Rise Of VC Capital in Gaming
The Rise of E-Gaming and Potential Revenue to be Generated
The start of 2020 has seen a rise in the demand and traffic when it comes to online gaming both by consumers and advertisers. While the pandemic has forced many companies to shift towards a work from home setup, that has allowed employees to take up hobbies that they wouldn’t have otherwise.
Not only are games an important part of our culture, but video games — specifically online gaming — has exploded in popularity, so much so that it is clouding over other forms of entertainment like movies, music, outdoor activities and much more. According to an estimate, more than 48% of consumer spending in 2019 alone came from US and China, which generated a collective of $ 73.4 Billion.
Naturally with such explosive numbers and potential for more growth in the different fields of online gaming such as E-Sports, Virtual Reality, mobile and cloud gaming and many more verticals, Venture Capitalists and advertisers are flocking by the dozen to generate their coin from this gold mine. However, before we dive deep into the details and business metrics of investing in online gaming, let’s take a look inside the world of online gaming and the various categories.
What is online gaming?
Online gaming or e-gaming is a booming field which refers to games played online or over a network. Some popular electronic games are DOTA 2, Minecraft, Fortnite, PUBG, Leagues of Legends, Counter Strike and many more.
Online games are usually played on consoles, PCs, or mobiles — that has been a recent development. Mobile gaming, unsurprisingly takes over 45% of the online gaming market, by bringing around $68.5 billion just in 2019. Another profitable segment of online gaming is E-Sports which basically takes online gaming to a virtual or an actual arena.
Not only is E-Sports a profitable segment, but one that brings in a lot of viewership that attracts advertisers and sponsors by the dozen. In 2020 alone the E-Sports market was valued at over $980 million and has a projected track of reaching $1.6 billion by 2023.
Online Gaming Eco-System
When we look at the online gaming eco-system, there are many stakeholders involved that range from developers, hardware providers, streaming platforms and more. Some of the main stakeholders directly involved are:
· Software developers: coders are by far the most important part of the online gaming eco system as they are the ones that bring games to life. Many online games have open source code which means they are developed and the code is refined by developers from all over the world. Discord, OpenAI are some examples of platforms used by developers for games.
· Gaming Studios: the ones that bring developers together to carry out and bring to life different online games are gaming studios such as Blizzard Entertainment, Valve studios, and more.
· Hardware developers: in order to provide a platform for the games to run on, there are many companies that develop the hardware to allow these games to play on. From the developers of PS5 that is Sony, Xbox producer Microsoft, Oculus, Intel and more.
· Game Publishers: in order to finance and distribute online games, game publishers act as a mediator that allows the world to play and enjoy them. Some popular game publishers are Ubisoft, EA games, Activision, and more.
· Distributors/retailers: Google Play,GameMine, PlayGiga Gamestop, Steam are some of the popular distributors and retailers that act as platforms from which gamers can buy and download games.
· Streaming Service Providers: streaming games has become a profitable profession for many gamers. Although YouTube allows them to upload for free however platforms like Twitch allows streamers to make monetary benefits from the platform as well.
As evident from the above points, the online gaming industry has many stakeholders involved that not only has room for VC funding and sponsorships, but advertisers as well. What is more, with the advent of 5G, the mobile gaming segment is predicted to become more profitable and with potential to grow further.
By 2022, it is predicted that most of the online gaming revenue is predicted to come from mobile at an estimate of $80 Billion. So the question arises where do VC capitalists fit in, and what are the metrics they should focus on? Let’s find out.
The Rise of VC Funding
During the pandemic, online gaming saw a boom in month-on-month traffic, and the increase hasn’t stopped since. While this has been good news for the gaming industry, Venture capital investments have been on a rise as well. According to data gathered by Venture Intelligence, VC funding rose from $176 million in 2019 to $376 million in 2020, and with the ban on Chinese gaming apps, there is big future for gaming start-ups and companies to make their mark.
Similarly, the number of gaming start-ups has also risen to 275 in 2019 from a meagre 25 in 2010. As the gaming industry grew to be larger than the music and video industry, there has been a spike in interest by investors that is making it one of the most lucrative industries.
If we look at the metrics of the gaming industry, it can be said that:
· Mobile gaming has 45% of the market share, whereas consoles represent 32%, and PC gaming represents 23% of the gaming market.
· While console growth has been 13% YoY, whereas mobile gaming has seen a 10% increase and PC gaming has seen a growth of 4% annually.
· Nonetheless, cross platform gaming has enabled these numbers to diminish in value as gaming has started to move away from PC and move more towards mobile and console.
Now if we take a look at the investor funding the gaming industry has received over the years from, names like Play ventures, London Venture, Makers Fund etc have been among the forefront. Traditionally generalist venture capitalist funds have stayed away from investing in games, however, with the growth spurt online gaming has seen especially in 2020, VC funds like NfX, Bessemer, the Raine Group, Andreessen Horowitz and more have started expanding their portfolios.
As of mid 2020, the amount of VC funding different gaming companies have received has surpassed the total funding the sector has received in 2019 that is around $700 million, with a project total to reach $1.5 billion.
Some high profile VC-backed start-ups of 2020 are:
· Roblox: managed to raise $150 million in Series G funding with a $4 billion evaluation. Funding was led by Andreessen Horowitz, along with Temasek, Altos Ventures, and more.
· Statespace: with a series A funding of $15 million by Khosla Ventures
· Genvid: managed to raise $33 million through Series B funding led by Huya.
· Superplus Games: gathered $5 million through Seed led by Makers Fund.
While some may argue that the increase in gaming traffic may die down post COVID-19, according to the data published by Verizon the 213% increase against baseline, will still remain at a healthy percentage once the pandemic is over. Predictions are too early to set in stone, nonetheless, investors are helping the gaming industry grow financially.
Conclusion: The Future of Online Gaming
Like we mentioned earlier, the pandemic has exploded the gaming traffic that the industry is seeing with increased viewership, however, that alone isn’t the only factor.
With 5G literally upon us, and the boom in E-Sports, online gaming is only going to go up financially and viewership wise as well. With the expansion of viewership, the traditional model of publishing a game and playing it, won’t work anymore.
Streaming platforms have a huge stake in the gaming industry as well, and virtual reality, cloud gaming are only going to bring the industry forward with their disruptive technology. This allows for both advertisers and marketers to gain monetization goals and improve the value chain of the gaming industry as well.
Coming back to E-Sports this segment of online gaming will see an increase of revenue that will reach a predicted $1.9 billion by 2021, as stated by Newzoo and Goldman Sachs. With the main viewership being formed by Millennials and Gen Z, online gaming will become the next social media network, and how will this area evolve will depend on future developments.
Online gaming has entered a new era with new technologies, evolving social dynamics online, and increased viewership through historical events like the on-going Pandemic. While many VC investors may have shied away from investing and expanding their portfolios in the gaming sector, they might just have to step in before it is too late.
— Illya Shpetrik