Capital market company PitchBook expects the subdued venture capital funding levels of 2023 - $4.3 billion or 72% less than 2022 - to persist into 2024.
This comes from the company's VC gaming trends and predictions for 2024 which also shows that startups and investment sources are changing. In the past twelve months, content developers received 56% (294) of closed funding deals, with developer tools and services following closely behind.
The largest sub segment consisted of publishers, developers, and studios, with 190 closed deals. And although content dominates in terms of closed deals, development startups hold an advantage in building enterprise value.
Downward pressure
PitchBook's data shows that the median pre-money valuation of development startups stood at $35 million, followed by access startups at $32.2 million. In contrast, content ranked second lowest at $17.5 million.
As for subsegments, technology services had the highest median pre-money valuation at $475 million, representing a significant increase since PitchBook's previous analysis. However, this total was somewhat inflated by a few high-value deals within the subsegment.
Recent valuation data shows that startups are facing downward pressure. Last year, many sub-categories had high valuation step-ups, but now only hardware and developer tools have step-ups over 2-times. Some company stages still have high step-ups, like pre-seed/seed developer tools, early-stage hardware, pre-seed/seed esport companies, late-stage publishers, developers & studios, and early-stage gambling deals.
Closing the fundraising gap
PitchBook also expects that the fundraising gap between content and development startups will narrow due to alterations in the investor landscape.
“The peak fundraising years of 2020 to 2022 lured nonendemic investors as Web3 and Metaverse hype peaked. This ‘tourist’ capital — alongside the perfect storm of low interest rates and consumers stuck inside during a pandemic — has officially cleared, and many investors that sought exposure to games are liable to grapple with the lengthy development timelines and capital-intensive nature of development,” said PitchBook’s report.
The market firm also expects non-gaming investors to reconsider their investments or shift towards more familiar business models, like SaaS. While these investors may move on to other opportunities, corporate VC investment in gaming may not have hit its lowest point yet.
Although corporate VC performed slightly better than the overall gaming VC market in the past year, historically active firms faced regulatory and geopolitical challenges in 2023. Also, Web3 corporate investors slowed their investment activity last year.
PitchBook's data has shown that startups and investors are in a difficult position due to decreased funding and a challenging outlook for public listings. With exits unlikely and established companies having cash to spend, PitchBook predicts a slight increase in M&A and CVC activity in 2024.
