The number of active investors in the game will also decline as the sector remains underinvested relative to public market capitalization.
According to a Pitchbook report, venture capital-backed content developers will struggle to wrest market share from incumbents.
According to Pitchbook, which tracks global venture capital investments, the number of active investors in game developers has dropped dramatically since the start of the COVID-19 pandemic last year. Meanwhile, another Pitchbook report noted that Discord, the gaming communication platform, has a 93% chance of going public through an initial public offering (IPO) in 2025.
In 2021, there was a gaming boom here. According to Pitchbook, 2,359 venture capitalists wrote checks to support publishers, developers and studios (up from 734 in 2020). By 2023, their number has halved to 1,142 investors, and the decline will continue until 2024.
"We expect a lot more in 2025, with the number of investors backing content developers shrinking even further, but the industry's long-term trajectory means the sector is underinvested compared to the $187.7 billion spent on games annually," wrote Eric Bellomo, Pitchbook's head of development. Analyst on upcoming technologies.
There are many reasons for capital inflows and outflows. A record number of VC funds have been launched and a record amount of capital has been raised across the venture ecosystem during the frenzy of the zero interest environment.
The game itself sat at the crossroads of several new trends, attracting unprecedented capital to the industry. With Facebook turning to the Metaverse, cryptocurrencies and blockchain-based games exploding in the zeitgeist, and stay-at-home orders issued, consumers are left with few choices for entertainment.
Alas, easy come, easy go. By the end of 2023, the sector has proven to be overinvested. Previously, many of the delayed releases were in the hands of the public, with much weaker releases planned for 2024. Interest rates have risen, forcing investors to scrutinize potential deals. Invariably time-consuming and expensive game development cycles became unrecognizable and soon unpopular compared to traditional software-as-a-service business models.
Apple's aging of IDFA (which prioritized user privacy over targeted ads) increased customer acquisition costs and further squeezed mobile gaming margins. Exits have become hard to see as M&A dries up, the IPO window closes, and regulatory interference in deals by Meta (formerly Facebook) and Microsoft discourage other acquirers.
With so much content, consumers are increasingly choosing to play "perpetual titles," leaving dwindling time for brand-new releases.
Even so, Pitchbook believes the industry is underinvested. The gaming industry has a market cap of more than $1 trillion worldwide (excluding Microsoft, but Tencent),16, 17 according to the Q3 2024 Games Report, with only $1.5 billion to $4 billion invested annually (from the COVID-19 except), 2024
This means reinvesting an infinitesimal portion of the industry's market capitalization into high-risk ventures. By comparison, according to the Pitchbook Q2 2024 Retail Fintech report, public fintech companies have a market cap of more than $1 trillion, 18 and $10 billion to $17 billion are invested in the industry annually.
Similarly, according to our healthcare IT VC Q2 2024, the total size of the healthcare public market will exceed $100 billion with approximately $5 billion in investment per year.
So new funds and vintages have 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 in April, Bitkraft announced a $275 million round for its third fund, and Griffin Gaming Partners announced its third flagship fund. In the last four to six years, another batch of specialist investors have come online to back the industry, including Makers Fund, Konvoy Ventures, 1Up Ventures, F4 Fund, Play Ventures and many others.
Despite the weaker quarterly investment performance, there are several key tailwinds. The next generation of consumers will spend a lot of time in the gaming environment.
More than 90% of consumers between the ages of 13 and 17 play games every week, averaging seven hours a week. The value of gaming has been established in technology companies (NVIDIA), movies ('Super Mario Bros. Movie' and 'Detective Pikachu'), television ('The Last of Us') and more.
From e-commerce (Temu and SHEIN), educational technology (Duolingo), media (The New York times and Netflix) and social networks (Twitch, LinkedIn), games and gamification models are especially integrated into the company's survival. strategies. Emerging markets in Latin America, India and pockets of Africa have the potential to attract another billion consumers to the category within a decade.
These fundamentals will continue to attract more investors to the segment, with additional headwinds expected from the release of Grand Theft Auto VI and new generations of Sony and Nintendo consoles.
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