The England side may be out of next month's European Championships, but it'll be business as usual for Betfair, the online betting exchange that is tackling the challenges of a fast-growth business in one of the UK's most highly regulated industries

If ever there were a company that defied stereotyping, it's Betfair. Its glassy offices on the river at Hammersmith in London look more like a high-tech campus than the home of a betting business. It speaks volumes about how mainstream and professional the online-gambling market has become, as well as about Betfair's own image. "We are seen as a gaming business, although we probably see ourselves as much as a technology business," says co-founder and non-executive chairman Edward Wray.

Betfair revolutionised gambling when it launched in 2000, and its founders are working to retain those values as the company strains past £180m revenue, £19m profit and 1,200 employees.

Launched at the height of the dotcom boom, it was one of two companies to introduce peer-to-peer gambling to the Net. (It acquired the other, Flutter, in 2001.) Co-founder Andrew Black, whose colourful working history includes stints in professional gambling, software development and stockmarket trading, merged these three to create a betting exchange modelled on the New York Stock Exchange. "Andrew wanted to replicate the flexibility and the opportunity to buy and sell," says Wray. "Before we came along, you couldn't take both sides in betting. Traditional bookmakers set the price and that was it: take it or leave it." Betfair put the control in the hands of the customer, taking a small (up to five per cent) commission, and leaving the odds-setting to the punters.

Today, Betfair is "by far" the dominant operator in peer-to-peer gambling, according to a report by analyst firm Screen Digest. "No other operator comes close to matching any of Betfair's exchange-betting performance metrics", which include a market share of at least 75 per cent, says the report.

Its operations are now global, taking in European markets and gambling-mad Australia (where cricketer Shane Warne is said to be ditching sport for professional poker), and it regards itself as a global, rather than a British, company. This broad approach was rewarded in April when Betfair scooped a Queen's Award for International Trade. It's the second time the company has been recognised—in 2003 it received a Queen's Award for Innovation.

Perhaps most impressive is that Betfair has managed all this without the help of the US market. Online gambling is largely illegal in the US, but plenty of UK-based online-gambling firms took advantage of the legal grey area presented by their offshore status, until online betting was outlawed under the 2006 Unlawful Internet Gambling Enforcement Act. High-profile arrests of three BetOnSports board members in the past two years have made Betfair's decision to steer clear of the US look "more and more sensible", says Ed Barton, an analyst at Screen Digest.
For Wray and Black, it was never an option. "The legal situation there was very clear; it wasn't a huge surprise. Our business model is not predicated on the US, China, Japan, India or other big markets."

Wray, who describes himself as a "glass half full" person, even goes so far as to say it has benefited the business. "From a technology point of view, when you're starting out you spend a lot of time looking at where the threats are coming from," he says. "Being able to exclude the US was great." Now the business is in a position where he'd be comfortable if the ban were lifted—which is considered to be a question of when rather than if. Pressure is increasing and the EU recently began investigating a complaint lodged by the UK-based Remote Gambling Association that the US ban is discriminatory.

The US experience is just one example of how regulation dominates the industry. It's the biggest challenge for Betfair, inseparable from its other strategic goal of international expansion.

Protectionism is not uncommon. "Gambling seems to have missed out on the free market," says Professor Leighton Vaughan Williams, the director of the Betting Research Unit at Nottingham Business School. The online sector is still relatively new, with regulation lagging behind development: a September 2007 prevalence survey by the Gambling Commission found that while 68 per cent of UK adults had taken part in some form of gambling, only six per cent of that group had used the internet.

Betfair decided early on to use compliancy as a competitive advantage. "Our business model is to embrace regulation, not try to circumvent it," says Wray. It spends a fair chunk of its revenue on legal advice worldwide, but it's an investment. "We go straight to the top every time with legal advisers. They might be expensive, but the quality of advice you get is second to none. If you're going to do something, do it properly. Don't cut corners."

Its approach has done much to sanitise gambling's seedy image. Its £3.9m rescue of failed exchange Sporting Options, a goodwill gesture to ensure the image of online gambling wasn't tarnished, won the company the Socially Responsible Operator of the Year at the inaugural eGaming industry awards. But more important, it actively shares information through agreements with some 30 sports bodies, such as the Lawn Tennis Association and the British Horseracing Association, and has been instrumental in several high-profile investigations into suspicious betting. All of its customer-facing staff are sent on a course run by GamCare, the charity for problem gamblers.

But it's a balancing act. After all, it's a gambling business, and to be prissy and overbearing about individual punters' decisions would be wrong, believes Wray. "Internally, we try to lead the values of the business—transparency, integrity, professionalism and openness," he says. His rule of thumb: "You should never be doing something that you wouldn't want everyone else to see you doing."

Wray clearly wants to maintain the small-company ethos, where people are loyal to the business because they are a part of it. But it's a tough call in a company that now handles 15 million transactions a day and has around five billion page impressions a week, "probably more than all of the financial exchanges in Europe put together, and we have to settle all those in real time", Wray says. "I'm not quite sure when you could say we were no longer a small company. It's a bit like watching your child grow up: you can't exactly identify when they changed—you just know they look different."

Betfair has also had its share of growing pains. "When we moved into this office, at the end of 2002, we had half a floor," says Wray. "It was a bit like sitting in the middle of Wembley Stadium. We thought: we'll never fill it. We now have three floors and are bursting out at the seams."

