Video game startups could be a bright spot for VC in 2024

The global video game industry makes more money each year than movies and music combined. But that doesn’t mean the sector was immune to the macroeconomic impacts of the last few years. Gaming companies have held sizable layoffs, and venture funding to the category hit a five-year low in 2023. But VCs are optimistic that things will turn around this year.

Gaming startups raised $2 billion last year, according to a report from video game-focused VC Konvoy Ventures. 2023’s total was down significantly from 2021, $9.9 billion, and 2022, $6.7 billion.

Many VCs think that 2024 could be a bloodbath for startups, generally, as exits aren’t likely to return to any kind of normalcy until 2025; many companies will run out of money and have to shut down. But video games might be an outlier, according to some VCs.

For one, there were still a lot of positive milestones for the sector in 2023. There were multiple titles released last year that garnered huge audiences, including Baldur’s Gate 3 and Hogwarts Legacy, which each sold more than 22 million copies. Despite a flat year for growth in terms of the overall gaming industry, video games are still projected to grow into a $229 billion industry by the end of the decade.

The category is also changing, which opens the door for startups to launch alongside new trends. As drama around Apple’s App Store fees continues to persist, the industry is moving away from mobile games — which traditionally raised the most venture money — and toward cross-platform games, which are more expensive to make, but more lucrative, too. Unlike some categories, AI is just in its early innings in video games and will likely start to stake its place this year.

Josh Chapman, co-founder and managing partner at Konvoy, said the industry should return to normal growth in 2024. The increase in activity caused by tourist investors coming in due to pandemic-fueled gaming spikes and the crypto folks backing web3 gaming has all retreated. The industry can return to organic growth this year, he said.

“A lot of the web3 and crypto stuff in gaming sort of evaporated last year,” Chapman said. “The lack of web3 gaming companies pitching in the market led to an overall drop in deal flow. That’s one subsector of gaming, everything else stayed pretty strong.”

Ilya Eremeev, managing and general partner at The Games Fund, told TechCrunch that despite the industry coming off of a more challenging year for fundraising there is a lot to be excited about. One of the main things is the amount of developer talent available after the industry shed thousands in headcount through layoffs last year. Plus, compensation for these positions has gone down, which means startups might be able to land top talent in this market.

While some of the tourist investors have exited the space, corporates have remained active and have started to participate more at the early stages. It also goes against the trends in the broader venture space, where corporate VCs participated in the lowest percentage of U.S. deals in 2023 in nine years, according to PitchBook data.

“Strategics in Asia trying to run overseas operations in Europe and in the U.S., especially in Europe, they realized there is a growth opportunity in this region,” Eremeev said. “Sometimes they accumulated a lot of capital, they need to invest and are more open for high-risk deals and they invest in early stage.”

But the biggest trend to watch in video games this year is AI. While the AI frenzy in 2022 sparked a lot of existing companies to tout their AI prowess or a lot of companies to start building fast, it wasn’t as immediate of a jolt to the video game sector, Eremeev said. But companies are starting to launch, and they could have big implications — especially regarding the costs associated with game creation.

Mobile ruled the gaming space for a long time, not just because the games were popular, but because they weren’t as expensive to produce as, say, an immersive data-heavy PC game. This made them more venture-backable. Sofia Dolfe, a partner at Index Ventures focused on gaming, said that watching AI unfold in the video game sector is one of the things she’s tracking the most this year.

“We are at the early innings of AI, it will lower the ability to create something, it will also lower the barrier for some areas of gaming that have been less VC investable,” Dolfe said. “Triple AAA quality games on PC that had really long-form creation cycles, it didn’t lend itself as much with the venture model as mobile games, bringing down those costs we will see a lot of studios being built that leverage that technology that I’m excited about.”

Generative AI embedded in games is another development to watch. There could be really interesting advancements where games can become more of a choose your own adventure in a way if AI allows users to fully control every aspect of the game, including NPCs (non-playable characters). This will of course have to have guardrails and guidelines, Eremeev said.

Interestingly, no investor mentioned AR or VR as an area of growth they are excited about this year. But with the current list of big video game releases set for 2024, and with Disney taking a 15% stake in Epic Games just last week, VC investors may have good reason to be optimistic about this year and video game startups in the long term.

“It’s going to be a very tricky and challenging year for the gaming industry but some amazing opportunities will emerge,” Chapman said. “If you look at Halo, Halo was built in 2001. League of Legends was built in 2009. Tough times produce incredible companies.”