Active investors in game developers could decline in 2025 | Pitch book

The number of investors active in gaming will continue to decline as the sector remains underinvested relative to public market capitalization.

And according to a report from Pitchbook, venture capital-backed content developers will struggle to take market share from incumbents.

The number of active investors in game developers has fallen sharply over the past year since the outbreak of the COVID-19 pandemic, said Pitchbook, which monitors global venture capital investments. At the same time, another report from Pitchbook pointed out that Discord, the gaming communication platform, has a 93 percent chance of going public through an initial public offering (IPO) in 2025.

In 2021, the gaming boom was here. According to Pitchbook, 2,359 venture investors have written checks to support publishers, developers and studios (up from 734 in 2020). By 2023 the number will have halved to 1,142 investors, and the pace will be even lower in 2024.

“We expect more of the same in 2025, with a further decline in the number of investors backing content developers, but the long-term trajectory of the industry means that the sector will continue to grow compared to the $187.7 billion invested annually in games “Too little is spent, too little is invested,” wrote Eric Bellomo. Emerging Technology Analyst at Pitchbook.

The reasons for the abrupt inflow and outflow of capital are varied. During the hustle and bustle of the zero interest rate environment, record numbers of VC funds were initiated and record amounts of capital raised across the venture ecosystem.

Gaming itself found itself at the intersection of several emerging trends that drew unprecedented amounts of capital into the industry. Facebook had embraced the metaverse, cryptocurrencies and blockchain-based gaming were exploding into the zeitgeist, and gaming awareness rose as stay-at-home orders were placed, leaving consumers with few other entertainment options.

Oh, just come, just go. By the end of 2023, the sector proved to be over-invested. A flurry of previously delayed releases have been in the public’s hands, with a much weaker release slate scheduled for 2024. Interest rates soared, forcing investors to take a closer look at potential deals. Game development cycles, constantly time-consuming and expensive, became unrecognizable compared to traditional software-as-a-service business models and soon became unpalatable.

Apple’s elimination of IDFA (which prioritized user privacy over targeted advertising) increased customer acquisition costs and further squeezed mobile gaming margins. Exit routes became increasingly difficult to identify as mergers and acquisitions dried up, the IPO window closed and regulatory interference in deals initiated by Meta (formerly Facebook) and Microsoft deterred other buyers.

Given the abundance of content, consumers increasingly chose to play established “forever titles,” shrinking the time for net new releases.15 Finally, the explosion of interest in AI and machine learning has resulted in dollars moving away from previously trendy categories became.

Still, Pitchbook claims the sector is underinvested. The gaming industry’s market cap exceeds $1 trillion globally (excluding Microsoft but including Tencent)16, 17, with only $1.5 billion to $4 billion invested annually (excluding the COVID-19 outlier years), according to the Q3 2024 Gaming Report.

This means that a tiny fraction of the industry’s market capitalization is reinvested in high-risk ventures. In comparison, publicly traded fintech companies have a market capitalization of over $1 trillion18 and, according to the Pitchbook Q2 2024 Retail Fintech Report, $10 billion to $17 billion is invested in the industry annually.

Similarly, the total capitalization of the public healthcare IT market exceeds $100 billion, with approximately $5 billion invested per year, according to our Q2 2024 healthcare IT VC update.

Therefore, new funds and vintages have indeed emerged since early movers like London Venture Partners started targeting the ecosystem. Andreessen Horowitz committed $600 million to gaming in April as part of a broader $7.2 billion fundraising campaign, Bitkraft announced a $275 million round for its third fund and Griffin Gaming Partners announced its third flagship fund. Over the last four to six years, another group of specialized investors has also come online to support the sector, including Makers Fund, Konvoy Ventures, 1Up Ventures, F4 Fund, Play Ventures and many others.

Despite the low quarterly investment numbers, there are several key tailwinds. The next generation of consumers spend a lot of time in gaming environments.

Over 90% of consumers between the ages of 13 and 17 play games every week, averaging seven hours of gaming time per week. The value of games has been found across technology companies (NVIDIA), movies (“The Super Mario Bros. Movie” and “Detective Pikachu”), television (“The Last of Us”) and more.

Across sectors from e-commerce (Temu and SHEIN) to education technology (Duolingo) to media (The New York Times and Netflix) to social networks (Twitch, LinkedIn), games and gamification models have an important role to play Customer loyalty strategies played by companies. Emerging markets in Latin America, India and parts of Africa are also poised to attract another billion consumers into the category within the decade.

These fundamentals will continue to attract more investors to the segment as additional tailwinds are expected from the release of Grand Theft Auto VI and new generations of consoles from Sony and Nintendo.