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 precipitously in the past year since the onset of the COVID-19 pandemic, said Pitchbook, which monitors global venture capital investments. At the same time, another report from Pitchbook noted that Discord, the gaming communications platform, has a 93% chance of going public through an initial public offering (IPO) in 2025.
In 2021, the gaming boom was here. Pitchbook said 2,359 venture investors wrote checks backing publishers, developers & studios (up from 734 in 2020). By 2023, the number was halved to 1,142 investors, with 2024 pacing lower yet.
“We expect more of the same in 2025, with a further pullback in the number of investors backing content developers, but the industry’s long-term trajectory means the sector is underinvested relative to the $187.7 billion spent on games annually,” wrote Eric Bellomo, analyst for emerging technology at Pitchbook.
The reasons for the abrupt capital inflow and outflow are numerous. During the frenzy of the zero-interest-rate environment, record numbers of VC funds were initiated and record amounts of capital were raised across the venture ecosystem.
Gaming itself sat at the intersection of several emergent trends, which drew unprecedented amounts of capital into the industry. Facebook had pivoted to the Metaverse, cryptocurrencies and blockchain-based games exploded in the zeitgeist, and awareness of gaming increased as stay-at-home orders were issued, leaving consumers with few other entertainment choices.
Alas, easy come, easy go. By the end of 2023, the sector proved overinvested. A glut of previously delayed releases were in the hands of the public with a much weaker release slate scheduled for 2024. Interest rates spiked, forcing investors to scrutinize potential deals more closely. Game development cycles, perpetually time-consuming and expensive, are unrecognizable relative to traditional software-as-a-service business models and soon became unpalatable.
Apple’s IDFA deprecation (which prioritized user privacy over targeted ads) raised customer acquisition costs, further pressuring margins in mobile games. Exit pathways became difficult to see as M&A dried up, the IPO window shuttered, and regulatory intervention into deals initiated by Meta (formerly Facebook) and Microsoft discouraged other acquirers.
In the face of abundant content, consumers increasingly chose to play established “forever titles,” leaving a shrinking pool of time for net-new releases.15 Lastly, explosive interest in AI & machine learning has siphoned dollars from previously trendy categories.
Nevertheless, Pitchbook maintains the sector is underinvested. The gaming industry’s market cap exceeds $1 trillion globally (excluding Microsoft, but including Tencent),16, 17 with only $1.5 billion to $4 billion invested annually (excluding outlier COVID-19 years), according to the Q3 2024 Gaming Report.
This marks an infinitesimally small portion of the industry’s market cap being reinvested into high-risk ventures. By comparison, public fintech companies have a market cap of over $1 trillion,18 and $10 billion to $17 billion is invested into the industry per year, according to the Pitchbook Q2 2024 Retail Fintech Report.
Similarly, the combined healthcare IT public market cap exceeds $100 billion with approximately $5 billion invested per year, according to our Q2 2024 Healthcare IT VC Update.
As such, new funds and vintages have indeed cropped up since early movers like London Venture Partners started targeting the ecosystem. Andreessen Horowitz earmarked $600 million for gaming as part of a broader $7.2 billion fundraise in April, Bitkraft announced a $275 million round for its third fund, and Griffin Gaming Partners announced its third flagship fund. Another batch of specialist investors have also come 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 others.
Despite depressed quarterly investment figures, several key tailwinds exist. The next generation of consumers spends vast amounts of time in game environments.
Over 90% of consumers between 13 and 17 years old play games every week, averaging seven hours of playtime weekly. 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 education tech (Duolingo), to media (The New York times and Netflix), and social networks (Twitch, LinkedIn), games and gamification models have integrated prominently into company’s retention strategies. Emerging markets in Latin America, India, and pockets of Africa are also capable of bringing another billion consumers into the category within the decade.
These fundamentals will only continue to draw more investors into the segment with additional tailwinds expected from the release of Grand Theft Auto VI and new console generations from Sony and Nintendo.
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