The global video game industry makes more money each year than movies and music combined. But that doesn’t mean the industry has been immune to the macroeconomic effects of recent years. Gaming companies have kept significant layoffsand venture funding in the category hit a five-year low in 2023. But VCs are optimistic that things will turn around this year.
Gaming startups raised $2 billion last year, according to a report from video game-focused VC Konvoy Ventures. The 2023 total is down significantly from 2021’s $9.9 billion and 2022’s $6.7 billion.
Many VCs believe that 2024 could be a bloodbath for startups in general, as exits aren’t likely to return to any kind of normalcy until 2025. Many companies will run out of money and have to shut down. However, video games can be something of an extreme, according to some VCs.
First, there were still many positive milestones for the industry in 2023. There were many titles released last year that garnered huge audiences, including Baldur’s Gate 3 and Hogwarts Legacy, each sold more than 22 million copies. Despite a solid year of growth for the overall gaming industry, video games are expected 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 launch alongside new trends. As the drama surrounding Apple’s App Store fees continues to rage, the industry is moving away from mobile games — which have traditionally garnered the most venture money — and toward multi-platform games, which are more expensive but also more profitable. Unlike some categories, artificial intelligence is still in its infancy in video games and will likely start gaining ground this year.
Josh Chapman, co-founder and managing partner of Konvoy, said the industry should return to normal growth in 2024. The increase in activity caused by tourist investors coming due to gaming spikes fueled by the pandemic and people encryption that support web3 gaming has declined. The industry may return to organic growth this year, he said.
“A lot of the web3 and crypto stuff in gaming evaporated last year,” Chapman said. “The lack of web3 gaming companies coming to market has led to an overall drop in deal flow. This is a sub-sector of gaming, everything else has remained quite strong.”
Ilya Eremeev, director and general partner of The Games Fund, told TechCrunch that despite the industry coming off a tougher year for fundraising, there’s a lot to be excited about. One of the main things is the amount of developer talent available after the industry shed thousands of workers through layoffs last year. Additionally, compensation for these positions has decreased, meaning startups may be able to attract top talent in this market.
While some of the tourism investors have left the space, companies have remained active and become more involved in the early stages. It also contrasts with trends in the broader venture space, where corporate VCs participated in the lowest percentage of US deals in 2023 over the past nine years, according to PitchBook data.
“Strategists in Asia who are trying to run overseas operations in Europe and the US, especially in Europe, have realized that there is a growth opportunity in this region,” Eremeev said. “Sometimes they have accumulated a lot of capital, they need to invest, and they are more open to high-risk deals and invest at an early stage.”
But the biggest trend to watch in video games this year is artificial intelligence. While the AI frenzy in 2022 triggered many existing companies to tout their AI prowess or many companies to quickly start building, it was not as immediate a jolt to the video game sector, Eremeev said. But companies are just getting started, and it could have big implications — especially when it comes to the costs associated with making games.
Mobile ruled the gaming space for a long time, not only 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 risky. Sofia Dolfe, a partner at Index Ventures who focuses on gaming, said that watching artificial intelligence unfold in the field of video games is one of the things she is watching the most this year.
“We’re in the early stages of AI, it’s going to lower the ability to build something, it’s also going to lower the barrier for some areas of gaming that have been less VC investors,” Dolfe said. “Triple AAA quality games on PC that had very long development cycles didn’t help the venture model as much as mobile games, by bringing that cost down, we’re going to see a lot of studios come up that take advantage of this technology I’m excited.”
Generative AI embedded in games is another development to watch. There could be some really interesting developments where games can become more of a choose your own adventure if AI allows users to fully control every aspect of the game, including NPCs (non-playable characters). This of course should have guardrails and guidelines, Eremeyev said.
Interestingly, no investors mentioned AR or VR as a growth area they are excited about this year. But with the current list of major video game releases set for 2024 and Disney taking a 15% stake in Epic Games just last week, VC investors may have good reason to be optimistic about this year and video game startups long term.
“It will be a very difficult and challenging year for the gaming industry, but some amazing opportunities will arise,” said Chapman. “If you look at Halo, Halo was built in 2001. League of Legends was built in 2009. Difficult times produce incredible companies.”
