While many dotcoms struggle for backers, a gambling site has investors clamouring. Katharine Campbell investigates

It is unclear if the washing line is art or utility. But, festooned with grungy T-shirts, it combines with the punch bag, the background music and the luridly painted chill-out room to shout: "Silicon Valley start-up". Welcome to the offices of Flutter.com, in Clerkenwell, London.

Perhaps the cachet of a group of entrepreneurs from the Valley helps. The first online person-to-person betting site has certainly managed to cut through the current scepticism about internet start-ups to create a veritable feeding frenzy among venture capitalists.

Flutter, which launched its site in May and has just closed a $33m second round of financing valuing the company at $170m, says it was five times subscribed and found itself besieged by at least six more would-be investors clamouring "really aggressively" to be let in after the round had closed.

any start-ups are fretting about whether they will ever get their hands on more money just at the moment, and even the lucky ones are having to accept lower valuations. Competition for Flutter, however, ensured that the valuation actually rose during negotiations, stock market volatility notwithstanding. Josh Hannah, co- founder, says: "Venture capitalists really move as a herd. As soon as you get some interest, there's a stampede."

Flutter did not start off awash in cash but, in good Valley tradition, was boot-strapped on credit card debt. Mr Hannah, 29, and Vince Monical, 30, colleagues at Bain, the management consultancy, hit on the idea after a series of personal bets, mainly on the Superbowl. "We were the only people who really understood the internet [at Bain] who hadn't left. We kept talking about what would be the perfect internet business idea," says Mr Monical, who, as the 13th in a family of 17 children, jokes he had the advantage of not being frightened at the prospect of chaos.

In the early part of last year they, with the third co-founder Mark Peters, also at Bain, worked on the project in every spare moment. But they were having fun. "We barely saw the light of day. If it had been some boring B2B (business-to-business) exchange I couldn't have done it," says Mr Monical.

In June they quit their jobs to set up the business - initially in the UK, because of the state-by-state regulation of betting in the US which makes the idea unfeasible at present.
The credit card bills began to mount, and the first and only real tension between the three - according to Mr Monical - arose in August as they pursued a deal with a UK incubator. The incubator wanted a big chunk of equity in return for very little apparent genuine help. "It was Josh's leadership that brought us round to saying, 'we do it on our own or we don't do it',".

A week after ditching the incubator the founders bumped into Alex Nigg in the street. Mr Nigg, another Bain alumnus more recently at Telecom Italia Ventures, had just moved to Europatweb, the internet group set up by Bernard Arnault.

He was prepared to move quickly, and first-round financing was completed within 30 days - with Europatweb taking 45 per cent of the company. Mr Hannah relocated to London, followed by Mr Monical and the real work of building the business and the team began.

Investors get excited about Flutter for a number of reasons. They all point to the maturity of the team, despite its relatively tender years. As for the idea, as Neil Rimer at Index Ventures puts it: "It can only be done on the web. And unlike so many European dotcoms, it is not a me-too version of an existing US business."

The concept involves the rapid creation of a community, with its members placing bets between each other on anything from the results of Euro 2000 to the likelihood of Madonna christening her child Jesus. Friends will e-mail each other, the theory goes, spreading the idea by "word of mouse" - a process known as "viral marketing".

While venture capitalists in general are talking about how the current nervousness has sent them back to basic bottom-up analysis of hard numbers for new investments, the fact is that valuing a business at this stage is art not science - and negotiation (at which Mr Hannah is said to be brilliant). Simon Murdoch at Chase Episode 1, which co-led the latest financing round, says: "It is a model that intuitively feels like something incredibly viral." Mr Murdoch launched the UK and German operations of Amazon, a clear viral marketing success story, while Benchmark, the US venture firm and another Flutter investor, made its name by backing eBay, the auction site. For better or worse, Flutter is being tagged as "the eBay of gambling".

The initial source of revenue is the 2.5 per cent commission Flutter takes on either side of the bet. It also plans e-commerce takings, for example through partnership with a wine site, allowing bets on bottles of wine. Because participants place deposits before they can enter a bet, Flutter hopes to be sitting on ever-increasing cash piles, for which it has undisclosed plans.

Competition includes the offline betting shops which, says Mr Hannah, have been spending heavily both on marketing and on partnership and distribution deals for their online operations. But it is much wider. "We compete with everything that is fun to do for a fiver."

But even viral marketing ideas need other forms of promotion and Mr Hannah concedes "less than half, say about a third" of the latest financing will go on more traditional marketing.

The speed with which the community can be built will be pivotal to success, in turn determining if the venture capitalists' own "flutter" comes good.



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