Gaming Will Revitalize Consumer Investing

Gaming Will Revitalize Consumer Investing

Over the past decade, venture capital firms have increasingly shifted away from investing in the consumer sector. In 2024, only 6% of all VC investment dollars went into the consumer sector from the top 100 most active VC firms (see chart above from SVB).

Thinking about the last 5+ years (setting game titles aside), the last great consumer app that truly has taken off in mass adoption has been ChatGPT. Before that, a few others worth highlighting were TikTok (2016), Discord (2015), Robinhood (2013), Coinbase (2012), Snapchat (2011), Instagram (2010), WhatsApp (2009), Uber (2009), Spotify (2008), Zillow (2006), and the list goes on. Many of these are Forever Apps (which we did a deep dive on in 2023) or short-term apps, which are also very lucrative consumer investments.

It has been a while since there was a steady release of new consumer apps/platforms that are capturing attention and mass adoption. We believe that the under investment from the venture capital space has partially contributed to that; and therein lies the opportunity.

‍Why Have VCs Preferred B2B > B2C?‍

Here are a few of the core factors that we believe have contributed to the slowdown in consumer investing from the venture capital investment firms:

1. Enterprise (B2B) investing has been more lucrative: the venture industry has primarily focused on enterprise SaaS for the past decade for the following reasons:
   • enterprise customers monetize for longer and have higher lifetime value (LTVs)
   • B2B companies trade at higher multiples than consumer companies due to stickier client bases and more predictable cash flows
   • the exit environment has been healthier for these companies given the faster path to IPO and higher propensity for strategic M&A
2. Rising customer acquisition costs (CAC): these costs vary widely from e-commerce (~$70) to insurance ($1.2k), yet due to economic stimulus during covid as well as inflation the past 5+ years, it is increasingly expensive to acquire customers. Even Google’s average CPC increased by 10% from 2023 to 2024 (after only a 2% rise from 2022 to 2023). It is far more expensive than ever before to acquire new users.
3. Social media platforms have won the war for attention and time: in 2024, the average time on social media (YouTube, TikTok, Instagram, Snap, X, FB, etc) was 2.5 hours per day (up only 15 minutes from 2019, showcasing how entrenched their moat is). Gen Z and Millennials are spending well over 2.5 hours per day while older demographics are spending between 1-2 hours per day. Social media platforms command the waking hours of the consumer at an unprecedented scale.
4. Incumbents are hard to dethrone: across various categories, the broad base of consumers has chosen their go-to platforms over the past 5-8 years. Whether across real estate (Zillow), car rides (Uber), finance (Robinhood), shopping (Etsy), or many other categories, it is a daunting task for a startup to try to dethrone these household names due to their strong network effects. Consumers today are very sticky, hard to impress, and require a 10x experience to win over. That is hard to do.
5. Microeconomic concerns around consumer weakness: in our view, the VC industry has had a misconception of the financial health of the consumer over the past 5+ years (which contributed to the preference for B2B). Looking at the data; as of 3Q24, the credit card debt in the United States is $1.17trn (4.2% of US GDP), up from $650bn in 2000 (6.3% of a $10.25trn GDP at the time). However, if you adjust for inflation, this $1.17trn is roughly equivalent to ~$668bn in 2000 dollars. While the credit card debt is certainly higher today, it is effectively flat since 2000 and down 2.1% (0.66x) as a percentage of GDP. Even credit card delinquency rates are only at 3.2% vs 4.5% in 2000 and 6.5% in 2009/2010 (right after the financial crisis).

Given the headwinds above (either real or perceived), it is understandable that the venture capital firms have quickly steered clear of the consumer category. That said, we at Konvoy believe that this presents a lucrative and opportunistic time to invest in the category alongside great operators who are innovating around the established incumbents.

