Prediction Market: Backed by Sequoia & Henry Kravis

A New Approach to Event-Based Investing

Over fifteen years ago, the Philadelphia Stock Exchange, later acquired by Nasdaq in 2008, and HedgeStreet, another exchange that has since been sold, both proposed offering event contracts to investors. These contracts were designed to allow individuals to wager on the outcome of future events, structured as all-or-nothing options with a predetermined payout.

Despite being a novel concept, it failed to attract sufficient investor interest at the time. Now, Kalshi, a New York-based startup with a team of 33, is revisiting this idea.

Securing Regulatory Approval and Funding

Kalshi’s efforts are bolstered by significant investment from prominent firms like Sequoia Capital, Henry Kravis, Charles Schwab, and SV Angel, totaling $36 million in funding to date.

A key achievement for Kalshi – founded by Tarek Mansour and Luana Lopes Lara, former MIT classmates and researchers – was securing approval from the Commodity Futures Trading Commission (CFTC) to operate a derivatives exchange last year.

Mansour emphasizes the collaborative approach taken with the agency, stating, “This was quite the process, as the more problems you face, the more problems emerge.” He also notes the value of having a former CFTC head of clearing join Kalshi as their head of regulation.

Leveraging Current Information Consumption Trends

Kalshi’s emergence coincides with a shift in how people consume news, often through social media and other platforms. Lopes Lara suggests this is significant, as the contracts are closely linked to current events and relevant global happenings.

While a partnership with a social media platform would be advantageous, Kalshi is currently reaching potential users through advertising on the question-and-answer website Quora. The founders also hint at further “partnership-based” collaborations in the future.

Expanding the Investor Base and Contract Offerings

Kalshi’s primary goal is to attract a new generation of traders – both individual and institutional, accredited and unaccredited – to wager on a variety of potential outcomes.

An example of a current contract available on the platform is one focused on whether Turkey will join the European Union by June of next year.

The platform utilizes a clearinghouse partner to hold user funds, ensuring all contracts are fully collateralized. Since its launch in late spring, Kalshi has attracted 4,000 users who participate in “yes” or “no” contracts, with payouts of 100% for correct predictions and zero for incorrect ones.

Future Growth Strategies

The founders anticipate accelerated growth this fall, citing “a few avenues for acquiring users and growing our user base,” according to Mansour.

Currently, individuals can experiment with the product directly through Kalshi’s website.

More significantly, Kalshi is establishing partnerships with brokers to enable users to trade event contracts in the same manner as stocks, commodities, or options through their preferred brokerage applications.

Mansour specifically mentions targeting major players like Fidelity and Charles Schwab.

Lopes Lara highlights that users of platforms like Robinhood and Coinbase are a primary target, given their existing understanding of investing and interest in event-based thinking.

Contract Limitations and Competitive Advantages

It’s important to note that event contracts related to sports outcomes are not offered, as this would be considered gambling. Lopes Lara clarifies, “That’s very much like gambling, and we don’t [facilitate] that.”

Federal regulations also restrict contracts tied to geopolitical events, such as the outbreak of war, and most contracts concerning individuals in political positions. For instance, betting on the recall of California Governor Gavin Newsom would need to occur elsewhere.

Mansour believes that replicating Kalshi’s success would be challenging for other brokerages or financial institutions, emphasizing the company’s accumulated intellectual property. He states that the detailed operational framework built specifically for event contracts would require significant time and effort for larger institutions to replicate.