Betfair had lofty ambitions when it headed for the stock market last autumn. "There is an argument," said Da
vid Yu, the chief executive, "that we should be considered alongside the leading internet players like Facebo
ok and Google."

The online gambling group, which allows punters to bet against each other rather than with a bookmaker,
was supposed to be Britain's answer to the tech floats that have dazzled America. In the eight months since
going public, however, Betfair has gone from dotcom darling to stock market shocker.

The shares have virtually halved, sales growth has been muted, and last Monday, Yu, the tech specialist
who has run the company since 2006, announced he would be standing down.

It had all seemed so promising. The company, which makes money by collecting a commission on winning
wagers, came to the market on a sea of hype, and with investors desperate for a piece of the action.
Spurred by comparisons with Google, Amazon and eBay, it had hoped some of the Silicon Valley stardust
would rub off on the west London-based betting firm. As it turned out, while tech stocks are hot, gambling
shares are not.

Floated at £13 (€14.40) a share, valuing the group at £1.4 billion, Betfair's stock never did better than on its
market debut. That first day of trading, October 22, saw it race up 19% to £15.50. Today, the shares stand at
770Åp.

The sale of just 15% of the company's shares at float was intended to provide a partial exit for the company's
backers, some of whom had been shareholders since it was launched in 2000. The two founders — Ed
Wray, who serves as chairman, and Andrew Black, who stepped back from the company — sold shares
worth £30m in the float.

But many of those who bought when it went public have not been as fortunate. "It's not Facebook and it's not
Google," said one leisure analyst.

"They need to regroup, put their hands up and say, 'We are a gaming company'. That has to be the focus."
Another analyst said: "It's a bookie and it has regulatory risk — that's why the share price has come back to
£7."

Yu is unrepentant, and insists the comparisons with the likes of Google and Facebook remain valid. It might
not have billions of users but it has a social networking-style set-up. He said: "We are a technology-led
business like other online leaders. We revolutionised an industry like other online leaders."

The problem with Betfair, according to some observers, is that its greatest innovation — the technology that
allows its customers to cut out the bookie — is now more than a decade old. "People talked up the company
at its float as though it was some sort of revolution but the revolution happened years ago," said John
O'Reilly, former head of online at Ladbrokes, the bookmaker.

Betfair initially terrified traditional bookies such as Ladbrokes and William Hill. But in the 11 years since it
launched, its rivals have sharpened up. Established players, along with newer entrants such as Bet365 and Paddy Power, have all narrowed the gap.

Yu bristles at the idea that the company has not been creative enough, pointing out that it was a pioneer of
so-called "in-running" betting, where punters can place bets on an event while it is under way, and is strong
in betting via mobile phone. Last week, it signed a deal with gaming software specialist Openbet to improve
its mobile offer.

However, other changes make Betfair seem rather like many of its rivals. For example, it has even started
putting fixed-odds bets on its site, something it wants to do more of. The firm denies such changes are a
sign of slowing growth on the exchange. "We are giving customers what they want," said Yu. "In 2004, we
added poker because our customers wanted to play poker. We added an online casino because they told us
they wanted to play casino games. Fixed odds is the next step."

Maybe. But by the company's own admission, revenue growth from what it terms "core Betfair" — that is, the
exchange and games such as poker — has slowed.

Between 2008 and 2009, revenues jumped about 20%. This fell to a 5% rise the following year. Results
published last week for the year to April 2011 showed revenue growth of nearly 8% in core Betfair, partly
helped by the 2010 football World Cup in South Africa.

Yu concedes that the performance was disappointing, and blames several factors. These include change in
the system used to power the group's poker operation, which led to the loss of some big money players.
More embarrassingly, Betfair's website crashed for several hours on the Saturday before the Cheltenham
Festival, one of the biggest events in the racing calendar.

While sales growth is slowing, the company could at least point to better than expected profits and a higher
than forecast dividend.

More surprising still was the news that the group would kick off a £50m share buyback programme, normally
the sort of thing one expects from mature companies that cannot think of anything better to do with their
cash. In seven years as a quoted company, Google has never paid a dividend, let alone started buying its
own stock.

Betfair, which has £155m of cash on its balance sheet, can afford to both fund all its investment plans and
buy back its stock, insisted Stephen Morana, the company's finance director.

Investors might hope that any future investments fare better than LMAX, Betfair's first attempt to try to
deploy the technology behind the betting exchange for other businesses.

LMAX was launched towards the end of last year as a share-trading platform, but in its first few months it
has failed to meet expectations. Its chief executive resigned in March and Betfair hopes a shift in focus
towards currency and commodity trading might boost LMAX's fortunes.

The disappointing launch has dented Betfair's credibility and insiders concede that the company is unlikely to
try any other new services until it has worked out what to do with LMAX.

Not all Betfair's problems are entirely of its own making. In the prospectus published to promote its float, the
company had identified overseas expansion as a key source of growth. So far, this has proved a forlorn
hope.

Governments in several European countries are regulating online gambling but expressly banning betting
exchanges, which has proved a source of deep frustration at Betfair. This might explain moves into fixedodds
territory.

"The process of regulation has been much stricter and less liberal than many people would have hoped,"
said Scott Longley, business editor of Gambling Compliance, an industry news service.

All of this has combined to give Betfair a tough start to life on the public markets. A change of management
may help. Some think that the group needs more figures at the top who clearly adore betting.

"How many of the board go home and spend the weekend betting?" asked one rival. "Andrew Black did
that." The hiring of Ian Chuter from William Hill as operations director is a step in that direction.

Analysts think that having halved, the only way for the shares is up. "There are significant challenges but at
the current price the risk-reward profile is now more attractive," wrote Nick Batram, leisure analyst at stockbroker Peel Hunt in a note to clients.

In other words, at this level, the business is a safer bet than it was.

Losing bet

Betfair's problems represent a reverse for Balderton Capital, the private equity house whose partners include
one of Ireland's best known venture capitalists, Barry Maloney.

"Balderton Capital backs companies and entrepreneurs with a sustainable, competitive edge and Betfair is a
perfect example of this," said Tim Bunting, a Balderton partner at the time of the flotation. "We ... would like
to congratulate the founders and management team on building one of the UK's biggest internet success
stories."

Balderton's original investment in Betfair was made in 2000 and it remains one of the largest institutional
shareholders. The partners were actively involved in the development of the business since its formation and
Bunting served as chairman in 2006.

Balderton invested $14m (€9.6m) in the company in 2000 and pulled out €6.7m at the time of the flotation. It
still owns more than 3% of the company.

But the massive return which looked odds on at the time of the flotation has shrunk as the company share
price plummeted.

Balderton is still one of the most successful technology investors on this side of the Atlantic, but its runaway
successes such as LoveFilm, sold to Amazon, rank alongside less successful punts such as Payzone, the
Irish mobile top-up company.

Recent investments include Gemvara, an online jewellery retailer and eWise, a global payments technology
company.

It is also a backer of Openet, the Irish telecom software company, planning to float in America late this year
or early 2012.

David Yu's Betfair has gone from dotcom darling to stock market shocker