• Sat. May 25th, 2024

Konvoy: Games venture funding declines in Q2 2023, ripe for M&A


Jul 10, 2023
Konvoy: Games venture funding declines in Q2 2023, ripe for M&A


Missed the GamesBeat Summit excitement? Don’t worry! Tune in now to catch all of the live and virtual sessions here.

Venture capital funding for gaming continues to decline in Q2 2023, per Konvoy Ventures latest games industry report. However, the venture firm believes this sets the stage for an active M&A environment.

Overall, Konvoy projects that the gaming industry is on track to reach $201 billion this year. This translates to 9.2% growth from last year’s $184 billion. The firm expects the market to continue growing at 8.9% annually. By 2027, the gaming market is projected to grow to $283 billion.

Konvoy expects the gaming industry to reach $201 billion in revenue in 2023

Q2 2023 games venture funding

While the overall market is expected to grow, games venture capital deals are declining dramatically.

Games VC funding is down 38% in Q2 vs Q1 2023

VC funding (pre-seed through Series I) totaled $472 million this quarter, a decline of 38% from Q1’s $761 million. While early stage deal (pre-seed to Series A) totals declined by 20%, a 60% drop in growth stage deal amounts drove the overall decline.

Like funding, the number of VC deals declined in Q2 2023

Additionally, the number of VC deals dropped by 20% from Q1 2023. Konvoy recorded 25% fewer early stage deals in Q2 which accounts for the difference.

The average deal size also shrunk alongside the funding totals and number of deals. In Q2 2023, the average deal size was $5.6 million, down 20% from $7.0 million the previous quarter.

Konvoy previously claimed that 2021’s growth in venture funding was an anomaly and current data is backing up that claim. VC funding this quarter is just 15% of Q4 2021’s peak funding total. Moreover, Q2 2023’s total is the lowest since Q2 2020 at the height of the pandemic.

H1 2023’s VC funding totals and number of deals are still greater than H1 2019 and H1 2020. This suggests that despite the headwinds, gaming is retaining some of its pandemic era interest from venture capital firms.

Private funding and M&A

While VC funding is up overall compared to pre-pandemic years, that isn’t the case when factoring in other private transactions (excluding M&A). H1 2023 brought in the lowest private funding total compared to the first half of the previous four years.

Private funding (excluding M&A) is on pace for a record low since 2019

This steep contraction in VC funding is a reflection of current market conditions. Rising interest rates are creating downward pressure for both investors and startups, leading to fewer deals closing. Investors account for higher interest rates by seeking higher rates of return. Rate hikes lead to funds discounting a startup’s earning potential, which lowers valuations in turn. To avoid lower valuations, startups that can wait for more more favorable market conditions will wait to raise new funding rounds.

Public gaming companies have cash to spend

Given the difficult market, there are fewer private funding deals outside of M&A. Konvoy expects more M&A activity as many large gaming companies have capital on hand. According to the report, 19 of the largest public gaming companies hold $45 billion in cash and equivalents. Additionally, public tech companies with gaming divisions have $176.2 billion cash and equivalents.

“The M&A and VC environments often work in tandem,” said Jackson Vaughan, managing partner at Konvoy Ventures. “Both the increase in M&A activity and the decrease in later-stage funding are symptoms of the wider macroeconomic environment. Investors don’t see a viable path for significant returns from late-stage startups in today’s market, which is why funding is down. As many of these startups have not quite reached profitability, often the only alternative is M&A. With these dynamics, acquirers are able to scoop up valuable assets on the cheap.”

Vaughan also pointed out that the drops in VC funding are not uniform across different markets. Asia continues to be the most active region, both in funding totals and the number of deals.

Konvoy also highlighted key trends and current events from Q2 2023 that will influence the gaming market. Embracer Group’s restructuring and Microsoft’s ongoing saga to acquire Activision Blizzard will be more impactful in the short term.

After spending more than $10 billion on over 80 acquisitions since 2016, Embracer is consolidating its holdings. The company expects the process to be completed by March 2024. With Embracer taking a break from its acquisition spree, Vaughan said this to could have some effect in the short term for gaming studios. However, this will come with minimal long term effects.

With the recent FTC hearings, Microsoft and Activision Blizzard’s regulatory saga is front and center for gaming industry investors. The outcome, particularly if the deal is abandoned, will set the tone for future games industry M&A.

“If this deal is abandoned, it could send a signal that might make other tech juggernauts reluctant to pursue large gaming acquisitions. Regulatory hurdles and drawn-out processes could see some public companies think twice before adding additional premium game content to their offering,” Vaughan said. “It’s possible that we’ll see the big companies look to pick up smaller studios and infrastructure companies to boost their product.”

As for future areas of growth, Konvoy highlighted Apple’s Vision Pro announcement, the growth of UGC platforms within popular IP and generative AI.

More details on these trends, regional data and key VC deals are available in Konvoy’s Q2 2023 gaming industry report.

GamesBeat’s creed when covering the game industry is “where passion meets business.” What does this mean? We want to tell you how the news matters to you — not just as a decision-maker at a game studio, but also as a fan of games. Whether you read our articles, listen to our podcasts, or watch our videos, GamesBeat will help you learn about the industry and enjoy engaging with it. Discover our Briefings.

Leave a Reply

Your email address will not be published. Required fields are marked *