Episode Description
Tom Waterhouse is an experienced investor and businessman. He formed Waterhouse VC in 2019 and I had the pleasure of speaking to him in depth about his experience and interesting career.
In this episode, Tom discussed the transformative changes in the betting industry, emphasising the importance of adapting to new technologies and learning from mentors.
Tom shares insights from his early start in business at age 18, his rapid ascent to becoming Australia’s top on-course bookmaker, and his masterful pivot to online bookmaking. This episode is packed with lessons on leveraging mentorship, adapting to market changes, and staying ahead in a competitive industry.
About Tom
Tom Waterhouse formed Waterhouse VC in August 2019 and is the Chief Investment Officer of the fund. Tom is an experienced investor and businessman, having launched the fund to leverage his 20+ years of industry experience in gaming and wagering. The Waterhouse family has been involved in wagering and related industries for over 100 years, and the family’s experience, contacts and capital give it access to deals in the market that most funds would not appreciate or have access to.
Transcript
Note: This has been automatically transcribed so is likely to have errors! It may however help you navigate the points of interest.
Mike: 00:10
Welcome to the troubleshooters podcast with me your host Mike McGrath. Now today’s guests may well be familiar to many of you. Tom Woods house is the son of the famous trainer, gay Waterhouse and famous bookie and father, Robby Waterhouse. And if that wasn’t enough, his grandfather Bill Waterhouse was one of the biggest bookies in the world in the 1970s. Now whatever you think of gambling, there’s no denying that people love a flutter in 2023 horse and sports betting in Australia was worth six and a half billion dollars employing 6500 people. In my view, Tom Waterhouse is a force of nature at age 42. Birthday to day 22 years and still going strong in business toma pitta, Mises they have a good attitude so essential to success in a free market. So take a listen as we unpack Tom’s incredible journey and chat about his new venture. The Waterhouse VC. Good morning, Tom Waterhouse. Great to have you come in and join us today. Thank you. Thank you. It’s great to be here. So we were just talking before we started that you and I were that we both started out in business fairly early. I think you started at age 21 or 22.
Tom Waterhouse 01:20
Yeah look, I started. Actually my dad asked me when I was first year uni so I must have been 18 or 19 is that right to go and work at the track and I worked for him and and he was he’s a great dad in that about basically just threw me always in the deep end. So I think I’ve ran his stand for him when he went away when he was 19 when I was 19. And then I started being a bogey bogey at the dogs soon thereafter. And then by 2021 I was a bookie at the races, which was there was a lot of fun.
Mike: 01:49
I know originally you were thinking about finance, but you The story goes that you got to the track and within 20 minutes, you’d realize you wanted to do it.
Tom Waterhouse 01:57
Yeah look, I still finished it. I did commerce degree. It’s in the union and majored in finance and I yeah, I loved doing that. But the racing industry and and bookmaking, there was just so much money there back then 20 something years ago, and it was just full of energy and excitement. And also I had a big advantage in that my grandfather was biggest book in the world and the 60s and 70s. My dad, he ran a professional betting syndicates since 1980. And was leading bookmakers. So I had a blueprint of what to do. And you’re very lucky when you’re young, and you have a mentor or a couple of mentors that can say, Look, this is how you do it. Because then it’s easy. You just follow what they say.
Mike: 02:37
It’s a great point that and actually I was gonna ask you what was it like our famous parents and a famous grandparents like that? Well, you know, was it all advantage? or was there some disadvantages to that?
Tom Waterhouse 02:48
You don’t even think about it, because that’s what all you know. Yeah. But now looking back on it, I think what an advantage, you know, like, what an amazing thing to be able to go into an industry that they have such a good understanding of such an exciting industry. Yeah, it’s a huge, like, I’ve been very, I’ve been blessed, you know, in terms of, and there’s always, like slight disadvantages to your advantages. But we’re not there’s not one second that I don’t think how lucky I was, you know. Excellent.
Mike: 03:21
And look, just on that point, then. I mean, we’re not talking just about you becoming a licensed bookmaker at age 20. We’re talking about you then became by age 28, the largest and most profitable course bookie in Australia. I mean, that’s phenomenal. Rise. Really?
Tom Waterhouse 03:37
Yeah. Look at the we’re sorry, there are a lot of things. But there are probably three main things obviously, my grandfather was, I had him as a mentor. And we went in in a partnership partnership when I was like 22, or something like that. So I valuable, great learning from him. And then my dad was a form genius. So he was had this amazing like, form database. So I had his form. And all the learnings I never stopped asking my dad, I still don’t stop asking questions that ask him questions. How do I do this? What should I do here. And then also, the internet took off. And I moved to Melbourne where you could offer different products than what you could in New South Wales. And I had the advantage of being able to access Betfair and see what the market was doing is like having access to the the ticker on the stock market. And a lot of the bookies hadn’t picked up on having a computer and stuff. So had big advantages. And also the name the brand the family. Yeah. But yeah, I thought I was gonna be doing that the rest of my life and and it was a highly profitable, large business. But everything changed into 2008/ 2009 with a change of regulation.
