The number of investors active in the game will further decrease as the sector remains underinvested relative to public market capitalization.

And content developers backed by venture capital will struggle to siphon market share from incumbents, according to a Pitchbook report.

The number of active investors in game developers decreased significantly last year since the start of the COVID-19 pandemic, said Pitchbook, which monitors global venture capital investments. At the same time, another report from Pitchbook says that Discord, the gaming communication platform, has a 93% chance of going public through an initial public offering (IPO) in 2025.

In 2021, the gaming boom is here. Pitchbook says 2,359 venture investors wrote checks supporting publishers, developers and studios (up from 734 in 2020). By 2023, the number is halved to 1,142 investors, with 2024 even less.

“We expect more of the same in 2025, with further declines in the number of investors supporting 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.

There are many reasons for sudden inflows and outflows of capital. During the frenzy of the zero-interest-rate environment, record numbers of VC funds were started and record amounts of capital were raised across the business ecosystem.

The game itself sits at the intersection of several trends that are capitalizing on the industry. Facebook pivots to the Metaverse, cryptocurrencies and blockchain-based games explode into the zeitgeist, and gaming awareness increases as stay-at-home orders are issued, leaving consumers with few other options. entertainment options.

Alas, quick to come, quick to go. By the end of 2023, the sector proved to be overinvested. The surge in previously delayed releases is in public hands with a weaker release slate scheduled for 2024. Interest rates have risen, forcing investors to scrutinize potential deals. Game development cycles, often time-consuming and expensive, were indistinguishable from traditional software-as-a-service business models and soon became unpalatable.

Apple’s removal of IDFA (which prioritizes user privacy over targeted ads) has increased customer acquisition costs, further pressuring margins in mobile games. Exit paths became difficult to see as M&A dried up, the IPO window closed, and regulatory intervention in deals initiated by Meta (formerly Facebook) and Microsoft discouraged other acquirers.

Faced with an abundance of content, consumers are increasingly choosing to play established “forever titles,” leaving less and less time for net-new releases.15 Finally, the explosive interest in AI and learning of the machine drained dollars from previously fashionable categories.

However, Pitchbook maintains that the sector is underinvested. The market cap of the gaming industry exceeds $1 trillion worldwide (excluding Microsoft, but including Tencent),16, 17 with only $1.5 billion to $4 billion invested annually (excluding the outlier COVID- 19 years), according to the Q3 2024 Gaming Report.

This marks a very small portion of the industry’s market cap being reinvested in risky businesses. In comparison, 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, 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 annually, according to our Q2 2024 Healthcare IT VC Update.

That said, new funds and vintages have actually grown since early movers like London Venture Partners started 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. Another batch of specialist investors have also come online in the last four to six years to support the sector, including Makers Fund, Konvoy Ventures, 1Up Ventures, F4 Fund, Play Ventures, and many others.

Despite the depressed quarterly investment figures, several significant tailwinds exist. The next generation of consumers spend more time in gaming environments.

Over 90% of consumers between the ages of 13 and 17 play games every week, averaging seven hours of game time per week. The value of gaming has been established by technology companies (NVIDIA), movies (“The Super Mario Bros. Movie” and “Detective Pikachu”), television (“The Last of Us”), and others.

Across sectors, from e-commerce (Temu and SHEIN), to educational technology (Duolingo), to media (The New York Times and Netflix), and social networks (Twitch, LinkedIn), games and gamification models integrate closely with the company’s sustainability strategies. Emerging markets in Latin America, India, and pockets of Africa could also bring another billion consumers into the category within the decade.

These fundamentals will only continue to attract more investors in the segment with additional tailwinds expected from the release of Grand Theft Auto VI and new console generations from Sony and Nintendo.