Why hi­er­ar­chies ‘suck all the fun out of any or­gan­i­sa­tion’

The on­line gam­bling in­no­va­tor may be keen to float but, he ex­plains to Ed­win Smith, money is not his pri­mary mo­ti­va­tion

The Sunday Telegraph - Money & Business - - Front page - Ja­son Trost,

In most eco­nomic sit­u­a­tions,” says Ja­son Trost, “the big­ger you are, the cheaper you can be.” But the Amer­i­can boss of Lon­don head­quar­tered Smar­kets says that isn’t al­ways the case. He be­lieves his com­pany is an ex­cep­tion to the rule. As an on­line gam­bling ex­change that acts as a mar­ket­place for pun­ters to bet on sport and po­lit­i­cal events, Smar­kets per­forms the same func­tion as its big­ger and more es­tab­lished com­peti­tor, Bet­fair (which merged with book­maker Paddy Power in Fe­bru­ary 2016).

But it charges lower fees; 2pc com­mis­sion on win­ning bets com­pared to Bet­fair’s stan­dard rate of 5pc. The rea­son, ac­cord­ing to Trost, is not be­cause Smar­kets is us­ing in­vestors’ cash to win mar­ket share by of­fer­ing its ser­vices at a loss – even though that tac­tic has been em­ployed in many other tech suc­cess sto­ries, from fel­low UK fin­tech busi­nesses such as Trans­fer­wise and Monzo, to Sil­i­con Val­ley’s Uber. In­stead, Smar­kets claims it uses tech­nol­ogy to be more ef­fi­cient than the com­pe­ti­tion.

“Bet­fair has such high fixed costs,” says Trost, point­ing out that the busi­ness had a head­count of around 2,000 be­fore its merger with Paddy Power. “We can run a lot leaner. We’re es­sen­tially do­ing what Bet­fair does, but with just 100 peo­ple. That’s [a] huge [sav­ing] – like £200m a year in costs, just to keep the lights on.”

By con­trast, Trost says that soft­ware and automation are at the heart of ev­ery­thing Smar­kets does. Its sys­tems not only use in­for­ma­tion pro­vided by sports data com­pa­nies to cre­ate events, mar­kets and con­tracts, they also au­to­mat­i­cally iden­tify what Trost calls “ma­te­rial events”, such as a goal in a foot­ball match, and then re­act ac­cord­ingly. He ad­mits that his com­peti­tors will au­to­mate some pro­cesses, but sus­pects many still “have peo­ple hit­ting red but­tons every time there’s a goal – that type of thing”.

The re­sult of all this ef­fi­ciency, ac­cord­ing to in­de­pen­dently au­dited fig­ures, is an im­pres­sive ra­tio of profit per em­ployee. The com­pany gen­er­ated £25.4m in rev­enue and £13.7m in pre-tax profit in 2016, and fin­ished the year with 78 em­ploy­ees.

That equates to £175,641 in profit per em­ployee; in the same ball­park as the equiv­a­lent fig­ure for Google’s par­ent com­pany Al­pha­bet, but a lit­tle way be­hind an­other en­thu­si­as­tic ex­po­nent of automation, Face­book.

But automation is not the only thing that the gam­bling in­dus­try is cur­rently grap­pling with. Last week, the De­part­ment for Dig­i­tal, Cul­ture, Me­dia and Sport (DCMS) un­veiled a re­view of the in­dus­try that in­cluded plans to re­duce per­mit­ted stakes on fixed-odds bet­ting ter­mi­nals (FOBTS) and also limit gam­bling com­pa­nies’ ad­ver­tis­ing op­por­tu­ni­ties. But Trost ar­gues that gam­bling per se is not the prob­lem: “It’s not the mech­a­nism, it’s the price.”

It would be per­fectly pos­si­ble, he says, for gam­bling com­pa­nies to op­er­ate FOBTS and sports books at a 0pc mar­gin. In that case, all the av­er­age cus­tomer would lose is time. Of course, the com­pany that takes on the risk and of­fers a ser­vice should take a cut, but the 8pc “house edge” that tra­di­tional sports book­ies might ex­pect, or the 10pc mar­gin that he claims is built into many FOBTS, means that “they’re rip­ping cus­tomers off ”. He says this is what the Govern­ment should be fo­cused on. “My big­gest wish would be for the Govern­ment to reg­u­late the take that bet­ting com­pa­nies can make. Or at least make the down­sides more ob­vi­ous – like a phar­ma­ceu­ti­cal or cig­a­rette ad­vert.

