The global video game industry makes more money each year than movies and music combined. But that does not mean that the sector has been immune to the macroeconomic impacts of recent years. Gaming companies have had considerable layoffs and venture funding for this industry hit a five-year low in 2023. But venture capitalists are optimistic that things will change this year.
Gaming startups raised $2 billion last year, according to a report from VC Konvoy Ventures, focused on video games. The 2023 total was significantly lower than 2021's $9.900 billion and 2022's $6.700 billion.
Many VCs think that 2024 could be a bloodbath for startups in general, as they are not likely to return to any kind of normality until 2025. Many companies will run out of money and have to close. But video games could be an outlier, according to some venture capitalists.
On the one hand, there were still many positive milestones for the sector in 2023. Several titles were released last year that garnered large audiences, including Baldur's Gate 3 y Hogwarts legacy, which sold more than 22 million copies each. Despite a year of no growth in terms of the gaming industry as a whole, video games are still projected to grow into a $229 billion industry by the end of the decade.
The sector is also changing, which opens the door for startups to launch alongside new trends. As the drama around Apple's App Store fees persists, the industry is moving away from mobile games, which traditionally raised the most venture money, toward cross-platform games, which are more expensive to make but also more lucrative. Unlike some categories, AI is just in its early stages in gaming and will likely start to take its place this year.
Josh Chapman, co-founder and managing partner of Konvoy, commented that the industry should return to normal growth in 2024. The increase in activity caused by the arrival of tourism investors due to gaming spikes driven by the pandemic and the crypto people backing web3 games have pulled out. The industry can return to organic growth this year, he said.
“A lot of web3 and crypto stuff in gaming evaporated last year,” Chapman said. “The lack of web3 gaming companies coming to market caused a general drop in transaction flow. “That's one subsector of gaming, everything else stayed pretty strong.”
Ilya Eremeev, director and general partner at The Games Fund, said that even though the industry is coming off a more challenging year for fundraising, there is a lot to be excited about. One of the main things is the amount of developer talent available after the industry lost thousands of people through layoffs last year. Additionally, compensation for these positions has decreased, meaning startups could get top talent in this market.
While some of the investors in turimso have left this space, companies have remained active and have begun to participate more in the early stages. It also bucks trends in the broader venture space, where corporate VCs participated in the lowest percentage of U.S. deals in 2023 in nine years, according to PitchBook data.
"Strategists in Asia who were trying to run operations in Europe and the United States, especially in Europe, realized that there was an opportunity for growth in this region," Eremeev said. “Sometimes they accumulate a lot of capital, they need to invest and they are more open to high-risk deals and invest in the early stages.”
But the biggest trend to watch in video games this year is AI. While the AI frenzy in 2022 caused many existing companies to tout their AI prowess or many companies to start building quickly, it wasn't such an immediate jolt to the video game sector, Eremeev said. But companies are starting to make releases and they could have big implications, especially when it comes to the costs associated with creating games.
Mobile devices dominated 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, a data-heavy, immersive PC game. This made them more endorseable by companies. Sofia Dolfe, a partner at Index Ventures focused on games, said that watching the development of AI in the video game sector is one of the things she is following the most this year.
"We are in the early stages of AI, it will reduce the ability to create something, it will also reduce the barrier for some areas of gaming where less venture capital has been invested," Dolfe said. "Triple AAA quality games for PC had really long creation cycles, they were not as adapted to the risk model as mobile games, reducing those costs we will see many studios being built that take advantage of that technology and that produces great enthusiasm."
Generative AI integrated into games is another advance to take into account. There could be some really interesting developments where games can become more like choose your own adventure if AI allows users to completely control all aspects of the game, including NPCs (non-playable characters). Of course, this will have to have limits and guidelines, Eremeev said.
Interestingly, no investors mentioned AR or VR as a growth area they are excited about this year. But with the current slate of big video game releases scheduled for 2024, and with Disney taking a 15% stake in Epic Games last week, venture capital investors may have good reason to be optimistic about this year and the startups. long-term video games.
"It's going to be a very complicated and challenging year for the gaming industry, but some incredible opportunities will arise," Chapman said. "If you look at Halo, Halo was built in 2001. League of Legends was built in 2009. Tough times produce incredible companies."
