The global video game industry makes more money each year than movies and music combined. But that doesn't mean the sector has been immune to the macroeconomic impacts of the past few years. Gaming companies are implementing large-scale layoffs, and venture funding in the sector will reach a five-year low in 2023. But venture capitalists are optimistic that things will improve this year.
Gaming startups raised $2 billion last year, according to a report from video game-focused VC Convoy Ventures. The total amount for 2023 was significantly lower than $9.9 billion in 2021 and $6.7 billion in 2022.
Many venture capitalists generally believe that 2024 could be a disaster for startups, as exits are likely to not return to normal until 2025. Many businesses will run out of money and will have to close. But video games may be an outlier, according to some venture capitalists.
One is that there were still many positive milestones in the sector in 2023. There were several titles released last year that found large audiences, including Baldur's Gate 3 and Hogwarts Legacy, which each sold over 22 million copies. Despite a year of flat growth for the gaming industry as a whole, video games are still projected to grow into a $229 billion industry by the end of 2020.
This category is also changing, opening the door for startups to launch in line with new trends. As the controversy over Apple's App Store fees continues, the industry is shifting away from mobile games, which traditionally attracted the most venture funding, toward cross-platform games, which are more expensive to produce but also more profitable. Unlike some categories, AI is still in its infancy in video games and could start to establish itself this year.
Josh Chapman, Konvoy co-founder and managing partner, said the industry should return to normal growth in 2024. Increased activity by tourism investors due to the surge in gaming due to the pandemic, and crypto players backing Web3 gaming have all retreated. . He said the industry could return to organic growth this year.
“In the last year, a lot of the Web3 and cryptocurrency-related elements in gaming have evaporated,” Chapman said. “The lack of his Web3 gaming company to market led to an overall decline in deal flow. This was his one sub-sector of gaming, and everything else remained very strong.”
Ilya Eremeev, managing and general partner at The Games Fund, told TechCrunch that the industry has a lot to look forward to despite coming off a more difficult year in fundraising. One of the key things, he said, is the amount of developer talent available after the industry cut thousands of jobs through layoffs last year. Additionally, compensation for these positions is decreasing, so startups may be able to access top talent in this market.
Although some tourism investors have withdrawn from the sector, companies remain active and are starting to participate more at an early stage. This also bucks broader venture trends, with corporate VC participation in U.S. deals in 2023 being the lowest in nine years, according to PitchBook data.
“Asia strategists looking to operate overseas operations in Europe and the United States, especially in Europe, have realized that there are growth opportunities in this region,” Eremeev said. “Sometimes they have accumulated a lot of capital and need investment, so they are more open to risky deals and are investing at an early stage.”
But the biggest trend to watch in video games this year is AI. While the AI craze of 2022 has prompted many incumbents to tout their AI capabilities and many to quickly start building, it will not impact the video game sector so quickly. said Mr. Eremeev. However, companies are starting to ramp up, which could have a major impact, especially when it comes to costs associated with game production.
Mobile has dominated the gaming space for a long time not only because games are popular, but also because they are less expensive to produce than, say, immersive, data-intensive PC games. This made them more susceptible to venture support. Sophia Dorf, a gaming partner at Index Ventures, said observing the deployment of AI in the video game space is one of the things she's most excited about this year.
“We're in the early stages of AI. AI will reduce the ability to create things and will also lower the barriers to some areas of gaming that are harder for VCs to invest in,” Dolph said. “Triple AAA quality games on PC had very long creation cycles and weren't as conducive to the venture model as mobile games, which drove down costs and led to more studios building around the technology. It will be. I’m really looking forward to it.”
The generative AI built into the game is also a notable development. If AI gives the user complete control over every aspect of the game, including her NPCs (non-playable characters), then games could become choose-your-own-adventures in a sense, a really interesting development. there is. Of course, this will require guardrails and guidelines, Eremeyev said.
Interestingly, not a single investor mentioned AR or VR as growth areas they expect to see this year. But with the current list of blockbuster video game releases set for 2024, and with Disney acquiring a 15% stake in Epic Games just last week, venture capital investors are looking ahead to this year and video game startups for the long term. There may be good reason to be optimistic.
“This is going to be a very tricky and challenging year for the gaming industry, but some great opportunities will emerge,” Chapman said. “If you look at Halo, Halo was created in his 2001. League of Legends was created in 2009. Tough times create great companies.”