It wasn't the first time Betfair underestimated its own success. In 2001, its acquisition of erstwhile arch-enemy Flutter was the move that gave Betfair pre-eminence, while also bringing onboard the skills of chief executive David Yu, among others.

Likewise, Wray recalls at least one instance when the growing business underestimated customer demand. "You never, ever want to get to a stage when you're hitting a ceiling," he says. "Every time you put extra capacity on, your customers find a way of using it."

But accidental success is something Wray advises fellow directors to allow for—along with failure. Even in a mature business, with the luxury of more planning time, "you have to be prepared to make investments that fail," he says. "When you start, it sounds crass but you don't really have time to think too far ahead. Now we are much more strategic."

There are also benefits in seeking out good partners, particularly in international markets. "As we look to expand globally, we know what we're good at and where we don't have any experience," says Wray. "When we launched our Australian betting business, we did a joint venture with what was PBL [now Crown], the Packer family's business. It's been a fantastic partnership for us."

The fact that the business is 50 per cent owned by Crown is unimportant, he says. "It's not what you're giving away but what you're getting as a result. People are always way too focused on their size of the pie, rather than just thinking: how do we grow this business? All the great entrepreneurs throughout time have always been very open and pragmatic about doing deals."

The other big challenge facing Betfair today is staying ahead of the curve, identifying the next big thing and how it will apply to the business. "Time—particularly in businesses like ours and with technology's rate of change—is the most undervalued commodity today," says Wray. "There are times when you can spend too long finessing the last five per cent of a deal when it might be better not worrying about it, even if that means giving away a bit more of the business."

The company invests heavily in new products, spending £22m on research and development in 2007, and has branched out with new exchanges, such as its series of climate-change markets (with any commission earned going back into the company's own climate-change strategies). Last December, it launched Tradefair, a financial-market exchange that takes its founders back to familiar territory. Nottingham Business School's Vaughan Williams says: "It is in a very competitive market on an international level. So innovation's important. When margins are low, new products such as Tradefair are a way of capturing a wider number of customers."

Web technology is a boon when it comes to these new products, says Wray: "The beauty of our business is that we can create markets and try new things. One of the great advantages of a shortened business cycle is that you can experiment an awful lot, relatively cheaply. The market will tell you very quickly what works, and if you're 70 per cent right, they'll tell you how to fix it."

But Wray is all too aware of the need for the founders to evolve alongside the business. "You have to be very careful that the initial views of the founders don't restrain the natural growth of the business," he says. "The big challenge for both Andrew and I is to be able to step back and feel confident in doing so. We were very hands on to begin with, but now the board is our real focus. Our role is to support the people who are running the business—David Yu and the rest of the senior-management team—and to keep the board fresh."

Clearly, with fewer days in the office, he and Black are making the transition to other board roles and a more independent outlook.
There are plenty of markets for Betfair to tackle yet, and Wray foresees big developments in the industry over the next 18 months. He won't be drawn on Betfair's own exit plans—a rumoured float a couple of years ago came to nothing and he rules it out for the immediate future. "If you run a good business, the exit will take care of itself," he says. "If you look for the exit, then I think you run the risk of falling flat on your face."

Betfair's ambitions are grand: its vision is to be "the betting platform for the internet", says Wray, and he is confident it's on its way to that goal. "I can genuinely say that I'm more excited about the potential of the business today than I've ever been in the last eight years. The opportunities that we have now are greater than we've ever had before. The market's evolved. And as a bigger company with more reputation equity, we can do things we couldn't have before."

The nature of Betfair means the bigger it gets, the better the service for punters, and Wray is keen to avoid small-company nostalgia: "We strive to keep looking forward, not looking back. It's all too easy to say: 'Oh, when we started we did it like this.' If you do that, you anchor yourself into the small-company mentality."

Calculated risks: Lessons from Betfair

Maintain your reputation for innovation
"We need to be thinking the whole time about what's happening around the world, looking at how we can apply new ideas," says Wray. "You have to put it out there and take your learnings from it."

Look after your people
Senior management have shares in Betfair and employee uptake of its save as you earn (SAYE) scheme is amoung the UK's best. As an added bonus, this guards against fraud. "One of our most effective tools against internally generated fraud is everybody else in the company," says Wray. "That sense of ownership means if someone is ripping the company off, they are ripping you off."

Stay true to your original plan
"It's about playing the long game, having a long-term view of the business," says Wray. "It would be very easy to cut a few corners, make a few dollars in the short term—and then create problems for yourself."

Invest aggressively
Buying Flutter a year after launch was risky, but it made Betfair the only game in town. Likewise, the company spent £22m on research and development last year—essential to maintain its pre-eminence in the sector.

Get into the black
"From a very early point, we were focused on getting the business to be cashflow positive as soon as possible," says Wray. "As soon as you are, you are in control of your own destiny."

Be prepared to fail
"We've done deals that haven't worked, but it's not a case of regret," says Wray. "Learn from experiences, but there's no point in beating yourself up about deals that you feel weren't perfectly structured."

Don't be too greedy
"It's always easy to look back afterwards, when your business is worth X amount and say: 'We shouldn't have given so much away'," says Wray. "But your business probably wouldn't have been worth X amount if you hadn't brought those partners on in the first place."

Step back from the business
Entrepreneurs can stifle growth if they fail to relinquish day-to-
day control.