The game industry, once riding high on pandemic-driven growth, is now navigating uncertain economic waters. In this report, we explore the current landscape of game industry investments, examining how investors and publishers are adjusting to new challenges.
From cautious equity investments to the impact of artificial intelligence and emerging trends, join us as we unravel the evolving dynamics of this dynamic sector.
Investors' Preference & Focus
Cautious Approach to Equity Investments:
It was noted that investors are exercising caution in the current tough economic environment.
Equity investors are increasingly looking for strong organic growth and positive cash flows rather than growth through acquisitions.
On the publishing and project financing front, investors are more selective about team backgrounds, leading to fewer prototype funding opportunities for first-time teams.
What They Focus?
AI has garnered substantial attention from investors, with significant funding rounds for AI-related companies.
Investors are particularly interested in generative AI, which has the potential to impact audience expansion, engagement, and monetization. However, there's a need to distinguish between genuine AI integration and superficial checkbox inclusion in pitches.
Beyond AI, other trends are catching the eye of investors. Photogrammetry, the use of AI software to create 3D assets from 2D images, is gaining traction.
User-generated content (UGC) is also on the rise, with the potential to enhance game profitability and longevity.
Additionally, Massively Interactive Live Events (MILEs) and gamified apps are expected to see growth in the industry.
Game Industry Situation
Slower Decision-Making Across the Ecosystem
"The entire ecosystem has slowed down."
Investors are taking more time to issue term sheets and complete transactions, while strategics are cautious about mergers and acquisitions, leading to reduced valuations.
Publishers are carefully selecting projects for their pipelines, emphasizing the need for companies to extend their runway and demonstrate progress when seeking additional funding.
Challenges in Later Stage Funding
The Venture Partner at London Venture Partners, pointed out that while seed stage funding remains active, later stage funding is a significant challenge for both venture capital firms and publishers.
Investors now require more proof points and evidence of traction, creating analysis paralysis as they delve deeper into details. The types of projects receiving investments have shifted, with a focus on self-sufficient studios and more predictable business models like B2B.
Future Outlook
The investment landscape is expected to pick up slightly, but the macroeconomic situation remains uncertain. Investors are focusing on raising enough cash to sustain their operations for the next 24 months, anticipating that market conditions will improve.
The industry is shifting towards more mature products and adopting a cautious approach, which is seen as a positive course correction after the loose-money period during the pandemic.
Potential Challenges
Despite cautious optimism, challenges lie ahead. Investors anticipate a wave of bankruptcies in the gaming industry over the next 12 to 18 months as companies face funding shortages and struggle to achieve profitability.
Inflation is also impacting budgets, emphasizing the importance of securing sufficient cash reserves to weather the economic uncertainty.
In conclusion, the game industry investment landscape is evolving as investors exercise caution and seek more mature, sustainable projects. While AI remains a focal point, emerging trends and a careful approach define the industry's response to current economic challenges.
Key Takeaways:
- Investors are now cautious about team backgrounds and provide less funding for prototypes, signing fewer first-time teams
- Difficult in securing later-stage funds.
- Self-sufficient studios & B2B are preferred by investors
- Increasing focus on fields such as practical AI applications, Photogrammetry, UGC, MILEs & gamified apps
- the peak bankruptcies predicted to be in the next 12 to 18 months
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