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
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