The number of investors active in gaming will decline further as the sector remains underinvested compared to the general market capitalization.
Venture capital-backed content developers will have a hard time wresting market share from incumbents, according to a report by Pitchbook.
Pitchbook, which monitors global venture capital investments, said the number of active investors in game developers has fallen sharply in the past year since the onset of the Covid-19 pandemic. Meanwhile, another report from Pitchbook indicated that Discord, a gaming communications platform, has a 93% chance of going public via an initial public offering (IPO) in 2025.
In 2021, the gaming boom is here. Pitchbook said 2,359 venture investors wrote checks to support publishers, developers and studios (up from 734 in 2020). By 2023, the number had halved to 1,142 investors, with a decline in 2024 so far.
“We expect more of the same in 2025, with a further decline in the number of investors backing content developers, but the long-term trajectory of the industry means the sector is underinvested compared to the $187.7 billion spent on games annually,” Eric Bellomo wrote. Emerging Technology Analyst at Pitchbook.
The reasons for the sudden inflow and outflow of capital are many. During the frenzy of the zero interest rate environment, record numbers of venture capital funds were launched and record amounts of capital were raised across the investment ecosystem.
Gaming itself was located at the intersection of several emerging trends, which attracted unprecedented amounts of capital into the industry. Facebook has pivoted into the Metaverse, cryptocurrencies and blockchain-based gaming have exploded in the zeitgeist, and gaming awareness has surged as stay-at-home orders have been issued, leaving consumers with few other entertainment options.
Unfortunately, easy come, easy go. By the end of 2023, the sector had proven to be overinvested. There has been a glut of previously delayed issues in public hands with a much weaker issue slate scheduled for 2024. Interest rates have risen, forcing investors to scrutinize potential deals more closely. Invariably time-consuming and expensive, game development cycles became unrecognizable compared to traditional SaaS business models and quickly became unpalatable.
Apple’s neglect of IDFA (which prioritized user privacy over targeted advertising) increased customer acquisition costs, putting further pressure on margins in mobile gaming. Exit paths have become harder to see as mergers and acquisitions dry up, the IPO window closes, and regulatory interference in deals initiated by Meta (formerly Facebook) and Microsoft discourages other acquirers.
Faced with abundant content, consumers increasingly chose to play “perpetual titles,” leaving a diminishing amount of time for net new releases. Finally, massive interest in artificial intelligence and machine learning has taken dollars out of previously trendy categories.
However, Pitchbook asserts that this sector suffers from a lack of investment. The market value of the gaming industry exceeds $1 trillion globally (excluding Microsoft, but including Tencent),16,17 with only $1.5 billion to $4 billion invested annually (excluding outside COVID-19 years), according to the Gaming Report For the third quarter of 2024.
This represents a very small portion of the industry’s market value being reinvested in high-risk projects. By comparison, public fintech companies have a market capitalization of more than $1 trillion,18 and $10 billion to $17 billion are invested in the industry annually, according to the Pitchbook Q2 2024 Retail Fintech Report.
Likewise, the combined overall healthcare IT market cap exceeds $100 billion with nearly $5 billion invested annually, according to VC IT Q2 2024 Update.
As such, new funds and varieties have already emerged since early movers like London Venture Partners began targeting the ecosystem. Andreessen Horowitz committed $600 million to gaming as part of a broader $7.2 billion fundraising campaign in April, Bitkraft announced a $275 million round for its third fund, and Griffin Gaming Partners announced its third flagship fund. Another group of niche investors have also emerged online over the past four to six years to support the sector, including Makers Fund, Konvoy Ventures, 1Up Ventures, F4 Fund, Play Ventures, and many more.
Although quarterly investment numbers are down, there are several key tailwinds. The next generation of consumers is spending a significant amount of time in gaming environments.
More than 90% of consumers ages 13-17 play games every week, with an average of seven hours of gameplay per week. The value of gaming has been established across technology companies (NVIDIA), movies (“The Super Mario Bros. Movie,” “Detective Pikachu”), television (“The Last of Us”), and more.
Across sectors, from e-commerce (Temu, SHEIN), to edtech (Duolingo), to media (The New York Times, Netflix), and social networking (Twitch, LinkedIn), gamification and gamification models have been prominently integrated into company retention strategies. Emerging markets in Latin America, India and pockets of Africa are also poised to bring another billion consumers into this category within this decade.
These fundamentals will continue to attract more investors into the sector with additional tailwinds expected from the release of Grand Theft Auto VI and new console generations from Sony and Nintendo.
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