Venture capital funding for video games slumped to a three-year low last quarter, reflecting investors’ growing distaste for risk and rising costs to develop new hits.
VC groups invested $700.3 million in gaming in the third quarter, the lowest total since the second quarter of 2020, according to data from PitchBook. The industry attracted more than $2 billion in every quarter for two years ending in mid-2022.
Video game companies are suffering from a hangover after a surge in play during the pandemic, with revenue in the $183 billion market down 5.1% last year. People are spending less time indoors, creating more competition for players’ attention, and the hype surrounding new technologies like the metaverse and Web3 has deflated. Rising interest rates have also hurt.
“There’s so much content on every platform,” said Joost van Dreunen, a lecturer at New York University’s Stern School of Business and veteran industry analyst. “It makes marketing very expensive.”
Large publishers, he said, are relying on the mass appeal of their existing intellectual property as an “easy way to make revenue instead of trying new ideas.
“It kills the middle class of the games industry,” van Dreunen said.
VC fund-raising for the industry peaked at $5.9 billion in the second quarter of 2022, when Fortnite maker Epic Games Inc. raised $2 billion at a valuation of about $30 billion, PitchBook’s data show.
Private equity groups’ interest in gaming is also dwindling. Game companies attracted just $20 million from such investors in the third quarter. Between 2018 and 2022, the average quarterly investment was $852 million.
“Game development is risky,” PitchBook analyst Eric Bellomo said. “Outsize returns come from a small collection of games, but it is very hard to pick those games at an early stage.”
In an environment where investors are more risk averse, Bellomo said venture capital firms are raising “the bar for titles and studios they fund.”
The past few weeks have been marked by layoffs and studio closures by game companies. Epic cut 830 jobs, while Sony Group Corp.’s Naughty Dog and Worms maker Team17 have also let go dozens of workers.
The Swedish video-game holding company Embracer Group AB, which bought up dozens of gaming companies starting in 2020, is now canceling games, eliminating jobs and closing studios. The company is looking to sell Borderlands developer Gearbox Entertainment. A $2 billion deal between Embracer and Saudi Arabia’s public investment fund fell through in May, Axios reported.
Documents in the US government’s effort to stop Microsoft Corp. from buying Activision Blizzard Inc. lifted the veil on game development costs, as well as the importance of a few big hits to the industry.
Sony’s The Last of Us Part 2 cost $220 million to develop, according to documents cited by the Verge. The data also showed that 1 million PlayStation users spent all of their time with just one game: Activision’s Call of Duty.