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The global video game industry makes more money every year than movies and music combined. But that doesn’t mean the region was immune to the macroeconomic effects of the past few years. Gaming companies have organized mass layoffsAnd venture funding for this category reached a five-year low in 2023. But the VC is optimistic that things will change this year.
Gaming startups raised $2 billion last year, according to a report From video game-focused VC Convoy Ventures. The 2023 total was significantly lower than 2021, at $9.9 billion, and 2022, at $6.7 billion.
Many VCs think 2024 could be a bloodbath for startups, generally speaking, with any kind of normalcy unlikely to return until 2025; Many companies will run out of money and will have to close down. But according to some VCs, video games may be different.
For one, there were still plenty of positive milestones for the sector in 2023. Many titles were released last year, attracting a large audience. baldur’s gate 3 And Hogwarts Legacy, each of which sold over 22 million copies. Despite a flat year for growth of the overall gaming industry, video games are projected to grow into a $229 billion industry by the end of the decade.
The category is also changing, which opens the door for startups to keep up with new trends. As the drama over Apple’s App Store fees continues, the industry is moving away from mobile games — which traditionally raise the most venture money — and toward cross-platform games, which are more expensive to make. Expensive, but also more attractive. Unlike some categories, AI is still in its early innings in video games and will likely start making its way this year.
Josh Chapman, co-founder and managing partner of Convoy, said the industry should return to normal growth in 2024. The increase in activity from tourist investors has all been set back due to pandemic-induced gaming spikes and crypto people supporting Web3 gaming. The industry may return to organic growth this year, he said.
“A lot of the Web3 and crypto stuff in gaming disappeared last year,” Chapman said. “The lack of Web3 gaming companies in the market led to an overall decline in deal flow. “It’s a subsector of gaming, everything else has been pretty strong.”
Ilya Eremeev, managing and general partner of The Games Fund, told TechCrunch that there is a lot to be excited about despite a more challenging year ahead for raising money for the industry. One of the main things is the amount of developer talent available after the industry lost thousands of jobs due to layoffs last year. Additionally, compensation for these positions has decreased, which means startups may be able to bring in top talent in this market.
While some tourist investors have exited the sector, corporates have remained active and have begun to participate more in the early stages. It also goes against trends for the broader venture sector, where corporate VCs participated in the lowest percentage of US deals in 2023 in nine years, according to PitchBook data.
“Strategists in Asia trying to drive overseas operations in Europe and the U.S., especially in Europe, realized there was an opportunity for growth in the region,” Eremeev said. “Sometimes they have accumulated a lot of capital, they need to invest and they are more open to higher-risk deals and they invest at an early stage.”
But the biggest trend to see in video games this year is AI. While the AI craze in 2022 prompted many existing companies to promote their AI capabilities or many companies to rapidly begin building them, it was not an immediate blow to the video game sector, Eremeev said. But companies are starting to launch, and they could have big implications – especially with regard to the costs associated with game creation.
Mobile ruled the gaming space for a long time, not just because the games were popular, but because they weren’t as expensive to produce as, say, an immersive data-heavy PC game. This made them more enterprising. Sophia Dolph, a partner at gaming-focused Index Ventures, said seeing AI evolve in the video game space is one of the things she’s most keeping an eye on this year.
“We’re in the early innings of AI, so while the ability to create something will be lower, it will also lower the barrier for some areas of gaming that have been less VC investable,” Dolph said. “Triple AAA quality games on PC that had really long production cycles, it didn’t lend itself as much to the enterprise model as mobile games, driving down those costs. We’ll see a lot of studios building that “I’m excited to take advantage of that technology.”
Generative AI embedded in games is another development worth watching. There could be really interesting developments where games could kind of become their own adventure if AI allowed users to completely control every aspect of the game, including NPCs (non-playable characters). It should definitely have guardrails and guidelines, Eremeev said.
Interestingly, none of the investors mentioned AR or VR as a growth area they are excited about this year. But with the current list of big video game releases scheduled for 2024, and Disney is taking a step 15% stake in Epic Games Just last week, VC investors may have good reason to be optimistic about video game startups this year and in the long term.
“It’s going to be a very difficult and challenging year for the gaming industry but some amazing opportunities will emerge,” Chapman said. “If you look at Halo, Halo was created in 2001. League of Legends was created in 2009. Tough times create incredible companies.”
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