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The global video game industry makes more money each year than film and music combined. But this does not mean that the sector has been immune to the macroeconomic impacts of recent years. Gaming companies have organized significant layoffsand venture capital funding in this category hit a five-year low in 2023. But venture capital firms are optimistic that the situation will change this year.
Video game startups raised $2 billion last year, according to a report from VC Konvoy Ventures, focused on video games. The total for 2023 was down significantly from 2021, $9.9 billion, and 2022, $6.7 billion.
Many VCs believe 2024 could be a bloodbath for startups in general, as exits are not expected to return to any normalcy until 2025; many businesses will run out of money and have to close their doors. But video games could be an exception, according to some venture capitalists.
On the one hand, there were still many positive steps for the sector in 2023. Several titles released last year attracted huge audiences, including Baldur’s Gate 3 And Hogwarts Legacy, which have each sold more than 22 million copies. Despite a year of stagnant growth for the entire video game industry, video games are nonetheless expected to grow to a $229 billion industry by the end of the decade.
The category is also evolving, which opens the door for startups to launch alongside new trends. As the drama around Apple’s App Store fees continues to persist, the industry is moving away from mobile games — which traditionally collect the most venture money — and toward cross-platform games, which are more expensive to achieve, but also more lucrative. Unlike some categories, AI is still in its infancy in gaming and will likely begin to take its place this year.
Josh Chapman, co-founder and managing partner of Konvoy, said the industry is expected to return to normal growth in 2024. The increase in activity driven by the arrival of tourism investors due to gaming spikes fueled by the pandemic and cryptocurrencies supporting Web3 games have all retreated. . The industry can return to organic growth this year, he said.
“A lot of Web3 and crypto in gaming kind of evaporated in the last year,” Chapman said. “The lack of Web3 gaming companies present in the market has led to an overall decline in deal flow. It’s a sub-sector of video games, everything else has remained quite strong.
Ilya Eremeev, director and general partner of the Games Fund, told TechCrunch that even though the industry is coming off a tougher year in fundraising, there is reason to be excited. One of the biggest issues is the amount of talented developers available after the industry lost thousands of workers to layoffs last year. Additionally, compensation for these positions has decreased, meaning startups might be able to recruit top talent in this market.
Even though some tourism investors left the sector, companies remained active and began to participate more from the early stages. It also bucks trends in the broader venture capital industry, where venture capital firms participated in the lowest percentage of U.S. deals in 2023 in nine years, according to PitchBook data.
“Strategic managers in Asia who are trying to conduct overseas operations in Europe and the United States, especially in Europe, have realized that there is an opportunity for growth in this region,” Eremeev said. “Sometimes they have accumulated a lot of capital, they need to invest and are more open to high-risk transactions and they invest early on.”
But the biggest trend to watch in video games this year is AI. Even though the AI frenzy of 2022 has prompted many existing companies to tout their AI prowess or many companies to start expanding rapidly, it hasn’t been such an immediate shock to the AI industry. video game, Eremeev said. But companies are starting to get in on the action, and it could have big implications, especially when it comes to the costs associated with creating games.
Mobile has long dominated the gaming space, not only because the games were popular, but also because they weren’t as expensive to produce as, say, a data-intensive immersive PC game. This made them more receptive to risk. Sofia Dolfe, a partner at Index Ventures who specializes in gaming, said watching AI develop in the gaming industry is one of the things she’s following the most this year.
“We’re in the early stages of AI, it will reduce the ability to create something, it will also reduce the barriers for certain areas of gaming that have been less investable in venture capital,” Dolfe said. “Triple AAA quality games on PC that had very long creation cycles, they didn’t lend themselves as much to the venture capital model as mobile games. By reducing those costs, we’ll see a lot of studios built that leverage this technology that I’m excited.
Generative AI integrated into games is another development to watch. There could be some really interesting advancements where games could become more of a choose-your-own-adventure sort of thing if AI allowed users to fully control every aspect of the game, including NPCs (non-playable characters). Of course, this will have to be accompanied by safeguards and guidelines, Eremeev said.
Interestingly, no investors mentioned augmented reality or virtual reality as a growth area they are excited about this year. But with the current slate of big video game releases set for 2024 and with Disney taking a 15% of the capital of Epic Games Just last week, venture capitalists might have good reason to be optimistic about this year and video game startups in the long term.
“This is going to be a very delicate and challenging year for the games industry, but incredible opportunities will emerge,” said Chapman. “If you look at Halo, Halo was built in 2001. League of Legends was built in 2009. Tough times create incredible businesses.”
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