How the DraftKings-Boston love affair may have saved daily fantasy

Massachusetts Attorney General Maura Healey says her decision to form daily fantasy regulations instead of banning it was based upon a strict reading of state law. But it was also made with very clear political realities lurking in the background. AP Photo/Steven Senne

As he arrived behind the lectern, Jason Robins took a moment. The DraftKings co-founder and CEO looked out, surveying the crowd of nearly 2,000 -- full of entrepreneurs, investors and dignitaries -- and allowed his mouth to curl into a half-smile. Just three weeks earlier, he'd been ascendant, riding his billion-dollar daily fantasy startup into the NFL season. But that was before allegations of insider trading at his company had drawn the scrutiny of investigators from the New York attorney general's office and the FBI. All of a sudden, the entire daily fantasy sports industry seemed primed to implode.

"Thank you for inviting me," Robins began, still smiling. "You usually get nervous speaking publicly, but this is actually the most relaxing experience I've had in the last few weeks."

The crowd laughed and cheered, so, shuffling on the Boston Convention & Exhibition Center stage, Robins tried the joke again: "No matter how badly this goes, it's going to be the best thing that's happened to me in the last few weeks."

He was speaking at the final awards ceremony for MassChallenge, a prestigious startup accelerator, that, like DraftKings, is based in Boston. Attendees had flown in from all over the world to watch members of the program pitch their companies, with the best of them splitting $1.5 million in grants. The planned speaker had bowed out at the last minute, so Robins was called in as a replacement -- partly because of DraftKings' prominence, yes, but also because he had a reputation around town for always being willing to help.

Uber co-founder and CEO Travis Kalanick had spoken the year before and, faced with a room full of top young talent and deep-pocketed investors, used his address mainly to evangelize the greatness of Uber. But Robins passed on that opportunity. Instead, in a speech that could have been written by the mayor of Boston or the governor of Massachusetts -- both of whom were in attendance -- Robins talked about Boston.

"One of the things that I've realized is that one of my important drivers, maybe my most important driver, is to build something great in Boston," Robins said. "To be able to create a product that millions and millions of people love -- in Boston. To be able to create jobs, thousands of them, in Boston. And to be able to feel like I made an impact on this city that I love."

Robins, 35, went on to extoll Boston's greatness and potential for another 10 minutes, as the locals in the crowd cheered. The Boston Globe would later recount the event in a story headlined, "DraftKings puts Mass. tech sector back on the map."

Of course, DraftKings' top priority right now is making sure it stays on the map. The company is slogging through a series of state-by-state battles over daily fantasy's legality, with officials in New York, Illinois, Texas, Nevada and beyond targeting it for extinction. When the daily fantasy controversy emerged this past fall, Massachusetts also looked ominous. The state's attorney general, Maura Healey, was elected to a four-year term in 2014 running hard against expanded gambling, supporting a ballot referendum that would have outlawed casinos in the state. As DraftKings' home-state attorney general, she had the power to strike the company a crippling blow.

But Healey chose not to. Instead, on March 25, she filed the country's first set of comprehensive daily fantasy regulations -- a slate of rules that experts agree could well become a template for other states to follow. The regulations cover everything from age limits to protections for small-time players to what is allowed to be said in all of those ads and commercials that blanket the airwaves.

Healey says her decision to form regulations -- which could affect the fortunes and futures of DraftKings and its largest competitor, FanDuel, throughout the country -- was based upon a strict reading of Massachusetts law. But it was also made with very clear political realities lurking in the background. For all its missteps, DraftKings has done one thing masterfully over the years: woo the city of Boston. From the tech whizzes who drive the area's economy to the politicians on Beacon Hill, the company is stocked with allies. New England Patriots owner Robert Kraft -- who recently sponsored a major initiative against youth violence with Healey's office -- is a DraftKings investor. Healey's old boss and mentor, former Massachusetts attorney general Martha Coakley, works as an adviser for DraftKings, pressing the firm's interests all over the country. And Boston Mayor Marty Walsh is so eager to see the business succeed that his chief of staff checks in regularly with Robins to see whether there's anything he can do to help.

In short, if Healey had tried to shut DraftKings down, she would have had to buck virtually the city's entire power structure. But by casting the industry a lifeline instead, the anti-gambling attorney general did something even more intriguing: She made herself a key player in the future of daily fantasy.

WHEN ROBINS AND his co-founders, Matthew Kalish and Paul Liberman, started DraftKings in 2012, none of them envisioned having to tangle with government rule-makers, according to Janet Holian, an early adviser for the company. "We were really focused on how to get a business started, how to raise capital, how to find an office. We weren't thinking along the lines of regulatory," says Holian, who joined DraftKings full time in January as global chief marketing officer.