Gaming is 21% of Consumer Unicorns Enterprise Value

In the chart below from SVB, you will notice that there are ~100 active unicorns in the United States that are VC-backed in the consumer internet space. The number of consumer unicorns saw a large uptick in 2019 and then an unprecedented acceleration in 2021 on the back of low interest rates, high valuations, and a vibrant IPO market. In the US alone, there were 1,035 IPOs (highest ever, SPACs were 60% of these) that raised over $300 billion. Late stage VCs, growth equity, and cross-over hedge funds were extremely active.

However, the percentage of VC dollars investing in the consumer space fell rapidly from 21% (2019) to 13% (2021) over a 24-month period. Even since 2021, it has fallen from 13% to 6% in 2024, showcasing how the category has continued to fall out of favor.

In gaming, there are 10 active unicorns that are based in the US. The full list below have raised a total of $12.1 billion since inception and their combined enterprise value (based on their last publicly announced valuation) is $60.3bn:

Only looking at the United States, these 10 gaming unicorns make up 10% of the 100 US consumer unicorns yet command ~21% ($57bn) of the total enterprise value ($280bn) of the US consumer internet unicorns. We believe that many on this list of 10 US gaming unicorns are very well positioned for liquidity events in 2025 and 2026 via IPO or large M&A.

In short, this is why we believe that the gaming sector will kick off a resurgence of consumer investing within the venture capital space for the next decade. While investment in consumer still carries the risks of high customer acquisition costs, competition for attention from social media platforms, and lower than B2B exit multiples, we believe that more exits will showcase that 1) the consumer incumbents are ready to be challenged and 2) the financial health of the consumer is not a fragile as many have feared.

‍Side note on Valve: we did not include Valve in the lists or calculations above because this company is unlikely to sell or go public in the foreseeable future and has not (publicly) raised any funding. Valve owns gaming assets like Steam (distribution platform, ~130-140m MAUs), Counterstrike (~24m MAUs), Dota 2 (7-8m MAUs), and more. Revenue estimates for Valve are rumored to be between $7-10b per year. This company is incredibly influential in the gaming industry and has a direct relationship with hundreds of millions of consumers. If it ever sold or went IPO, that would be a momentous occasion for the industry, yet we exclude it from the above given how unlikely we believe that is at this time.‍

‍Gaming: Internationally + Corporate Spin Outs

‍Even looking outside of the US, there are a host of companies that all have become incredibly successful and whose exits or liquidity events will meaningfully contribute to the global investment inertia around not only gaming but also consumer investing. A few notable ones include Dream Games (Turkey), Wildlife Studios (Brazil), miHoYo (China), Voodoo (France), Sky Mavis (Singapore, Konvoy portfolio company), and Mobile Premier League (India).

There are also a few gaming assets that are thriving within the corporate umbrella of larger companies. Two that come to mind are Riot Games (owned by Tencent) and Twitch (owned by Amazon). For Riot Games, the tensions between the US and China are likely to persist, which could lead to further talks around forced divestitures. A very active bidding process would emerge if Tencent had to sell Riot Games. For Twitch, it has seen an uptick in usage and monetization over the past 12-18 months, yet it fits oddly amongst Amazon’s failed gaming division and non-existent social strategy. It is possible that Amazon could sell Twitch to a better-suited buyer or private equity firm.

We believe that large gaming exits (M&A or IPO) in 2025-2026 will be the key inflection point to unleash the next wave of consumer investing for the venture capital industry. As a firm, we are excited to watch this narrative unfold and to continue our investments across both B2B and B2C within the gaming space.

‍Takeaway: We believe that large gaming exits (M&A or IPO) in 2025-2026 will be the key inflection point to unleash the next wave of consumer investing for the venture capital industry. The lack of investment into the consumer segment (now just  6% of the top 100 active VC dollars) creates a clear opportunity. However, we believe renewed investor interest will be driven by near term gaming exits. In the US alone, the 10 gaming unicorns account for just 10% of the 100 US consumer unicorns but command ~21% ($57bn) of the total enterprise value ($280bn) of US consumer internet unicorns. Gaming’s outsized influence combined with its near term liquidity outcomes will result in a resurgence of consumer VC investing for the next decade.