Mike: 04:40
Yeah. And then you had to pivot master pivot.
Tom Waterhouse 04:43
Yeah, because we were turning over, I think, held $6 million on Derby Day in 2008. My goodness, and like the favorite in the day, we would have got half a million dollars in cash out of it as a standard and the next year was lucky to get 5000 out of it. And I thought well, the game’s up. I have to move online. Okay. And so, yeah, we just launched waterhouse.com in 2009, proper launch in 2010. And within 18 months, we had a quarter of a million customers, which was just phenomenal growth. And but to put it in perspective, we turned over more our turnover more as an on course, booking in 2008 than Tom waterhouse.com turned over as an online booking before we sold. Yeah, okay. So on course, bookmaking was a big business. Yeah. Which is easy to forget, because when you go to the races, now, there’s no one there. But it’s only 1520 years ago that it was all there.
Mike: 04:51
Founding Tomwaterhouse.com, that movement online, you are having to figure that out yourself I presumed, um, it was effectively a digital revolution.
Tom Waterhouse 05:42
Yeah, it was. It was, it was an amazing learning experience, because I barely used email back in 2008. Right, I know that. And that’s for now, but I barely used email. iPhone only came out in 2008. That’s right, you know, so I think I had a knock here before then or something. So we shifted to online, and it was a big change. But you really look at what mentors and what’s going well, and a few of the other bookies had moved online, and their businesses when were booming, so the likes of sporting beds, sports bed, coal tidy alna, Skander in Melbourne that they were all moving online. And so you could go well, what are they doing? That looks like it’s pretty good. How do I sort of use that as a blueprint to copy and and to basically go in that in that space, and then find your own little path within it? And but yeah, that was a huge learning experience. And we, there was so much we didn’t know so many mistakes we made. But those mistakes and learning it ultimately led to us selling to William Hill and then running William Hill’s business in Australia.
Mike: 06:47
You were a part of a roll up effectively. Yeah. And but then they got you to become the managing director. So they obviously saw something in you because you weren’t the biggest part of that roller.
Tom Waterhouse 06:56
No we were the smallest. They paid 670 million for sportingbet and center bet. And we were a small add on. But they asked me to run that business because we had to learn everything. In terms of starting a digital marketing business. We went from 100, from three people to 100 plus people. And when you’re starting something out from scratch, you have to learn the IT providers, the CRM, the trading function, the digital marketing function, the advertising, the branding. And so if you bring three businesses together, if you’ve got someone that worked 10 years, 15 years, there might be the best marketeer of all time, but how do they know how it connects into trading or in finance or into all the other functions? And they basically said, Well, you’ve just done that. Come and run it.
Mike: 07:39
Do it again. Yeah. And did you feel prepared for that? I mean, did you feel that everything you’ve done prior to that was leading you
Tom Waterhouse 07:46
If you asked me in 2013 or 2014 I would have said oh I’mcompletely prepared, but looking back on it definitely not.
Mike: 07:53
You know, hindsight is easy, but what we may you have done differently, what key assumption did you make you guys make, which in fact turned out not to be the case.
Tom Waterhouse 08:02
So you assume that lines, the p&l, the you can drive efficiencies by just moving cost lines, right? And, and the if you can do things to turbocharge revenue, that that revenue there won’t be competitive change or change in regulation so we got rid of a lot of people to try and take the cost down. But those people that helped build what we him he’ll pay $670 million for and even though it was hard to maybe say well how do they directly contribute to getting that revenue? There were some key parts of that business at William Hill okay or we got rid of yeah, that actually impacted turnover significantly interest and then there was regular regulatory change we tried to grow in play through a product called Click to Call. William Hill bought a large credit business that didn’t go as well with increasing taxes, it was lower margin but no there were there were several mistakes and I I had never I’d come from being on course bookie yeah to online startup betting business, just with my family. You know, there’s no like proper reporting board and, and managing. We had 500 People working out where you mill Australian business, multiple offices in Tel Aviv, and Philippines, Australia. And we had 170 developers, while I hadn’t run a business going and reporting to a board in the UK. And so I was very lucky. A man called Steve Thomas who ran Microsoft in Australia ran apple in Australia, nine MSN, so reported to Ballmer, like Kerry pack, rent Zero in New Zealand, on the border, David Jones, Telstra. And he came in and mentored me and basically said, Look, this is how you run a larger organization. This is how you your priorities and objectives, how you cascade that down to a bigger, wider organization. And he was instrumental in making me get comfort in running an organization that size and he was, he was tremendous. He was really, really helpful.
