Mid-Year Review: Gaming

‍Mid-Year Review: Gaming

We have had a tumultuous first half of 2022 with geopolitical tensions rising and the beginning stages of a recession in full force. Back in April we highlighted how the macroeconomic environment impacts the early-stage investment climate for gaming companies (Gaming’s Investment Climate). In June we then covered how the gaming market is recession resilient and how we expect that to continue this time around (Gaming: Is It Recession-Proof?).

Here, halfway through 2022, we wanted to dive into how the gaming industry has fared so far this year. We are going to look into three categories: 1) the gaming startup funding landscape, 2) the public gaming sector, and 3) key trends.

1) Gaming Startup Funding Landscape

Gaming continues to be a top growth sector across the tech investing landscape. It sits at a compelling intersection of market-leading trends: social engagement, interactive media, and entertainment.

Q1: While 2021’s funding environment made for a record-breaking year across almost all sectors, gaming is well-positioned for another strong year in 2022. In Q1 of this year, we saw 221 gaming companies raise $2.6b across Angel, Seed, and Series A through D. This funding amount was 2.16x higher than the $1.2b raised in 1Q21 and was 1.54x the 143 gaming deals in 1Q21. The last point to highlight here is that the $2.6b raised in Q1 alone was 35% of the total $7.4b in funding in 2021, which included an impressive Q4 total of $3.2b (CBInsights).

Q2: As the broader markets fell off in Q2, gaming was not immune from this slowdown and price correction. In Q2 of 2022, we saw only $1.2b raised across 161 deals, representing a 50% decline in funding from what we saw in Q1 and a 27% decrease in gaming deal volume. Though this is a pullback from an incredibly active 4Q21 and 1Q22, 2Q22 is only a 14% decrease in total funding from the $1.5b raised in 2Q21, and deal volume actually increased by 15% from the 139 deals in 2Q21 (CBInsights). These initial indicators suggest gaming fundraising is proving to be relatively stable and active in the midst of other sectors in venture experiencing more intense slowdowns.

Gaming’s market share in VC: In gaming, we saw $3.8b invested across 382 gaming deals in the first half of 2022. Given our early-stage focus as a firm, it is worth noting that Seed + Series A companies in the video gaming industry comprised 301 (78%) of the completed gaming deals and $1.8b (47%) of the gaming capital raised year-to-date. Across the venture capital market in general, looking at only early-stage (Seed + Series A), gaming deals are now 3.16% of all venture deals and 2.53% of all venture capital raised (globally). This is up from 2.12% of all deals and 1.52% of all venture capital raised in the first half of 2020 (Seed + Series A). The market share of gaming in the early stage venture market is accelerating and we expect this to continue.

2) Public Gaming Stocks

The public sector kicked off 2022 with the biggest gaming acquisition in history when Microsoft agreed to acquire Activision Blizzard for $95 per share, or a total value of $68.7b (Microsoft). This acquisition would make Microsoft the third-largest gaming company by revenue, behind only Tencent and Sony.

The stock market as a whole had a rough first half of the year with the NASDAQ down -26.5%, the S&P 500 down -18.7%, and the Dow down -14.3%. When it comes to public gaming corporates, there is a wide range of results this year with Capcom outperforming (+15.48%) and Skillz struggling (-81.98%); but in general, gaming stocks have been hit much harder than the overall market. There are many reasons for this including supply chain issues, major game releases being pushed out, and potentially an overcorrection due to the unsustainable valuations these companies hit during the pandemic.

Link to Supporting Data

In the latest earnings reports for the top public gaming companies, there is a combined $115b (USD) of cash and cash equivalents on their collective balance sheets. We view this as a great indicator for the gaming market as a whole, but it is especially promising for early-stage investors and founders that will ultimately grow into acquisition candidates. Although the M&A market is likely to be negatively impacted by the current macro environment (2Q22 saw 74 gaming acquisitions compared to 83 in 1Q22 and 79 in 2Q21, according to CBInsights), these companies do have the cash to spend.

Link to Supporting Data

3) Key Trends in Gaming

Right now, the post-pandemic correction is happening for gaming. Some groups are projecting the market to stay flat this year or dip by 1-2%. Other reports still believe the market could grow and even exceed $200b in revenue. We believe that there is historical precedent to show that the gaming industry will thrive through the next 24 months across player adoption (adding 50-100m gamers per year), growing revenue (public and private companies), and continued funding from VCs.

That said, any dip year-over-year from 2021 to 2022 will likely be driven by a return to normalcy and easing of pandemic restrictions that accelerated the growth of the gaming sector and associated revenues. Isolation and lockdowns resulted in fast yet unsustainable growth for the gaming industry (20.5% between 2019 and 2020; CBInsights) that inevitably had to normalize, which we are seeing now. We believe that the current macroeconomic concerns are disconnected from the post-pandemic normalization we are seeing across gaming.

Mobile gaming is still expected to lead gaming revenues as more consumers across the world get access to smartphones and higher quality content moves towards mobile. Reports from data.ai suggest that in 2022 mobile gaming will surpass 60% market share in annual global consumer spending ($42b, 19% of global gaming revenues), which is 3.2x larger than the entire console gaming market.

PC gaming is continuing to grow with Steam still seeing record numbers of concurrent users and in-game users in 2022. Steam hit a record of 29.9m concurrent users in March of 2022 and the platform is currently seeing ~28.9m concurrent users per month (up 11% from 2021 averages). According to data.ai, PC games revenue is expected to reach $40b in 2022 (comprising 18% of the entire gaming market), up ~5% from 2021.

Console gaming is seeing a continued shift towards subscription-based models for consumers. Xbox increased Game Pass subscribers from 18m in January to 25m in April 2022 (Microsoft). PlayStation Plus currently boasts around 48m subscribers (Sony) as of their last update. We expect this momentum to continue as subscription business models promote customer lock-in, predictable recurring revenue, and better discovery of games for players (Evolution of Monetization; Konvoy).

In gaming hardware, supply chain constraints continue to restrict production and sales. According to Nikkei Asia, sales for the Nintendo Switch have fallen by 33% in Q2 2022 compared to Q2 2021. A spokesperson for Nintendo said the ongoing global chip shortage has had an impact on Switch productions (DotEsports). With respect to Xbox sales, Xbox CFO Tim Stuart said that supply chain issues are expected to continue in 2022, making it more difficult for console manufacturers to meet demand (WCCFTech). Sony expected to sell 22.6m PlayStations in the current fiscal year and has now cut back expectations to 18m in their most recent earnings call (TheNationalNews).

Takeaway: The gaming industry, like the rest of the economy, has experienced a pullback in the first half of 2022, partly due to the bearish macroeconomic environment and partly due to a correction of the unsustainable growth the industry saw during the pandemic. Looking forward, the fundamentals of the industry, businesses (both public and private), and consumer base, remain durable with strong growth prospects.

Finally, we also recently announced Konvoy Fund III (Bloomberg article and Live TV interview) where we will continue to focus on backing early-stage companies at the frontier of the gaming industry. We look forward to the opportunity to continue supporting great founders building ambitious companies globally and partnering with them for the long run.

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