VC Deal Value and Count Improves For Gaming Start-ups

Conditions in the venture capital (VC) arena have remained extremely tough at the start of 2023. But improving investor interest in gaming start-ups offers some reason for cheer, latest research from PitchBook shows.

Rising interest in generative AI helped VC activity in the gaming sector rise quarter-on-quarter at the start of 2023, according to PitchBook.

Startups in the video games industry raised a total of $1.1 billion spread over 140 deals during the first quarter of 2023, the financial data firm says. Deal value was up 10.7% from the prior three months, while the deal count increased 20.7% over the period.

The financial data firm says that “the development and content segments accounted for the largest funding totals” during quarter one. Deal values in these areas clocked in at $321.8 million and $504 million respectively over the period.

It adds that “strong funding for developer tools ($264.6 million) and content developers & publishers ($338.3 million)” were responsible for these figures.

Generative AI chatbot startup Character.AI led the way on deals in quarter one. It raised $150 million during a Series A funding round.

Other notable deals include those of games developer Believer Entertainment and metaverse business LandVault. These companies raised $55 million and $39.4 million respectively.

“Another Frontier”

November’s launch of OpenAI chatbot ChatGPT has amplified investor interest around generative AI in the gaming sector. This specific field of artificial intelligence uses patterns and structures in existing datasets to create original content likes images, sounds, videos and text.

PitchBook notes that “although artificial intelligence & machine learning are already deployed throughout the [games] industry, generative AI has the potential to drastically enhance the creative output of content developers, increase the speed of prototyping, and create personalized in-game experiences.”

It adds that “the potential speed and depth of game assets created by generative AI represents another frontier.”

Adoption of generative AI by games developers could solve a multitude of problems in the industry. PitchBook notes that software creation is a time- and capital-intensive endeavour, suggesting that development costs could hit $1 billion by the end of the 2020s.

There is also a dearth of technical talent in the gaming industry that this type of AI could solve. Creative workers currently outnumber technical employees by a ratio of five-to-one.

Annual Drop

But while VC in the gaming sector improved quarter on quarter, on an annual basis data continued to make for grim reading.

Deal value slumped 75.7% year on year in quarter one, while the deal count reversed 56.4% from the first three months of 2022.

VC activity remains strained as high inflation and economic uncertainty causes shoppers to tighten the purse strings. European sales of console and PC games dropped 11% to 39 million units during the first quarter, according to chart compiler GSD. Latest Statista data shows total video game sales in the US drop 5% in March, to $4.6 billion.

Yet despite year-on-year declines, PitchBook notes that “angel, seed, and early-stage VC deals accounted for the majority of deal value, which is a positive indication for the industry’s near-term growth.”

Tough Times for VC

Improving momentum in the gaming sector is a rare bright spot in an otherwise difficult period for VC. In Europe, dealmaking, fundraising and exits all worsened significantly the continent in the first quarter of 2023, according to recent PitchBook data.

Deal value slumped by almost a third (32.1%) quarter on quarter in the first three months of the year, to €11.8 billion. And the deal count dropped 19.2% from the final quarter of last year. Furthermore, the number of substantial exits “effectively ceased” during quarter one, the data company says.

The company suggests that full-year fundraising on the continent is on course for its lowest level for eight years. PitchBook comments that “growth has been increasingly harder to capture as inflation and monetary policy tightening have dampened capital deployment.”

Stress in the States

VC data has also remained grim on the other side of the Atlantic. KPMG says that first-quarter investment in the US “remained very subdued for the third consecutive quarter,” with total VC investment coming in at $31.7 billion.

This was down from $40.8 billion in the final quarter of 2022. It was also less than half the amount recorded in the same period a year earlier.

The number of VC deals, meanwhile, collapsed from a peak of 5,196 deals in the first quarter of 2022 to a low of 2,217 in the last quarter.

KPMG says that “protracted geopolitical uncertainty globally, the continued rise in interest rates, the ripples caused by the FTX bankruptcy and other crypto sector challenges in 2022, ongoing concerns about tech sector valuations, and the recent turbulence experienced by the global banking system” have all weighed on VC activity.