Mike: 09:52
So Tom, are you good at taking input? I mean, you mentioned your granddad, and it’s amazing how much influence our parents and grandparents can have on us, but you were very willing and out, you seem like a willing participant in that journey of that important journey. But it seems like the same again with Steve here that you were going, okay. Tell me what’s going on. It was a lot more polite conversation with Steve than it was with my grandfather. It’s easy now. Do you think the learnings were slow because of that?
Tom Waterhouse 10:21
It’s funny, my grandfather and I, who I just loved him so much. He was such a great man. But we used to have nonstop yelling matches on the way back from the races. And he’d be like, You absolute idiot, you imbecile, you’ve got no idea. And, but that was great. It’s one thing to, to love, a grandparent or a relative. But when it’s all love, and there’s no Yeah, unless you don’t see at all. And I feel that I loved growing up with him, because he was such a friendly, cuddly grandfather always enjoyed spending time with him. But when I got to see the raw, hard side of him, I loved him way more, because he saw everything. And he was tough. He was really tough and used to give it to me, like in terms of telling me what I did wrong.
Mike: 11:08
But I mean, in a way, it’s gold, because business is tough, and the free markets gonna find you out. And you know, that took a long time for me to develop that edge. Really? I think a mentor can really help with that. You need a blueprint. So you’re getting that input from Steve, I know you were there for was it three years as MD there?
Tom Waterhouse 11:26
Yes. So from 2014-2018.
Mike: 11:29
Tell us what happened then.
Tom Waterhouse 11:31
So there was again, tax and regulation became tougher in Australia. So regulated is really regulated.
Mike: 11:38
The regulatory area just kind of adds to the complexity.
Tom Waterhouse 11:42
I agree. It’s every time you make any sort of decent profit there. It’s just a red, red flag life flag to the regulator tax some more. And so there was further out a call it consolidation 2018 and William Hill store sold to the roll up between crown bed, bed easy PokerStars and flutter. And so I had, I had no job after that, because basically, it was consolidated into larger NC. And they had a two year non compete. Yeah. And I thought, well, what, what am I going to do? And to your point, I realized that B to C was tough. And the real opportunity, it’s a trillion dollar industry, the gambling industry, the real opportunity in that sector was in the supply the picks and shovels. So b2b, and I basically said to her, we had 170 developers in Sydney, another 100, in the Philippines, I said to a handful of them, I said, look, let’s go around the world and analyze the tech, the suppliers, and see if we can invest in them. So we started Waterhouse, VC, just on five years ago now. And and that was the era we knew that there was an opportunity in the space where they were making all the money with the supply side. Because what had happened, everything shifted to digital marketing. And the way that the large operators were differentiating was on product differentiation, so on user experience, so if you had a better user experience like to bid with mates, or cash out functionality, or a voice betting functionality, or you had more odds or more markets, that was a point of difference to not only bring customers in, but bring make those customers more sticky. Yeah, increased player value, lifetime retention. And that was where the large operators were differentiating so that that was the beginning of Waterhouse VC.
Mike: 13:26
Yes. You also started listed reserve, right?
Tom Waterhouse 13:30
So the CFO of William Hill was on from 2014, basically saying the world’s changed, bitcoins taken off and we you’ve got to get into Bitcoin and we, we William Hill needed to increase revenue, obviously, when I was running that business, and decrease cost. And so we look for lower cost places. So we build up the Philippines, from one person to a couple of 100 in terms of the female Australia business, and but we looked at Taiwan in China and India, a whole bunch of places and we actually came across in 2014 2015 2016, a whole bunch of operators that were crypto betting operators turning over more than we am here. We’re right globally, and now we’re a footsie 100 company. So we so realized he was he was actually right, CFO and when it finished he was going well where am I going to go and he ran listed reserve and so my the family invested in that business, along with another one of my close friends called men that are recoiling, who runs no brand, yet another venture capital firm, and that list reserve is has been growing great. I don’t have any active involvement except I’m a big cheerleader of the ex CFO at William Hill Australia and and what they’ve been able to do.
Mike: 14:48
And what are your thoughts on Bitcoin? Because, I mean, it seems like it’s here to stay. And it seems like it’s beginning to change the game around an alternative global way of paying for things, but it’s also pretty volatile and the powers that be don’t like it at all, do they?
Tom Waterhouse 15:05
I don’t know. It’s not our area of focus, you know. So in terms of, I’ve seen its amazing rise Yeah. 2014 or whatever. And, and what’s been eye opening for me is that a lot of these large companies are putting on their balance sheet and they’ve allowed these ETFs. And then you seem like a sovereign nation like El Salvador take it up. But that’s just reading the news. I have no particular insight at that I, I just focus on one industry and one little sub part of the industry being the suppliers. I like to I read about it, but the same way as I like to read about Apple and Microsoft.
Mike: 15:43
It’s certainly difficult to know where where that’s going to be or that’s going to go but I suppose a lot of these larger firms are having a bit of a you know, they’re having a bit of an each way bet and they’ve got to be, they’ve got to be on it in some way, shape or form.