Prob­a­bly the mid­dle ground would be to man­date that gam­bling op­er­a­tors have to pub­lish what the house edge is, so cus­tomers know. That’s much more im­por­tant than just reg­u­lat­ing the stake.

Since Smar­kets opened an of­fice in LA this year, Trost has been spend­ing most of his time there, liv­ing with his wife and five-month-old daugh­ter and com­ing back to the UK every six weeks. He was born in North Carolina in 1980 and had what he de­scribes as a “fairly stan­dard mid­dle-class up­bring­ing”. His mother was a nurse, his fa­ther an ex­ec­u­tive at phar­ma­ceu­ti­cal gi­ant Pfizer, as well as an early adopter of per­sonal com­put­ers. The fam­ily moved to Iowa and Trost grew up play­ing “pretty much every sport”, al­though he was par­tic­u­larly good at wrestling. He re­mem­bers want­ing to be an en­tre­pre­neur when he was as young as 10. By the time he at­tended North­west­ern Univer­sity in Chicago, Trost was pur­su­ing medicine. But he switched to com­puter sci­ence and started a busi­ness be­fore grad­u­a­tion. Desci­pher, a soft­ware com­pany that en­abled users to per­form self­di­ag­no­sis us­ing their lab­o­ra­tory test re­sults, made Trost “a lit­tle bit of money” when it was sold. “But it wasn’t life-chang­ing.”

There fol­lowed a short pe­riod as an eq­ui­ties trader, be­fore he joined the global as­set man­age­ment di­vi­sion of UBS, de­sign­ing soft­ware for trad­ing. “I didn’t en­joy it for a lot of the rea­sons that peo­ple don’t like work­ing for big com­pa­nies,” he says. But it did at least help to shape the or­gan­i­sa­tional struc­ture of Smar­kets when he came to the UK and launched the com­pany in 2008 (sports bet­ting is largely il­le­gal in the US).

“Hi­er­ar­chies kind of suck the fun out of an or­gan­i­sa­tion,” he says. “The other thing is that, even if a mid-level per­son has a great idea for a new prod­uct, it won’t hap­pen in a tra­di­tional com­pany un­less one of the top four or five peo­ple has come up with it.”

He hopes the com­pany will even­tu­ally branch out by of­fer­ing fin­tech prod­ucts that aren’t re­lated to gam­bling. But, aside from men­tion­ing the idea of a bit­coin ex­change in pass­ing, he won’t go into any more de­tail. He is, how­ever, un­am­bigu­ous about his in­ten­tion for the com­pany to go pub­lic one day. He adds that he would be tempted to fol­low the ex­am­ple of Snap Inc, the par­ent of Snapchat, de­spite the con­tro­versy caused by its founders’ de­ci­sion to is­sue non-vot­ing shares at its IPO. “Ba­si­cally Evan [Spiegel] and Bobby [Mur­phy] con­trol their com­pany,” says Trost. “I wouldn’t be that ag­gres­sive, but I think that the founder – in this case, me – should stay in con­trol.”

Men­tion­ing his com­pany in the same breath as Snapchat, which was val­ued at $28bn (£21bn) when it went pub­lic, might hint at hubris but it also sug­gests Trost’s out­look has changed some­what since last sum­mer, when he told a jour­nal­ist that he’d ac­cept “£20m and a steak din­ner” for the busi­ness. “I’m in­cred­i­bly lucky to have sur­vived the lean start-up years, to get Smar­kets to the point where it’s be­yond any kind of ac­qui­si­tion of­fer.”

The big­ger the com­pany gets, he says, the less he thinks about the money: “I lit­er­ally want to take as much mar­gin away from sports bet­ting op­er­a­tors as pos­si­ble and give it back to cus­tomers. That kind of stuff mo­ti­vates me way more than the pos­si­bil­ity of a nine-fig­ure cheque at some point. But I’d still take a steak din­ner any­way.”

‘I lit­er­ally want to take as much mar­gin away from the sports bet­ting op­er­a­tors as pos­si­ble’

As the chief ex­ec­u­tive of Smar­kets, Ja­son Trost, top, has shaken up the way pun­ters bet on sports such as horse rac­ing CV 1980 Born in North Carolina 2001 Co-founds Desci­pher, a soft­ware com­pany that en­ables users to self-di­ag­nose lab test re­sults 2003 Grad­u­ates from North­west­ern Univer­sity, Chicago, ma­jor­ing in com­puter sci­ence

2005 Joins UBS

2008 Co-founds Smar­kets

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