Gaming was once seen as a niche enjoyed by a small portion of the population, but it has quickly become a large part of American’s lives. Whether playing on the latest and greatest consoles, PCs, or their phones or tablets, it is increasingly a regular part of many people’s daily routines. Data shows that the video game market is projected to reach a revenue of $282.3 billion this year and is expected to grow at an annual rate of 8.76% between now and 2027.

Investors have, of course, long been attracted to this sector and the promise it holds. But as with many other industries, it has struggled with lagging investment and lower valuations in the past year. PitchBook has now released its Q4 2023 Gaming Report, looking at the gaming VC ecosystem at the end of last year. Interestingly, they reported an uptick in deal count and value in Q4 of last year, with $1 billion in investment across the vertical over 126 deals. However, those numbers are still down when you look at YTD and YOY numbers.

We have discussed in numerous blog posts that a great deal of what is now occurring across industries is a normalization and a return to more realistic levels of activity than the record-breaking numbers we saw during the pandemic years, and PitchBook agrees that is the case for the gaming sector.

They point out a few factors here, such as the “tourist” investors that were drawn to this sector during the peak we experienced between 2020 and 2022 when there was much hype surrounding Web3 and the metaverse. We have also moved past low interest rates and the rush to purchase games and gaming systems that occurred during lockdowns.

Many investors have also realized that developing hit games can require vast amounts of capital, not to mention time, and is far from a sure bet. This means many of them have begun to shift their focus. PitchBook notes that investor interest has moved on to different business models, away from traditional game development studios. These include more picks-and-shovels plays, such as back-end-as-a-service, developer tools, and anti-toxicity and content moderation tools.

Content continues to draw the attention of investors by number of deals, with $438.4 million across 71 deals invested in Q4; however, development startups (constituting services, developer tools and gaming engines) came in second with $288.7 million across 29 deals, along with the highest pre-money valuations of the segments tracked. As with other industries, growth- and later-stage investments continued to lag investments in early-stage companies in the last quarter.

We might not be stuck at home playing video games as we were during the pandemic, but the global appetite for video games is certainly still there. There are an estimated 3.3 billion active video gamers worldwide, and continuing advancements in this area, especially in AR/VR technology, generative AI, and even, to a less frequent and certain degree, new IP, have the potential to expand the audience, create new experiences, and lead to even greater growth and engagement. Investors will justifiably continue to target the gaming sector. Still, as the industry recalibrates to the current economy and new states of technology, we may see only the most intrepid investors continuing to focus on content. In contrast, others shift to new platforms and infrastructure to set the stage for the next wave.