In the wake of PitchBook’s comprehensive Gaming VC market report, a profound exploration into market segment trends has been unveiled. The report forecasts a continuation of the muted venture capital funding levels experienced in 2023, standing at $4.3 billion, a staggering 72% decline from 2022. However, the nuances lie in the evolving landscape of startups and investment sources, promising a paradigm shift in the gaming industry.
Funding Dynamics
Content Developers Dominance
Over the last twelve months, a commanding 56% of closed funding deals, totaling 294, were funneled towards content developers. Developer tools and services followed closely, showcasing the pivotal role of these entities in shaping the industry’s trajectory. Remarkably, publishers, developers, and studios emerged as the largest subsegment, with an impressive count of 190 closed deals.
Enterprise Value and Pre-Money Valuations
While content may reign supreme in closed deals, development startups are poised for substantial enterprise value growth. PitchBook data reveals a median pre-money valuation of $35.0 million for development startups, outshining access startups at $32.2 million and relegating content startups to a second-tier position with $17.5 million.
Subsegment Spotlight: Technology Services
Within subsegments, technology services soared to new heights with a staggering median pre-money valuation of $475.0 million. This significant leap underscores the subsegment’s resilience and adaptability, reflecting a marked advancement since PitchBook’s previous deep dive.
Valuation Step-Up Dynamics
Downward Pressure on Startups
Valuation step-up data exposes a downward trend exerting pressure on startups. In the buoyant atmosphere of 2022, eight sub-categories experienced step-ups of 2.0-times or higher, with four surpassing 3.0x. Presently, only hardware (2.8-times) and developer tools (2.2-times) witness pre-money valuation step-ups exceeding 2-times.
Notable Outliers
Analyzing by company stage, notable outliers include pre-seed/seed developer tools (6.2-times), early-stage hardware (3.1-times), pre-seed/seed esport companies (3.0-times), late-stage publishers, developers & studios (3.0-times), and early-stage gambling deals (3.2-times).
Bridging the Funding Gap
PitchBook anticipates a closure of the funding gap between content and development startups, attributing it to a shifting investor landscape. The exuberance of 2020 to 2022 attracted nonendemic investors seeking exposure to Web3 and the Metaverse. However, as the hype subsides, PitchBook envisions a reevaluation by these investors, potentially leading them towards startups with more familiar software-as-a-service (SaaS) business models.
Investor Landscape Shifts
Nonendemic Investors and Corporate VC
As nonendemic investors shift focus, PitchBook expresses caution regarding corporate VC. While corporate investments performed marginally better than the overall gaming VC market, challenges loom. Regulatory hurdles and geopolitical headwinds faced by historically active CVC firms like Tencent and NetEase, alongside a slowdown in Web3 corporate investments, underscore the complexities of the current landscape.
Outlook for 2024
In a challenging funding climate, PitchBook foresees a moderate uptick in both M&A and CVC activity during 2024. With exits seemingly off the table, startups face the prospect of down rounds as valuations reset. As funding constraints persist, incumbent gaming companies and cash-rich tech giants are positioned to play pivotal roles in shaping the industry’s trajectory.
PitchBook’s data paints a nuanced picture of the gaming industry’s current state. Navigating through funding challenges requires strategic acumen, adaptability, and a keen understanding of the evolving investor landscape. As startups brace for the complexities of 2024, the interplay between funding dynamics, investor strategies, and industry resilience will undoubtedly shape the future of gaming.
