VC investment in gaming startups dropped in Q1 2023, PitchBook reports

Following the pandemic-induced boom times of 2021, venture-capital firms have significantly scaled back their investments in gaming startups, according to PitchBook’s Q1 2023 Gaming Report.

The overall industry continues to grow: PitchBook estimated that the gaming industry was worth $447.3 billion in 2022 and projects that figure will reach $562.3 billion by 2026. Venture-capital funding for gaming startups, however, has diminished since 2021, when VCs were happily opening their checkbooks to startups of all stripes.

In Q1 2023, video game startups raised $1.1 billion across 140 deals, which was a 10.7% increase in deal value from the previous quarter but a precipitous 75.7% drop in deal value from the same time last year.

US consumer spending on games, likewise, dipped 5% year over year to $4.6 billion in March 2023, with consumers spending less on games and Twitch streaming hours (perhaps in favor of finally gathering face-to-face).

Macroeconomic uncertainty, recession rumblings, rising interest rates, and inflation concerns all contributed to muted VC spending and exits last year, with exit value falling from $30.5 billion in 2020 to $2.5 billion in 2022, the lowest it’s been since 2016.

One of the largest potential exits, Microsoft’s nearly $69 billion deal to acquire Activision Blizzard, has drawn heavy scrutiny and concerns that regulators in the UK and the US could block the deal.

The first major contraction in spending came in 2022, when global venture-capital spending for gaming companies reached $13.3 billion, a drop from the $16.6 billion raised in 2021.

However, “2022’s total deal value is nearly quadruple that of 2019 and 1.5x its total deal volume,” the report noted. (Deal value climbed to $7.9 billion in 2020.) While investment dipped in Q1 2023, “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 despite the small sample size,” according to the Q1 2023 report.

“I think it’s a little early to tell for certain if the level of gameplay that we see right now is going to stick or continue to revert to the mean, so to speak. The decline in gameplay and spend we’ve seen in the recent quarters is still above the historic levels,” Eric Bellomo, emerging technology analyst at PitchBook, told Tech Brew.

Bellomo said that factors like supply-chain challenges have affected the gaming industry broadly, while Apple’s privacy changes “complicate the outlook” on mobile gaming, though he emphasized the gaming industry isn’t in dire straits.

“It’s still kind of on that up-and-to-the-right trajectory, even if it’s down quarter over quarter. That said, again, I think we’re just a little close to the pandemic to know if this is really where it’s going to stick long term,” Bellomo said.