Tom Waterhouse 15:55
The area that I find interesting in terms of Bitcoin or the crypto space and that not necessarily Bitcoin, but it might be like USVT, or like those stable coins is that you saw what an amazing job the coats family, Denise Coates and the family did. If you said in 2000, could they go and surpass William Hill, bet tread, Victor Chandler Yeah, no, you just go. There’s just impossible. They had two shops. And they realized that the global betting space was far bigger than just UK. Yeah. And they innovated and improve the in play product, the user experience. And they just blew them away and done such an amazing job. I think she’s the largest taxpayer in the UK. She’s got it. She’s a dame or something amazing. Like, it’s just such a success story. And, and so incredible for the gambling industry to have someone achieve so much a genuine disruption and also give back like now in Stoke football team, they’ve just done an amazing job. But what’s happened in the last five years, you’ve seen this next round of innovators. So the likes of you’ve probably seen in the BRW Rich List, like the the likes of Ed Craven, or Tim Heath with sports bet. They’ve innovated and changed the game. So they’ve used crypto, and this new wave of technology and customer interface and customer direction, and marketing. And they’re probably the biggest betting companies in the world@stake.com is just massive. And it’s 20 years since we last saw that big change. And so for me, that’s very interesting. But as an investment point of view, I just want to stick to my knitting.
Mike: 17:37
You’ve finished up effectively, the stars group across William Hill, you’ve got a two year non compete. And so you move into your pivot into Waterhouse VC which was effectively your own fund.
Tom Waterhouse 17:47
We knew that there was opportunity in the trillion dollar market was the supplier side. And then we our first deal, we put $600,000 into a odds provider of racing odds have provided the integrity to the racing bodies. And then it had provided the odds to the bookmakers. And thought, well, this might be an interesting product because it may expand into further jurisdictions outside Australia, US is opening up. And so we put 600,000 into that and we’re able to negotiate to buy an option in it for 19.9%. That deal went well for us. And we went actually, let’s not concentrate on investing, let’s concentrate on options in suppliers. And then there was lack of timing in the the interest rate environment, interest rates increased. And a lot of the business we were looking at was struggling to then get funding. So the ability for us to buy options in those businesses was much easier than it was in 2020 2021.
Mike: 18:41
So just for the uninitiated. So effectively, what you’re doing is you’re and you’ve, you’ve now gone global. So you’ve now opened up the world in terms of where you might find these assets. These, you know, digital, innovative, b2b. You mentioned picks and shovels, right? So you’re, you’re looking for these business, you find one you like the look off. Yep. And you open up a dialog and you effectively rather than say you price the business, you might call that a strike price you sell or we think your business’s worth X. Yep. And we’d like to buy options. Based on that. We can exercise over the next one or two years.
Tom Waterhouse 19:22
Three years. We want three year option. We want the time value of the option.
Mike: 19:26
And that’s private, and listed companies. So if it’s a private company, to how are you valuing that again, in three years, I mean, it’s a dividend play, is it?
Tom Waterhouse 19:35
Some of them are dividends, some of them were sold an option. So I’ll give you I’ll give you an example of how we look for businesses. And then I’ll give you an example of how we’ve sold an option. So for instance, we thought that racy may taught take off in the US we thought that esports may take off in the US because they need product in the US they’ve only got basketball, NFL, baseball, they haven’t got products all year round. And they’ve got plenty of gaps. It’s not like racing, that’s wall to wall here. And so we thought maybe eSports is a filler product. And so we looked at all of the different eSports providers out there, spoke to many of them spoke to a lot of the companies that were using this data supplier. We then went actually, we think the best one is this one company called Odin in, based in Prague, we then had conversations with them spoke with the people that they were dealing with, what’s their uptime? What’s his service level ability? What contracts do they have to have provide the data, we then went and visited their business in Prague spoke to their team looked at their models then spoke to the people that they had agreements to provide the data with? And then when actually will this is an interesting space? Can we negotiate to buy an option in that business? Now, we’ve never executed that option, we haven’t gone into the money with that option.
Mike: 20:46
Just staying on that right? The business in Prague, what’s in it for them? I’m a vendor, I’ve got a business, I’ve done pretty well. I may or may not need cash. So you’re looking for somebody that can scale that can be the next big thing. What’s in it for me to do a strike price today? You given me a premium for that?
Tom Waterhouse 21:05
We’re paying for the option? Yeah. And then we’re also they’re getting to evaluation. They’re like, actually, we’d be very happy if we got to that in three years. Okay. But by having us on board, we’ve got some of the many of the leading people in the industry in our fund.
Mike: 21:17
So you’re bringing human capital, you bring in some expertise.
Tom Waterhouse 21:21
Yeah we don’t have any active involvement. I don’t take any boards. We don’t exec non executive, no management, no. Like, like, we don’t provide any any work.