One thing that did become a priority for the company, though, was reaching out to Boston's growing tech community. Robins and his colleagues quickly became regulars at meet-ups, panels, university events, networking sessions -- you name it. Even if they weren't on a specific panel, there was often someone in the audience representing DraftKings. "If you wanted to do something to connect with fellow entrepreneurs, there's stuff you can do pretty much every week, big and small," says Michael Troiano, the chief marketing officer of a locally based data virtualization company called Actifio and a board member for the New England Venture Capital Association. "Those guys were on a lot of panels."

Scott Bailey, the managing director of MassChallenge, says he observed the same thing: "You see DraftKings everywhere. But not only is it just having a logo up, it's being present and engaged."

Of course, DraftKings had much to gain from being so active. For starters, it made the company popular within Boston's tightly knit tech community, which helped with recruiting employees. Becoming part of the community's fabric also helped cement the impression around town that DraftKings was, above all, a tech company -- not a gambling company or a fantasy company. More Snapchat than Caesars. Holian says, though, that the outreach wasn't part of any calculated plan. "As far as I know, it happened organically," she says. (Robins declined to comment for this story.)

If DraftKings was eager to reach out to its neighbors, Boston was dying for a company like DraftKings. Bostonians are known for carrying chips on their shoulders and, in the city's tech community, there's no bigger chip than its reputation for not being able to develop so-called consumer tech companies -- the type of user-oriented startups like Twitter, Airbnb and Uber that Silicon Valley specializes in.

Though Greater Boston's tech sector remains one of the nation's strongest -- Massachusetts received the second-most venture capital investment in the country last quarter, behind only California -- it's powered by biotech and business infrastructure-focused companies. Those types of enterprises typically require years of research and millions in investment to succeed. Consumer tech startups, on the other hand, often don't need to worry about developing new treatments or technology -- a single key insight can quickly blossom into a billion-dollar unicorn, a la Instagram. A strong consumer tech scene, many believe, could vault Boston's economy to the next level.

But the consumer tech companies that have started in Boston have often left. The most common reason cited? The city's reputation for not having the talent base or money necessary to compete with the Bay Area -- for being home to hidebound investors too averse to making risky bets on outside-the-box projects. DropBox, for instance, started in an MIT dorm before fleeing for California. And Mark Zuckerberg famously started Facebook at Harvard before moving west.

Facebook's departure in 2004 cast such a shadow that, although some in town dismiss it as ancient history, many others haven't quite let go. "Even though we're happily married, we can't stop thinking about the one that got away," says Nicholas Rellas, the co-founder and CEO of Drizly, an alcohol delivery company that started and has remained in Boston. "Moving out of Boston is a very active conversation that young companies have. ... People who are starting companies ask me all the time."

If DraftKings could become a new consumer tech flagship for Boston -- a new Facebook -- the thinking goes, then a whole ecosystem of new companies could grow up around it. The company has not been shy about reminding people that it is, in fact, a consumer tech company -- in Boston. At his MassChallenge speech, Robins declared, "Let's debunk this myth that somehow we can't build great consumer tech in Boston."

"What does Boston not have?" he went on to ask, ticking off all the city's resources. "There's really no reason why Boston should not be the consumer tech hub, and I think we are on our way to being there."

MASSACHUSETTS ATTORNEY GENERAL Maura Healey is a former athlete herself, having captained her basketball team at Harvard and played professionally overseas. She has remained tuned into sports, and says her office actually began looking into daily fantasy's legal status last spring, well before all of the controversy. "I brought together my consumer protection lawyers, gaming lawyers, our antitrust lawyers, our folks from our public protection bureaus and our chief legal counsel to say, 'Let's have a look at this,'" she says. The group first tried to get its arms around what exactly daily fantasy was -- and then worked to figure out how Massachusetts law applied to it.

When Healey publicly declared on Sept. 16 that her office was examining the issue, it had been less than a year since she had been elected as an ardent gambling opponent. On her first day in office, she had testified to the Massachusetts Gaming Commission that she would make gambling enforcement a priority. Her campaign website is still home to a 2014 column she wrote about casinos, in which she said, "I do not believe a modern economy that creates opportunities for every person can be built on gambling."

For DraftKings and New York-based FanDuel, much was at stake. On top of the negative publicity and costs associated with a legal fight, in 2015 Massachusetts was home to some 237,000 daily fantasy players -- the fourth most of any state -- who accounted for nearly $12.4 million in revenue (ninth highest), according to the research firm Eilers & Krejcik Gaming.

While Massachusetts laws never anticipated anything like daily fantasy, they do seem to provide an opening for the industry to be shut down. One statute declares all betting pools -- any situation where money is gathered, a "trial or contest of skill" occurs, and then winners are paid out -- illegal. While other states have wrangled over whether daily fantasy relies on skill or chance, the betting pool statute renders that distinction moot, according to a white paper produced by the Massachusetts Gaming Commission in January. It would have been a relatively easy interpretation, says Gaming Commission Chairman Stephen Crosby, for daily fantasy to be declared illegal. "It sure looks and smells like a betting pool under Massachusetts law," Crosby says.

