Failure to Launch: The Series A Crunch

Earlier this month, Carta released its inaugural VC Fund Performance report, which analyzes benchmarks for more than 1800 funds across six recent vintages. Amongst other things, Carta reported that graduation rates from Seed to Series A are declining. While 30.6% of companies that raised a seed round in Q1 2018 raised Series A within two years, only 15.4% of startups that raised a seed round in Q1 2022 could do so in the same timeframe, a ~50% decrease overall.

This week, we will be analyzing the transition from Seed to Series A for gaming startups and identifying the key trends.

Graduation Rates (Seed -> Series A) in Gaming

When looking at comparable time frames to the Carta report:

• Only 7.9% of gaming startups who raised Seed rounds in Q1 2018 were able to raise a Series A round within 2 years (vs 30.6% of all Seed stage startups).
• Only 1.6% of gaming startups who raised a Seed round in Q1 2022 were able to raise a Series A round within 2 years (vs 15.4% of all Seed stage startups).

While graduation from Seed to Series A has declined across all sectors, the decline within gaming has been much more dramatic: 80% decrease in gaming vs 50% decrease across all Series A deals.

When looking at this heatmap, there is a period between late 2019 and early 2021 that distinctly outperforms other Seed cohorts. ~10-12% of companies that raised a Seed round between 2019-Q4 and 2021-Q1 were able to successfully raise a Series A round. We believe that this is due to the large uptick in the number of gaming companies being funded and the overall amount of VC funding funneling into gaming from late 2021 and early 2022. As a reminder from our quarterly report, VC funding into gaming companies dramatically increased between 2020 and 2021 and this trend continued through early 2022.

From 2019-2021, Series A financing was active (by number of deals), yet there was a steady decline from Q1 2021 onward in the number of Series A companies that raised a previous Seed round. This is strange because the decline continued during the period where there was a large increase in the number of gaming venture capital deals across stages (Q4 2021 and Q1 2022).

Despite operating counter to broader gaming trends from Q4 2021 and Q1 2022, Series A financing was impacted by the same pullback seen across stages in gaming from Q2 2022 through Q4 2023.

The surge in deals from Q4 2021 to Q2 2022 was not driven by Series A rounds for companies that had previous Seed funding. Instead, based on the below average graduation rates we are seeing 2 years later; many of these Seed deals were likely in low quality companies that should not have received funding.

VCs On The Sidelines

The decline in Series A activity can partially be attributed to inactive funds. Immediately prior and during the period of high investment activity in gaming (2020 and 2021), a record number of new vintages were being raised. Over 730 funds, a record $128b was raised in 2021 (1.5x the fund count and 74% more capital raised in 2020). As of Q1 2024, the total amount of dry powder was $317b with 72% of the dry powder from 2020-22 vintage funds (EisnerAmper). More funds were raised than ever before and the vast majority of this committed capital remains uncalled.

Bridging The Gap

While there has been a dramatic decrease in the number of gaming companies that have raised a Series A round since late 2021, we have seen a resilient proportion that were able to raise some sort of VC funding after their Seed round. These include Seed extensions, convertible notes, angel investments, “Unattributed” VC rounds, and Series A rounds.

16% of companies were able to raise some sort of Non-Series A round from 2018-2020 and this has remained at 15% from 2021-2022. Note, it has not been 2 full years for the 2023 Seed cohorts.

Interestingly, the proportion of gaming companies that raised a Seed round and then were acquired has only increased over time. Of the companies that have raised this calendar year (2024), 6% have already been acquired. As graduating to Series A has become more difficult, selling for parts or acquihire exits become more likely for Seed stage startups.

Themes in Successful Series A Rounds

• 42% of companies who have raised a Seed round between 2018-2023, and have gone on to raise a Series A successfully, have been game studios developing at least 1 game (what we refer to as “Content”).
• Studios that raised a Seed round in 2021 are seeing below-average graduation rates relative to the broader industry - only 39% have been able to raise a Series A.
• A majority of gaming companies that have raised a Series A round between 2018-2023 are building gaming-related technology, platforms, or infrastructure or are esports-related (Non-Content).

Themes in Acquisitions

While graduation rates have been more evenly split between Content and Non-Content, there is a more dramatic trend toward Non-Content in acquisitions. 70% of all companies that raised a Seed round between 2019 and 2023 and were acquired were building gaming-related technology, platforms, and infrastructure.

Takeaway: There has been a strong decline in graduation rates from Seed to Series A within gaming. Only 1.5% of companies that raised in early 2022 have been able to successfully raise a Series A round within 2 years. Series A financing has always been challenging for gaming, but the recent venture capital pullback has exacerbated this hurdle. Companies that have raised Seed rounds still are able to either raise bridge financing (Seed extensions, angel funding, or convertible notes) or exit via acquisition.

There is also a significant amount of capital on the sidelines. While 2020 and 2021 were record years for venture firms raising fresh funds, 72% of dry powder is from 2020-22 vintage funds.

While the venture market sentiment is pessimistic, Konvoy remains excited about investing in the technology, infrastructure and platforms of the gaming industry.