The number of investors active in gaming will fall further as the sector remains underinvested relative to public market capitalization.
And venture capital-backed content developers will struggle to siphon market share from incumbents, according to a report by Pitchbook.
The number of active investors in game developers has fallen significantly in the past year since the start of the COVID-19 pandemic, said Pitchbook, which tracks global venture capital investments. Meanwhile, another report from Pitchbook noted that Discord, the gaming communication platform, has a 93% chance of going public through an initial public offering (IPO) in 2025.
In 2021, the game riser was here. Pitchbook reported that 2,359 venture investors wrote checks supporting publishers, developers & studios (up from 734 in 2020). By 2023, the number was halved to 1,142 investors, with 2024 even lower.
“We expect more of the same in 2025, with another pullback in the number of investors backing content developers, but the long-term trajectory of the industry means that the an underinvested sector compared to the $187.7 billion spent on games each year,” wrote Eric Bellomo, an emerging technology analyst at Pitchbook.
There are several reasons for sudden capital inflows and outflows. Due to the favorable interest rate environment, the highest numbers of VC funds were initiated and the highest amount of capital was raised throughout the venture ecosystem.
Gaming itself sat at the crossroads of several emerging trends, which attracted unprecedented amounts of capital into the industry. Facebook had moved into the Metaverse, cryptocurrencies and blockchain-based games exploded in the zeitgeist, and awareness of games increased as stay-at-home orders were issued, leaving consumers with few entertainment options. another.
Oh, come easy, go easy. By the end of 2023, the sector was overinvested. A bunch of previously delayed bonds were in public hands with a much weaker release slate scheduled for 2024. Interest rates rose, prompting investors to scrutinize deals that could be there. Game development cycles, which are time-consuming and expensive, are unrecognizable compared to traditional software-as-a-service business models and were soon impossible.
Apple's IDFA downgrade (which prioritized user privacy over targeted ads) raised customer acquisition costs, further pressuring margins in mobile gaming. Exit routes became difficult to see as M&A dried up, the IPO window closed, and regulatory intervention in deals initiated by Meta (formerly Facebook) and Microsoft discouraged other buyers.
Despite abundant content, consumers increasingly choose to play established “forever titles”, leaving time dwindling for net new releases.15 Finally, there is an explosive interest in AI & machine learning on dollars from previously fashionable categories.
Despite this, Pitchbook maintains that there is little investment in the sector. The market cap of the games industry exceeds $1 trillion worldwide (excluding Microsoft, but including Tencent), 16, 17 with only $1.5 billion to $4 billion invested annually (excluding COVID-19 year out), according to the Q3 2024 Gaming Report.
This indicates an infinitesimally small portion of the industry's market cap being reinvested in high-risk ventures. In contrast, public fintech companies have a market cap of more than $1 trillion, 18 and $10 billion to $17 billion is invested in the industry annually, according to the Q2 2024 Retail Fintech Pitchbook Report.
Similarly, the combined healthcare IT public market cap exceeds $100 billion with approximately $5 billion invested annually, according to our Q2 2024 Healthcare IT VC Update.
As such, new funds and old funds have emerged since early movers like London Venture Partners began targeting the ecosystem. Andreessen Horowitz earmarked $600 million for gaming as part of a broader $7.2 billion fundraising in April, Bitkraft announced a $275 million round for its third fund, and Griffin Gaming Partners announced its third major fund. Another batch of niche investors have come online over the past four to six years to back the sector, including Makers Fund, Konvoy Ventures, 1Up Ventures, F4 Fund, Play Ventures, and many others.
Despite dismal seasonal investment figures, there are several key tailwinds. The next generation of users will be spending a lot of time in game environments.
More than 90% of users between 13 and 17 years of age play games every week, with an average of seven hours of play time per week. The value of gaming has been established across technology companies (NVIDIA), movies (“The Super Mario Bros. Movie” and “Detective Pikachu”), television (“The Last of Us”), and more.
Across sectors, from e-commerce (Temu and SHEIN), to educational technology (Duolingo), to media (New York Times and Netflix), and social networks (Twitch, LinkedIn), games and gamification models are integrated into evident in corporate retention. tactics. Emerging markets in Latin America, India, and pockets of Africa have the potential to bring another billion consumers into the sector within the decade.
These fundamentals will continue to draw more investors into the sector with the expectation of additional tailwinds from the release of Grand Theft Auto VI and new console generations from Sony and Nintendo.
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