots of money.
So at the end of 1999, we had a bit of a rethink, polished up the business plan and then I basically got hold of the investment banking bonus calendar, so I worked out when bonuses were announced, and when they were paid, and then we tried to go and see people in between those two dates. Rather than just go to JPMorgan, I went to people in 10 different banks between us. And we tried to get someone on a trading floor in each of those banks, the idea being if we had an investor there, that person would spread the word about their investment.
So we did a friends and family round for a million pounds. I think we'd raised it, sort of, middle of February, 2000 -- just in time, because the market obviously then crashed three or four weeks later. Once we'd got that, that was really when it became serious, certainly for me, in the sense you suddenly had friends and family who'd put, between them, a million pounds on the line, and you suddenly felt a real sense of responsibility and a real sense of urgency to make it work for them.
Black: We launched a product that I was immensely proud of, because it just looked so good. You had all these fancy graphics cricket balls spinning in from different angles, or tennis balls, or footballs, or whatever which, I think, made a difference. It was very interactive, we used a lot of Flash technology, which was unusual at the time.
I look back on it as one of the most exciting periods of my life, I guess, the first six months of Betfair, which were fairly high-octane stuff. We would have some disagreements, we'd shout and scream and that sort of thing I certainly did. But it was incredibly exciting, watching the numbers go up, and watching the business actually happen.
Wray: In those early days we used to count the number of signups, individually almost, and we'd sort of say, "great day today, 11 people opened an account," or whatever.
The first year, from memory, we did a few hundred thousand pounds in commission, and the second year we did six million, and the third year we did 35 million or something. So you know, it grew very, very quickly. But even from two or three months in, I remember thinking that we're on to something here, big time.