Mike: 21:30
You don’t go on the board? We don’t do anything. But there’s a big thing for people in the industry, there are no fun though, actually, they have looked at this business, we probably go in to do an option lists. One and 100 businesses we would do an option in and we do a lot of work before we do the option. So for instance, there was a Canadian business that will listing on the Canadian stock exchange, they want to give a sell us a 19.9% option. Our CTO, who’s head engineer at Qantas, William Hill, been in the industry for a long, long time. Ultra experienced, he said, Look, I don’t think the tech is can scale enough. I don’t mean should have the option. I’m not technical. I’m like, Oh, it sounds exciting. He said no don’t do it.
Tom Waterhouse 22:12
We didn’t do the deal that, thankfully, we didn’t do that deal. A business out of Vietnam, emailed me on Christmas Eve, a year and six months ago, and said, look, we’ve got this tech stack, we run out of money, we did a token sale and to 2018. We need funding, we need help, would you be open to doing a deal with our business or whatever. I’m like, Ah, I don’t know this business. Never heard of them. Based in Vietnam. I don’t know about those these developers token sale fleeted on to the CTO, he had a call with their head engineer, looked at their code and went actually it’s very impressive, right? We bought an option in that and then was able to get it. They got investment a few weeks off the back of us doing an option with Okay, and then we sold the option never convert the option sold the option for 23 times our option value within five months. Right. So that’s a success story. There’s been plenty of duds?
Mike: 23:01
Yeah sure. So whatever calculation you’ve used to come up with the strike price for the option, you’d use a similar valuation in two or three years time and decide what you want to do. Or if it’s a private company, if it’s a listed company has no problem.
Tom Waterhouse 23:14
Or we try and find a buyer that needs we’re looking for businesses that providing great service that we know there’s a need. So we basically spend all our time thinking like we’re an operator, what does an operator need.
Mike: 23:26
So you’re really figuring out who’s going to buy it
Tom Waterhouse 23:28
Correct. This morning before this meeting, we had an amazing call with a business that changed the user experience. Yeah. If you like betting on NBA when you go to your betting sites, website, it’s all NBA stuff with offers around the NBA. It’s not the new usual user experience. Great Business, great tech, very good team. But I’m thinking my head where does that you end up in three years or two years? You know, that’s, that’s the thoughts going through my head not it’s thinking as an operator, will there be a need? And will it be easy to integrate? Because what I saw it we Emil, we had 500 products in the roadmap. Once you were in the William Hill ecosystem, you had very sticky revenue, but to get in the ecosystem was really hard. So I’m thinking all the time can it get into the ecosystem?
Mike: 24:20
So you’re really bringing this 15 years of niche expertise in a way to the investment side of the equation correct and say okay, and and it’s it’s hard yak I mean, you look at 100 you might you might end up getting involved in one.
Tom Waterhouse 24:34
It’s so much travel because for us the meeting place to meet all the businesses is wherever the global gambling conferences are on so like, just in these first few months the Euro London our ice gambling conference, SBC in Rio. I gaming next in New York, SBC New Jersey. Portfolio Managers just got back from Malta from the big conference there. Then you’ve got Amsterdam, then you’ve got of Portugal, it just is always but we do back to back meetings for days. And there’s nothing like having face to face where you can say, Okay, well, is this what you’re trying to achieve? Why are you trying to do that, and also your contact base, and also you getting such a better understanding of the industry. And so we just want to focus on one industry. It’s very, it’s much easy for an analyst to understand the value of tap Call, or entertain or ceases, it’s very hard for someone not in the industry to understand whether a data supplier or voice spreading solution or platform like is, what value is it, you know, they’re currently generating very little revenue. Is it worth lots, little?
Mike: 25:46
It’s one of the hardest parts of I mean, we’ve really only learned in the last 20 years that a business with no, sometimes no revenue, but definitely no earnings can be really valuable. Right. I mean, that’s, that’s a new phenomenon. Really, and and now we’re starting to have to price IP. And that’s not easy to price, because we’re, you know, we’re we’re trying to look at utilization and utility, and we’re going over what timeframe and how much money doesn’t need it. What else is going to change in the meantime, so it’s high risk game, but you have a high risk tolerance. I mean, do you enjoy it Because we’re buying options at what we think is really good value.
Tom Waterhouse 26:28
So we’re basically buying. We’re betting 100 to one shots. Yeah. And we’re thinking we’re getting much better odds.
Mike: 26:35
It’s very clever. So you effectively, your risk is your premium? Correct. And, and the time value of money.
Tom Waterhouse 26:42
Correct and yeah, and our time. And so there’s three elements to the fund. That’s the first pillar. Yeah. And that’s how we’ve, we’re 31 times investors money.
Mike: 26:53
It’s incredible I mean, I was going to ask you, is that sustainable?
