The Gaming Ecosystem: Market Overview & VC Investment Considerations

Market Overview

Looking at the current market statistics, we see the general consensus for the video game market projected to be ~$300 — $400 billion for 2023, VC deal volume near 1300 with $13.3 billion capital deployed in 2022, China & Mobile Gaming taking up the largest share of demographics and revenue generation, among other notable characteristics. Anyone with internet and some finance experience can generate these models or regurgitate facts about this industry with relative ease. Whether you look at consultant reports, Statista, CAPIQ, or Pitchbook — you are going to get different TAM assessments and assumptions that alter CAGR i.e., do you include content generation (Twitch or YouTube Gaming), Esports, gambling, infrastructure & tech (platforms for development, monetization & advertisement verticals, web3 applications & blockchain currencies), or even physical video game sales?

The important points to note are these:

· There are about 3 billion people that have participated in the video game ecosystem worldwide this past year. This explosion of the industry can be attributed to many factors (video game prevalence in modern media, content personalities, mobile gaming, deployed capital) but we can keep it brief for everyone’s sanity. Covid worked as a catalyst, forcing people to be at home, and propelling people to seek entertainment and social interaction. Video games became the dominant medium to fulfill this need. In fact, it is the largest market for entertainment for people under the age of 50 as of this year. This growth in consumers, especially new untapped market segments/demographics, means the industry will continue to see substantial growth for years.

· There has been a considerable disruption in distribution and monetization models every 5–10 years. Product popularity, whether it be platform or IP, is constantly changing as well. The following is a brief list articulating the development and options, but not exhaustive of all examples.

o Product: Arcade — Console — Online gaming — Mobile. Specific game preferences, brands, and marketplace can change exponentially faster than 5–10 years

o Distribution: Physical game sales, Digital sales, Mobile, Indie Publisher & Distributor marketplace, Web3/Blockchain

o Monetization: One-time sale (AAA), Live service model (MMO’s), Free to Play (loot box, skins, microtransaction, advertisement, gacha), Play-to-earn

· Exits are down, but financing is still there: As discussed earlier, financing and deals in the gaming industry are only slightly down from the peak in 2021 in new and growth startups. While exits are down (IPO market down market-wide), consumer growth and investor interest remain above many other sectors tech-focused sectors.

· Three questions VCs should be asking:

o What are the market trends in the future?

o What is the next innovation going forward?

o Where are the proper sub-sectors to deploy capital within the gaming industry?

Investment Spaces

If I knew exactly what the next successful unicorn would be in the industry, the dominant product offering in the space, and could time the market correctly I’d be playing VR on my yacht in the Bahamas with Warren Buffet right now. What I can say, based on my knowledge of the industry, connections, and mass consumption of video game content, is that three notable nascent revolutions are happening within this market. One, if not all of these, will become commonplace within the next 10 years.

Content Creation Platforms

The gaming ecosystem is becoming more and more interconnected with the rise in popularity of content creation and technology advancement over the past decade. Twitch at this point is ubiquitous, even for most consumers outside of the gaming industry — it helped bridge the gap between the previously perceived sub-culture of anti-social/lazy gamers to a mainstream activity that promoted competition, social interaction, and unmatched entertainment. It has evolved over time to host millions of concurrent viewers and become a content creation and social interaction platform connecting the entire entertainment space (Just Chatting is frequently the highest-watched category). The right streamer playing your game and promoting it can have ripples that change the direction of the industry and blow up a studio overnight (Battle Royale games, Among Us). This social interconnection is not exclusive to Twitch mind you, Youtube, Facebook, Kick, and Discord — not to mention the crossover between Esports, TikTok, and Instagram. The video game ecosystem has transitioned into a medium for social networking and lifestyle, as well as traditional gaming.

What’s the point here? Content creation is a massively growing market now within gaming. Companies and software that enable content creation and interaction with gamers through promotion, ease of use, turn-key platforms, consumer engagement, or interconnectivity among other social media platforms, all have high potential to be acquired or take considerable market share in upcoming years. *Also, I know there is a Mixer joke in here somewhere, but I am blanking — maybe Ninja has one.

Web3/Blockchain

Very promising, especially given it has the potential to disrupt both monetization and distribution, are companies utilizing Web3 and blockchain. The value proposition is quite simple and aligns with the popularity of blockchain tech being used in other sectors. It’s decentralized from the developer, and allows gamers to utilize these assets in the real world, thus giving power to the players and creating permanence of the effort put into the game and an economy rewarding players for their involvement beyond entertainment. The concept of implementing this is usually tied to play-to-earn models, with various structures on earning NFTs or cryptocurrencies. The monetization attached to this is still in its infancy, whether the developers take a trade percentage of the assets, or utilize common advertising monetization, or require upfront entry costs into the ecosystem — business models are still being developed and nothing concrete has been solidified. 

This innovation in technology has the potential to revolutionize distribution and open new markets for revenue within gaming. The current problems center around poor IP development (similar to early mobile games), execution, infrastructure, and adoption. Startups have an upside as early movers here and have considerable crossover potential to concurrently developed virtual and metaverse platforms.

VR

Look, everyone and their mother has claimed that VR tech is going to be the future. The problem has never been the technology inherently. It has been a product/market fit. An early version of VR was created in the 1980s by VPL Research. Almost 40 years later, the infrastructure and scalability at a low enough cost for consumer adoption is making headway for companies to develop products with this tech. The immersion of VR, capabilities, and lateral growth into tangential markets (social, video conferencing, etc.) is unmatched. It will do to gaming what 3D modeling did to 2D platformers years ago. Similar to the blockchain, many developers have struggled to adapt the technology to make quality IPs attractive to the wider market. Yet, as investors, we are looking to the future to identify the teams and founders with a vision to make this happen. With proper sourcing and support, VCs will find incredible early-stage opportunities in this space.

Final Thoughts

This is not an exhaustive list of all the successful verticals to invest in, a comprehensive view of operational/strategic limitations of growth or scale given current consumer & marketplace dynamics, nor does it give any insight into sourcing, financing, and generating exit returns for VCs within this industry.

Yes, there is a massive trend towards producer/developer consolidation from the large public players (Microsoft acquiring Activision Blizzard, Sony and Bungie merger — a potential merger with Take-Two as well). There is a lot of potential in developing infrastructure systems that enable cheaper and faster development for individuals and small studios. Generative AI to speed up code development is incredibly promising as well. Mobile games will certainly continue to accumulate market share as more investment keeps pouring in consistently, and a larger percentage of the eastern market gain access to smartphones or reliable internet infrastructure. 

Finally, it is important to consider the foundation of this industry – game and content-focused studios. Any new development studio with a few experienced developers (potentially first-timer devs as well) can create a sensational AAA, mobile, or Indie game that generates exceptional returns. I believe the three investment spaces above are standout considerations for investment, but the true heart of the gaming ecosystem is the games themselves. New studios can choose to implement or leverage these technologies, but a truly creative sandbox, story, or gameplay innovation can propel a studio to stardom with one incredible game. So, never turn down a game studio that knocks on your door with a pitch (these standout traditional games are what got most of us into this industry, to begin with) for Minecraft, Hades, Among Us, Angry Birds, PUBG and the like — especially if you have the ability to deploy capital and seek returns beyond a 10-year time frame or have LP’s understanding of development times of studios.