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As with many other industries, the gaming sector has faced its fair share of problems this year as startups struggle to secure funding. Pitchbook has just released its Q3 2023 Gaming Report, examining venture capital trends and emerging opportunities in gaming. It is not surprising that there has been a drop in funding; however, there is still funding going to game studio startups and investment being focused on game analytics startups. Foley had the privilege of advising on an investment in multiplayer game moderation platform GGWP, which was announced in July 2023.
Below, we look at some of the highlights from the Pitchbook report.
Number of transactions and transaction value
Gaming startups saw a decline in total transactions and transaction value in the third quarter. For the quarter, there were 113 transactions valued at $857.0 million, representing a 10.3% decrease in the number of transactions and a 35.3% decrease in transaction value. This is a significant year-over-year decline, with transaction value down 67.5% and number of transactions down 50.2%.
Pitchbook points out that despite the quarterly decline, the last four quarters generated between $800 million and $1.1 billion in investments. Investments in video games in 2023 are currently on track to narrowly exceed the $3.7 billion invested in 2019.
Which subsets are investors targeting?
Pitchbook data shows that the content segment accounts for the largest share of investment activity, with $514.2 million spread across 66 deals. The content segment was more than double the next segment, development, with $247.7 million invested. All other categories totaled only $35 million in investment.
Early and advanced offers
Venture capitalists are currently more focused on early-stage deals, which total $353.0 million, just ahead of late-stage deals, totaling $299.0 million. The report notes that this is a reversal from the previous two quarters, during which investors invested more in late-stage deals.
In the third quarter, seed and pre-seed deals accounted for more than 70% of all VC deal activity in the gaming sector. Risky growth deals have declined significantly. These deals accounted for over 30% in 2020 and 20% in 2021. However, they accounted for just 5.8% of deals in 2023. Late-stage deals, meanwhile, showed an impressive increase from 23 .9% of transactions in 2022 to 46.1%. % year to date in 2023.
Investment may be down overall in the gaming industry, but that has been the case across most industries. Over the past two years, economic conditions have caused investors to shy away from making deals. But there’s plenty of dry powder to deploy in the gaming space. Pitchbook highlights this in a recent article that traditional investors have “strengthened their presence in games in recent years” and that much of the money remains to be invested.
Recent deals and major industry exits, along with more distribution channels and AI-augmented game development, leading to more intuitive and less capital-intensive game creation, are laying the foundation of renewed investor attention to the gaming industry.
Gaming is an imaginative and transformative industry, at the forefront of adopting, developing and applying technology, often in unanticipated ways. Investors will undoubtedly continue to fund the exciting innovations coming out of the gaming industry, and we expect a return to increased levels of investment as global economic conditions continue to stabilize.
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