Tom Waterhouse 26:57
Well, I’ll run you through the three pillars. And so 31 times MBS has money, we’ve compounded 100% per annum. Are we going to compound 100%? per annum as we grow? Yeah, it’s a much harder task. We will close our fund, we plan to close it off under 500 million, okay, because we think to get to have a good chance of getting above market return is much harder. Probably at 70 million now. So yeah. So we do with pillar one, we’re finding options in a core area that we understand really well, when we’ve had several option deals come off. But we’ve found a sweet spot in. One of our investors said, Look, our son works at a large betting company. There’s this, everyone’s talking about this young guy, he’s unbeatable in tennis, you should go and meet him. So I went I met the guy, he was ultra impressive. We made a lot of groups that think that they can win betting and they’re either had a period of positive variance, either, like they have some small edge, but it’s not sustainable. Or they’re just deluded. You know, like it’s and it’s very hard to win betting because if you bet on the Sydney Swans on the weekend, you can win on that match. But the average bet is betting regularly, and there’s margin against them. So it’s very hard to win when you bet regularly. But there’s a few groups around the world that are hugely successful. So in the UK, Tony Blum who owns Brighton Football Club, probably the world’s best secret soccer punter, David Walsh, joins MOBA Museum and Joko, probably the world’s best racing Syndicate, they win huge amounts of money because they’re able to put into their statistical models 1000s of factors that can predict the true probability of that event than the bookmakers can. So you can win like Jim Simmons with raisins, topologies that want huge amounts through their data models, or on the stock market, but it’s hard and you have to put in a lot of work. And so when we met this young guy were very skeptical, but I spoke to him, got one of my dad’s analysts to speak with him. He used to work with Tony bloom, I called Tony bloom, I said, Look, is he is this guy good. He’s like, he’s very good. We’re very sad to see him leave. We optioned up his business. And he tripled turnover for three years on a row, we converted the optional one times last year’s earnings. And pillar two of our strategy. We have now optioned up and converted multiple betting syndicates, we have a profit share. So not the downside risk of these syndicates, we have a profit share in them. But that’s pillar two of our strategy. So we have hopefully, great capital growth in pillar one, finding and negotiating options and then converting them or selling them. Pillar two, we’ve optioned up many betting syndicates.
Mike: 29:44
So you said there’s sort of 10 or 12 around the world that are successful, right? So there’s limited options to do that I presume
Tom Waterhouse 29:52
The only time we see great value is there’s probably three times when they’re very young, and they don’t know how to set up an organisation, we’ve helped him scale from himself to 23 analysts. He’s got global distribution. He’s a much bigger operation now. Now, he may have done that completely on his own without us. But there’s great to have someone investing alongside the business that has been in the industry already. 20 plus years. He’s just starting out.
Mike: 30:19
Your option premium gives him some cash, right? Correct. Okay. It also gives us some credibility, and they can perhaps leverage that and going borrow some money. Yep. Is that really what goes money?
Tom Waterhouse 30:30
Yeah. Just even the conversation of who’s the best HR Recruiter who’s the best tech company? Third party tech? What are the best banking solutions? What are the best, like, we live and breathe it.
Mike: 30:41
I presume you’re looking for the guys who are emerging really, that’s what you’re looking for.
Tom Waterhouse 30:45
In the very beginning, professional betting group that’s facing regulatory change, changing risk restrictions and regulations, right, and wants to go into a new market, or a group that’s much older and wants to retire. Okay, so the other three areas of that we’ve now optioned up three betting syndicates converted to. So that’s pillar two of the strategy. So pillar one’s given us all our uplift. That’s how the investors got 31 times. Pillar two is a dividend play. We’re a fixed unit trusts, we have to distribute or realize gains, and dividends each year. So and then what we found is our investors, because they like what we’re doing, yes, put money back into the fund. So we sit in cash. And at the beginning, we were thinking well do we put it in term deposits in bonds, and the families for probably 10 years as followed a 13 F strategy. So we look at the 16, best performing long term funds that have beaten the s&p over 30 years. And each quarter when they released their 13 F filing, which has all their positions, the portfolio weighting how much each position what they bought and sold, we have an analyst here, and then also sees going through the 13 efiling. Going for and applying our proprietary filters to their stock picks. So we have to go into only positions that those 16 funds have got a greater than 1% portfolio positioning, trading under 20 times pay, I’ve got greater than 20% revenue growth for five years in a row, and very little debt. And so it normally narrows down to around 15 positions with an evenly weighed against those 15 positions. We’ve outperformed the s&p since we started doing by 7.9%. Our average P E ratio is 13 times s&p, I think starting at 2223 times our median growth rate is 27%. The median growth rate of the s&p is 18. A Sharpe ratio is 1.07. We’re not trying to beat the s&p, we’re not doing anything very smart with that third pillar, but we just say to investors, look, we’re not trying to for the sake deploy money for the sake of deploy money. Your money sits here and pillar three, the family are happy to be in this equity strategy. It may not be the best world’s best equity strategy them you might find better. Yeah, but it’s a solid equity strategy. But we’re going to be hard to beat against equity strategy, because on top of that equity strategy, we get a dividend play out of the professional betting syndicates, and we get capital growth in the options come out.
