Torulf Jernström is CEO of Finnish developer Tribeflame.

His blog is Pocket Philosopher.

You can read all his PocketGamer.biz columns here.

Sam Myers is a Principal at London-based VC firm Balderton Capital.

Gaming has been a great hunting ground for VCs in the last decade.

A usual suspect when it comes to pushing innovation forward, gaming as an industry found itself in the middle of a perfect storm over the past 10 years that made it the perfect high-risk, winner-takes-all profile for a VC’s portfolio.

With the benefit of hindsight, it is pretty obvious why this is the case. Not only is it a massive market, but it is also a market where the old-guard (triple-A) had little advantage over its smaller, faster-learning competitors as the market embraced mobile and casual-web.

From an investing perspective, gaming since 2009 had the perfect characteristics to win big as a VC:

• A new audience and a much broader demographic than before. Not only did far more people have easy access to games through a playable device, the smartphone, but the audience of those who did was different from those who played games on console and PC.
• New ways of playing. Mobile helped casual grow up because it is the perfect device for five to 10 minute sessions, five to 10 times per day. A new platform not only means using new tools, but also designing for a different format and a type of player behavior triple-A had no experience designing for.
• New platform. On both mobile and casual-web, those who began developing for the new platform early won out. Whenever a new platform comes out it leaves a vacuum for new IP to be built and discovered as players look for new things to play.
• New business models grew with a new platform. F2P worked so well simply because there was now a big enough gamer population to build big business by monetising only the 1%.

All-in-all, these four shifts not only grew the market but also contributed to something even more important - making it more valuable to be small, nimble and experimental than to be big, well-capitalised and experienced. An early-stage investor’s dream!

Looking at gaming today, however, shows a very different story.

The “new guys” pretty quickly became old guard and, at least within casual/mobile, seem to be holding their positions pretty well through being well-capitalised (try competing with King and Supercell using their own UA techniques) and experienced (e.g. Clash Royale and Clash of Clans are quite different games but came from the same team inside Supercell).

At PGC, the two of us got talking about exactly this - where do we see the same opportunities in gaming now that we could have spotted in 2009?

Yes, we agree that as the new gaming market grows and matures, the obvious place to look is in the tools and platforms supplying the market (more around investing in those selling the shovels in the gold rush at another point) but gaming itself continues to be a great place to invest. It is just not obvious where.

Setting the scene for the overall games market

This is a really big market. The whole market is about 100 billion USD, according to Newzoo and SuperData with some 30% each coming from PC & console and 40% from mobile (roughly speaking).

Mobile is growing the fastest, casual web (Facebook and various flash game sites) and handheld consoles are falling. In broad strokes, the biggest market and the fastest growing is Asia, though Western markets are also growing, but at a slower rate.

The old - PC & console

Some of the most successful VC investments have been made in well-established markets where companies managed to change the rules of the of the game (no pun intended) and grow quickly off a user base that was already there. Better addressing demand that is already in the market can often be far better than building your own market.

Unfortunately, this isn’t quite the case when it comes to ‘the old’ in the gaming world. While Steam has been a source of some indie successes, existing IP still dominates and the number of games seems to be growing faster than the number of gamers, making it difficult for new companies to truly break through.

Some companies are attempting to rewrite the rules in this, now mature, market. One way of doing this is to use new tools and concepts to redefine the production process, in the way Bossa has done using Improbable’s SpatialOS and user-generated islands for Worlds Adrift, and Hello Games' No Man’s Sky managed to shoot to into a top 12 spot on Steam in 2016, with a peak of 220K concurrent players.

But in general the staying power on PC and console is far worse than on mobile, making it a more difficult space to bring home VC-style returns.

The now - Mobile

This is the platform we both know most about. The good news is that, contrary to what we used to think about the longevity of a title, hit games have pretty amazing staying power. If your game becomes a hit, it can pay off over five years or more.

The bad news is that mobile is now incredibly competitive and the rules are pretty well understood. You can either make money through showing ads to a huge audience of players or by creating a huge in-game economy and keeping players in the game for long enough to make them valuable.

In the first option, it is all about climbing the Top Downloaded charts through simple and approachable games. The value of each individual user, however, will be too low to spend to acquire profitably, meaning you either need to strike massive virality or effectively cross-promote.