The Gaming Commission white paper also points to a "lottery statute," which outlaws games dependent on chance -- unless specifically sanctioned -- as another potential liability (the skill vs. chance debate is relevant here). "I happen to think it's gambling. I think it is illegal," says Scott Harshbarger, a former Massachusetts attorney general who has long opposed expanded gambling in the state. "Why are we treating this entrepreneurial effort different than any other gambling enterprise?"

"I think if DraftKings were not based in Boston, we'd be having a totally different conversation." Boston political consultant

But outlawing daily fantasy would have been a fraught decision for Healey. Rellas, the Drizly co-founder, says that if Healey had gone after the industry, there would have been an uproar from the city's tech community. "There was probably going to be a lot of outrage," he says. "It's like seeing a family member in trouble."

The city's political class likely wouldn't have taken it much better. Both Boston Mayor Marty Walsh and Massachusetts Gov. Charlie Baker have made concerted efforts to court the tech sector, which has been a huge growth engine for the area. Since the recession, high tech jobs in Boston have been increasing by an average of 9 percent per year, according to a recent report from the city. At the same time the daily fantasy drama was playing out, both administrations were actively -- and ultimately successfully -- wooing GE to relocate its headquarters from Connecticut to Boston, pitching the city as an innovation hub. "That's our new world. That's what Massachusetts is selling," Harshbarger says. He adds that DraftKings' ability to define itself as a tech company was, "to some extent, ingenious."

"They changed the perception of what the decision was," he says. "The decision was 'Should you make it hard for a startup?' as opposed to 'Should you make it hard for someone to establish gambling?' And that's a different kind of question."

Baker, who declined to comment, has been consistently supportive of DraftKings. And Walsh's chief of staff, Daniel Koh, who previously worked in the tech world as chief of staff for Arianna Huffington at The Huffington Post, says that the mayor's office is committed to helping DraftKings succeed. The company employs 300 people, but has ambitions to grow that number by many multiples. That's one of the reasons Robins has Koh's cellphone number, and the two talk every couple of weeks. "It's not necessarily about an existential threat to his company," Koh says. "It's more just like, 'How can we make you feel welcome, and how can we help grow a fast growing company in Boston?'"

Koh says that DraftKings represents not only an opportunity to slay the city's consumer tech dragon -- "There's a stereotype that it wouldn't be in a place like Boston, but it is" -- but also a chance to grow the overall ecosystem by holding onto all of the talented coders, developers and engineers who might otherwise leave.

Though the mayor's office has no real power over the issue, Koh says the Walsh administration has been in touch with Healey throughout the process. "It would be unfortunate to lose a company to San Francisco solely because there was an attempt by the government to create regulations that would eliminate their opportunity to do business in the state," he says.

On Oct. 7 -- the day after New York Attorney General Eric Schneiderman opened his inquiry into daily fantasy -- Healey declared that the industry is not prohibited by any state or federal laws. "We're not looking to shut them down," she said then. Instead, she vowed to use her power under the state's Consumer Protection Law to craft regulations that would make the games as fair as possible.

Healey elaborated on her thinking to the media a month later: "I think anybody looking at this acknowledges it's a form of gambling. Just because it's gambling doesn't make it illegal. We play the stock market. There are all different ways in which gambling may happen. ... Just as a pragmatic matter, I think it's important to get beyond that. Let's focus on the issues, let's focus on protecting consumers."

As one political consultant put it, echoing a common refrain: "I think if DraftKings were not based in Boston, we'd be having a totally different conversation."

HEALEY, OF COURSE, rejects the notion that political pressure -- or anything besides a strict reading of the law -- affected her judgment that daily fantasy is legal. She says her office considered a range of possibilities, including whether the industry should be outlawed and whether any criminal laws were in play. The final analysis, she says, was simply that the Consumer Protection Law was the most relevant statute. "The job of our office is to look at the facts, look at the law and make the judgments," Healey says.

She declined to explain why the state's betting pool or lottery statutes do not make daily fantasy illegal, as the gaming commission suggested they might. "I'm not going to comment on others' views of laws. I just know what our determination was," she says. "I don't know that anybody has studied this or looked at this as closely as we have."

Once she declared daily fantasy legal in October, Healey's next step was to actually craft the regulations. And so her staff set about meeting with various experts, as well as representatives from DraftKings, other daily fantasy operators and government (Healey says, though, that no one from her office spoke with Kraft or with Coakley, her predecessor who now advises DraftKings). As the process advanced, Koh says that he believes the AG's office was mindful of DraftKings' place in Boston. "We have a great relationship with Attorney General Healey," he says, "and we feel like she understands, instead of just coming down with government rules unilaterally, without really regard to or respect for the kind of business situation that's here, to really think through some thoughtful regulations, not in partnership, obviously, but with respect of a new business in Boston that continues to grow."