Mike: 33:14
Yeah, this is a wholesale fund presumably. You know, what, what’s the kind of minimum to come and get involved with you?
Tom Waterhouse 33:22
So we had a minimum of million for the first four and a half years. And now it’s just you have to be a sophisticated wholesale investor.
Mike: 33:29
So and so the rules for that there’s various rules for that, but it’s about a quarter of a million.
Tom Waterhouse 33:34
Minimum investment, I think you without getting any accounts to begin all that is half a million is and then you have to get. If you don’t put in a half million, you have to go through all of that thing of showing that your high net wealth or sophisticated investor
Mike: 33:45
Are you open at the moment to raising up the funds
Tom Waterhouse 33:50
The fund has never been close. He’s got a lot of headroom there. Yeah, the funds have been closed. And for us, I think if we can keep our head down and just finding great option deals. Well, we’re gonna get to closing point. And that’s yeah, that’s the aim of just and then just basically keep going.
Mike: 34:09
You’ve got great sort of heritage in this kind of gaming, punting area, right? What is it about human nature that that finds it’s so fascinating to have a bet?
Tom Waterhouse 34:20
Well, people have been betting since the beginning of time, and sort of your betting when you make an investment in anything, you’re putting your money where your mouth is, you know, and the issue with bedding. Why it’s hard is because you’ve got seen of your margin against you regularly, but if you have a bit with your mate and he says one thing and you say the other well, it’s much more in bet because you’re not taking a margin out one person with the the issue is and why it’s hard to win bedding is because you’ve got margin against you. But it’s really people putting thought well, I’ve thought long and hard in the State of Origin I think New South Wales has value because of this. And the excitement of being proved you Right. You know, it’s like having a bit when you play you made in tennis or in golf. Yeah, there’s some people that take a very good at analyzing and taking very good bets in terms of risk payoff. And there are other people that just go well, actually, I just want that dopamine hit of excitement all the time. So it’s, it’s very different.
Mike: 35:22
So if according to Ibis last year, horse and sports betting Australia’s worth $6.4 billion, right, and, you know, the earnings of that, in that sector, about 835, companies make it about 15%. Net, if you look at all, there’s a million companies in Australia that operate so million that actually employ people. And the average net profits about 9.7%. So clear. And interestingly, this, the staffing element of you of the gaming world is only 5%, which is quite low, because of the tech shift that’s gone. So this is a pretty profitable area, if you get it right. Even with the regulatory kind of demands and the shifts in that. Yeah, there’s a huge amount of money to be made in gambling globally. It’s a massive industry, you find that the operators so Fanjul had their first quarter of profit two quarters ago, in the US, it’s been open up since 2018. They’ve had had fantasy before that, but that’s only one operator, that it has six years of operation one quarter profit in Australia will who are the profitable operators here in Australia where you’ve got Tabcorp but they’ve been struggling in terms of them and graphing share price down 40% In the last year sliding market share. Yes. Sport spirit seeing revenue, decline. Yeah, they’re profitable. Entertain is profitable here. But you’ve got a whole raft of other operators that a line ball or loss making Yeah, a lot of entrants that came into the market here, lost their shirts coming in the UK is seen all the operators share price has just been killed. Now I’m not crying poor for the operators.
Tom Waterhouse 37:06
But then you see the people that are looking at stuff differently, like dabble here in Australia, who would have thought a startup three or four years ago could come and make inroads. That’s an amazing success story, what they’ve done in Australia and being acquired or partly acquired by Tabcorp. That was a brilliant investor investment by Tim Heath in the older group. You’ve seen what Tim hates done with sports but Dotto and you’ve seen what a Cravens done with steak. They’re incredible operators, and they’re making great profits. But just to put up a bookmaking business and go, we’ll look it’s a lucrative industry, I’d I’d warn against that.
Mike: 37:45
When you’re going around the world looking, you know, for as part of your work in Waterhouse, VC. I mean, there’s an old saying that money follows management, you’re looking for talent really is that at some level, to what extent
Tom Waterhouse 37:59
We love businesses that are at least going to be generating revenue. So we there’s a big thing between an idea, and there’s lots people have a great idea, but even if they’ve got a small amount of revenue, they’ve at least gone through the pain of getting a client on board on boarded interaction, so we can at least speak with someone, and then we’re looking for something that’s that’s critical, you know, like, we get actually, we know people that need that service, we that really want that and haven’t been able to build it a nice people have been able to do it. And if we say, Oh, well, look, it’s just a no brainer for this person to take that on board. Well, I call It’s a no brainer for us to negotiate to buy an option. And that’s what we’re looking for. But we see, often, there’s some founders that go, this is amazing, I’m really excited. It’s great space. And then there’s just some founders that it feels like they for us to let the business fail, I would rather die and near non stop. And because we’re not, we’re not pushing investors, we’re not active in terms of things. It’s like, we take an option, we hope you do well, or optioning up lots of businesses. We see some that just the founders just don’t have the same ambition as other founders, you know, and that’s, I guess that’s life.