The former is incredibly difficult to engineer and the latter places existing, bigger companies at a massive advantage.

The second route is all about building the right economy in the game, pacing it well, and making sure there is enough content and social interactions to get past the 100+ hours of play / $1000+ spend hurdle.

The big guys already have this figured out and are doing it well. They also have the war chest to outspend once they find the right lifetime-value to acquisition cost ratio, so striking gold in casual is becoming increasingly difficult.

Investors also have this figured out by now. Once you find a company with games showing the right KPIs for a hit, it will be obvious to the market that the company is going to do well, and its valuation will shoot up because of it.

Investing before these are in place, however, is far too risky, as even the best teams working on what look like incredible concepts often fail to build truly captivating games.

To do well when investing in mobile games, you need to look for the unseen and change the definition of what good looks like.

Instead of looking for the Day 1 to Day 30 retention benchmarks that have determined a hit in the casual era, we should look for those that can build strong Day 30+ retention, but likely at the expense of having a narrower audience.

There will likely be more games building games for smaller groups that can spend significant amounts on mobile, in areas like collectibles - where people have been used to spending significant amounts outside of gaming - or for turn-based or eSports-related games, where long-term retention can hold up well.

Still lot’s to be done!

The new - Building for tomorrow’s platforms

So is now really the time to move into greener pastures? With mobile maturing, it makes sense that gaming entrepreneurs and VCs are looking for the next platform to build an empire on top of.

The issue with new platforms is timing and uncertainty. Not only do we not know when these markets will develop to the degree they need to in order to build a big business but we also do not know fully which experiences work well, making it difficult to pick winners.

The first, obvious one to comment on is VR. The opportunity in the long run could be huge, and VR is seeing some of the benefits for newcomers for developing on a new platform.

There is still a content and IP vacuum, which means that new players (although not many of them yet) are actively looking for new content.

Being seen in the mobile app store is far more difficult than in VR app stores and those who build the strongest IP in the coming year have a good shot at winning big once the market matures.

Yet, for 2017, we remain VR sceptic. The timing issue is pretty clear when you consider that that only some one to two million units of high-powered tethered versions sold in 2016 and a total of five million Samsung Gear VR headsets have been shipped.

Overall, these are some pretty small numbers, considering that tablets sold some 18 million units during their first year on the market and one of the top VR games announced revenues of only $3 million.

For the foreseeable future, VR will remain a place where a lot of VCs seem to be putting money in, but due to its limited market size, will not be getting money out. Prepare for the VR desert and raise for money for at least three years’ runway.

AR, in its lighter form, brought one of the biggest successes of 2016 - Pokemon GO. It shot straight to the top, and though the hysteria has since died down, it is still maintaining a respectable #10 spot among top grossing iPhone games in the US.

Overall, it was a good demonstration of how well a combination of strong IP and using AR capabilities like computer vision and location on mobile can build a new category. We hope to see more of this in 2017.

As we go towards AR from near-eye displays like Hololens, the opportunity is huge - far bigger than that in VR - but, again, suffers from the same timing problem from both an adoption and hardware development perspective.

And finally, something that we see as more immediate - the rise of chat games. It is likely that we will follow the lead from Asia and move towards a new platform geared towards social gaming, in-chat.

At the moment, the experience is still clumsy and the gaming experiences to date are shallow, but we are hoping to see a lot of evolution here, and we are expecting to see it soon.

The audience is already there and it has great links to social features and virality. Facebook is working on sidetracking the app store here in the west and is likely to encourage a new breed of social games built as ‘apps’ within Messenger.

A portfolio approach to investing

The unique thing about gaming is that everyone seems to have understood that this industry is a portfolio play.

Because it is hits-driven and because it is difficult to predict success, even for developers with a decades of experience, most studios try to have multiple, sometimes simultaneous, shots at goal.

VCs have realised in recent years that investing in games is no different - gaming is one of the only industries where it is accepted that a single VC can make multiple, potentially competing bets in the same market.

For those who can, the best option is probably to balance backing teams exploring less trodden paths in mobile and a few big, longer-term bets aiming to own new platforms.