Healey rejects that notion, as well. "Whether they're from Massachusetts or Texas or Idaho, it doesn't much matter," she says. "My job is not to play politics. My job is to enforce the law."

As she worked, Healey says that she saw parallels between issues around casinos --- a battle she lost -- and daily fantasy. "I sure have the same concerns about potential problematic addictive behavior," she says. One of her strongest worries was about the susceptibility of young people to problem gaming.

On Nov. 19, Healey issued a draft list of regulations. Among other things, they barred anyone younger than 21 from playing, banned games based on college and high-school sports, and limited players' deposits to $1,000 per month (unless companies verify that individual players can afford greater losses by checking their income and assets). To curb the scourge of top players -- sharks -- winning the vast majority of the prizes, Healey proposed that they be publicly identified with a logo beside their name and more beginners-only pools be set up. Advertisements for daily fantasy companies -- controversial for how easy they make it seem to score big money -- would also have to disclose average net winnings. Observers widely hailed Healey's work. "Those regulations are robust and strike the right balance," says Daniel Wallach, a sports attorney focused on gaming issues at the firm Becker & Poliakoff. "In a perfect world, it will be the template that every state will adopt."

Even Harshbarger says he was impressed. "My initial position that I think it's illegal is not necessarily a damning critique of Maura Healey. She's been a stand-up person on this." he said. "The practical judgment here may well have been to not have a Pyrrhic victory, work hard, and see if you can't have a large influence." Healey, of course, denies this assessment as well -- the only factor, she says, was the law.

DraftKings' immediate response to the draft regulations was measured. It lauded Healey's "thoughtful" approach but expressed "concerns." The company did, however, voluntarily adopt two of Healey's proposals for users everywhere, agreeing to publicly identify top players and ban third-party software designed to let people quickly submit hundreds of lineups.

On Jan.12, Healey's office held a hearing, during which anyone could offer comment on the draft proposals. Griffin Finan, a lawyer for DraftKings, spoke for the company. He opened with a reminder: "As our CEO, Jason Robins, said during October's MassChallenge Start-up Awards, DraftKings loves the opportunity to create products that millions and millions of people love in Boston, and to create jobs, thousands of them, in Boston." Finan then criticized a number of provisions, including the $1,000 deposit limit, the age limit of 21 (not 18), and the college sports ban.

Amid pressure from the NCAA, DraftKings and FanDuel would later drop all of their college-based contests. But Wallach says the age limit is particularly problematic for DraftKings and FanDuel. Eighteen- to 21-year-olds represent a prime demographic for daily fantasy, and having fewer players means smaller pools and less revenue. "The worst-case scenario [for the companies] would be if that age minimum has cascading effects throughout the country," Wallach says. If the $1,000 deposit limit spreads, it would also cut into revenue.

Across the country, states are trying to determine the best course of action on daily fantasy -- about 20 have taken up bills to legalize the industry, but most include only the bare-bones regulations recommended by the Fantasy Sports Trade Association, an industry lobbying group, and are liable to change. Virginia and Indiana are the only states so far that have passed laws (regulations are light in Virginia; Indiana created a new oversight body for the industry, so the jury is still out there). Everywhere else, the situation remains very much in flux. For instance, in California -- where some 359,000 players accounted for $33.2 million in daily fantasy revenue in 2015, both tops in the country, according to Eilers & Krejcik Gaming -- the legislature is considering a bill. Attorney General Kamala Harris may also take up the issue. For any lawmakers or AGs looking to impose more comprehensive rules, the Massachusetts regulations likely will be a top reference.

When Healey finally did file the final version of her regulations three weeks ago, there were small tweaks but no major changes. Companies have until July 1 to adhere to the new rules. State lawmakers could still pass their own bill -- the Massachusetts Gaming Commission pleaded in its white paper for the legislature, which, unlike Healey, has the power to tax, to end any controversy by addressing daily fantasy -- but after years of bruising fights over casinos, they appear unlikely to touch the issue anytime soon. Healey's regulations stand as the law of the land. "We listened. We listened to public comment and we took in public comment, but we didn't change a thing," she says. She adds that her office will keep open an ongoing investigation into the industry and is prepared to take "any action that is appropriate."

As Martha Coakley, the former Massachusetts AG now in the employ of DraftKings, waited for her successor to file the final regulations, she was content that Healey had given the company a fair hearing.

"I think the office has a reputation for being fair and for trying to understand what it is you're regulating," she said. "Here's a new business that said, 'We decided to stay in Massachusetts. You know, we got offers to move to other states, but we want to make our home here.' And I think that both the governor and the attorney general have said, 'Well, we'll hear you out.' And I think they have."