Mike: 39:18
I mean, in that technology area, you must come across this a lot. We do a lot of technology deals. And we do find this a certain genre of owner that has a fanciful idea around valuation. So you must get to a point where you see something it lines up, but you just can’t agree the right option price,
Tom Waterhouse 39:35
Correct. Yeah, it’s for us we’re looking for value all the time of what we think is value. And and there’s also one other thing I think is very interesting is that the amount of people to create significant businesses now is dramatically reduced. We just did an option deal with a business last week. And the guy’s ultra talented, but he spilled the whole working tech solution, completely working, you can scan a QR code have the bet everything works. He’s got a financial background, never done a day’s coding in his life and coded up the whole user experience everything through using code from catch up at no other person in his team. So it’s amazing that someone he’s obviously ultra intelligent person, but he hasn’t had to go to coding school. He just has to know the right prompts to put into AI. And he’s built a product that we’ve optioned up at half a million US dollar valuation with just him as the only person. It’s really incredible. Like, you wouldn’t That’s not possible 10 years ago.
Mike: 40:46
What it does is it drives innovation, doesn’t it? It right it? It’s sort of democratizes commerce even more, I mean, the liberal democracies have been great, right? If you look at what’s happened in the last 200 years, but I think it’s only just the beginning. I really think that, that the internet, you know, for all its drawbacks, and there are many we spoke earlier. But the democratization of information, the ability to, for people to innovate, and to bring their talent to bear, I think is never been great. I think the opportunities ahead of us are a phenomenal idea.
Tom Waterhouse 41:29
And I think there’s never been a better time to go into business, or be alive, if you’ve got get up and go. Because you have got all the tools at your fingertips, like you used to, to get the amazing knowledge of what was the cutting edge of business. 100 years ago, you had to be at Harvard, or Oxford or Cambridge, and learn from the best professors. You can watch a video now or you can prompt GPT and get the answers to everything. It’s amazing.
Mike: 41:58
Well, interesting. I’m an investor on the board of a company in Western Sydney. And we’re creating 3d metal printed valves for Gilmore’s, who are sending out rockets. They’re taking up satellite dishes, there’s a whole emerging aerospace area around putting coms, you know, using space to put dishes. And the demand for that apparently is off the charts. But you couldn’t, you know, we can 3d metal print a high grade valve, starting with, you know, some powder.
Tom Waterhouse 42:33
It’s amazing. It’s just incredible.
Mike: 42:35
Good stuff. So look fantastic for you to come in today. And fantastic to get to know some of your story. Just going back to your dad from it. I really liked that idea that your dad let you he unleashed you to do stuff, right? But but you know, Richard Branson’s parents were probably similar.
Tom Waterhouse 42:53
I remember reading his book losing my virginity or whatever in it, and they just dropped him or dropping him off and sit down swimming in the river or something.
Mike: 43:02
And find your way home, find your way around amazing. It’s a little bit different now. But I do think that, you know, we need to encourage ourselves as parents to kind of let our kids make mistakes and go and try stuff because I do think it helps when certainly helps in business, correct.
Tom Waterhouse 43:20
And, and that’s why we love businesses that are generating just a little bit of revenue. Because once you’ve got a little bit of money in your hands, you can pivot you can go somewhere you can, you’re just thinking Amen. But pre any revenue coming in. It’s just an idea. You know, and that’s some and I think once you’re in business, and you just get that taste of a little bit of money.
Mike: 43:39
Yes. And a lot we see that a lot we see technically buys businesses where they’ve built they’ve built a platform, and they’ve they’ve used the philosophy we will build it and they will come and often they don’t and there’s no revenue but you’re right if you can move to revenue you’ve really overcome probably the biggest hurdle and and the learnings from that a valuable to people like you know, Tom, great to spend some time with you. Great to have got to know you. I’m sure that our listeners will be delighted all but all business owners generally alysus I’m sure they’ll be delighted to have heard your story more power to you.
Tom Waterhouse 44:14
Thank you so much. Really appreciate it.
Mike: 44:16
Take care. Well, there you have it such an enjoyable chat. I loved how open and frank Tom was and so positive about the future. When you can say I’ll be doing this for the rest of my life. You’re normally onto something. Thanks to Tom. And if you want to know more about the water house fee see, the details will be in the show notes. Now a quick shout out to our sponsors Oasis partners. If you are thinking about your options, feel free to get in touch with more than 500 successful deals completed. We know a thing or two about getting a deal done. And we’re also the most discreet operator in the market. If you liked this content, be sure to tell you’re friends and if you’re feeling very generous leave a like, only good ones please, we’re very sensitive. Thanks for listening.
Link to previous episode: https://www.oasispartners.com.au/podcast/human-leaders-over-hero-leaders/