Venture Capital's Power Play: The Explosive Growth of Gaming and Esports Markets

n the world of venture capital, “fun” is big business. In recent years, catalyzed by the emergence of various technologies, gaming and esports, which were once considered child’s play, have become highly lucrative endeavors that warrant the attention and financial investment of the venture capital community. Gaming is not just about the Sony PlayStation and the Microsoft Xbox as the ecosystem of this sector stretches far beyond the reach of these two huge companies. 

What started with companies like Atari in the 1980s has evolved into a truly global industry with stakeholders in the tech sector, traditional sports business and even the gambling community. Most importantly, gaming and esports now appeal to everyone and can be played everywhere whether it be on a console, PC, tablet or mobile phone without any significant loss in the quality of the experience. A foundational technological achievement is the rollout of 5G technologies like eMBB (enhanced mobile broadband) services that have made rich mobile broadband experiences possible daily by enabling more reliable streaming of HDTV, media-rich games and augmented and virtuality reality experiences. 

This has made it possible for enterprising startups to experiment with new products and services knowing that the infrastructure exists to access large numbers of paying customers. Likewise, on the advanced hardware side, the tremendous technical and financial success of NVIDIA in making graphics chips for gamers before advancing towards its current focus on the artificial intelligence market demonstrates that gaming is a powerful beachhead market. Meeting the needs of this demanding segment of the customer base empowers entrepreneurs to segway into other markets that require a high degree of technical acumen—as NVIDIA has demonstrated. Global markets, inelastic demand, ubiquitous access, high technical barriers to entry, and vast numbers of paying customers—this is what venture capitalists love.

The Gaming and Esports Market

As defined herein, the gaming or video game industry is an entertainment industry whose value chain encompasses the research, design, development, distribution, marketing and monetization of video games. These games are increasingly sophisticated technologically as they include complicated online worlds and cloud-based virtual realities along with traditional video games. Consequently, their research, design and development is becoming an ever more capital-intensive task requiring the financial assistance of venture capital investors willing to embrace the risks inherent to this activity. 

The industry is decidedly global and has been from its inception as many of the leading firms in the sector were initially Japanese and the country has retained that market leadership with Sony and Nintendo acting as industry platforms. The industry has exploded in recent years. 

Between 2019 and 2021, it grew 26% to $191 billion with the US comprising about a third of that market. When two-thirds of a market exists outside the US, that is a testament to how truly global a particular industry is. But the impact in the US is still extensive. According to the Enterprise Software Association, in the US, there are over 2,300 gaming development companies and 525 publishing companies including hardware manufacturing, software engineering and distributors.

They directly employ 66,000 people and indirectly contribute to the employment of 220,000 people. More profoundly, video games are unique in terms of their impact across many different disciplines and sectors including mobile, PCs, sound cards, graphic cards, semiconductors, displays, CPUs, headphones and even specialized furniture. For every normal PC or mobile application, there is a more elite videogame customer with higher requirements as far as what they need the product or service to do. That is part of what makes this market so special and unique. 

As used to be said of New York City, “If you can make it there, you can make it anywhere.” In that sense, the gaming sector is a natural segway or entry point to the enterprise market which has the most demanding customers of all. This is the path that NVIDIA has taken and its success in navigating it is why its stock is booming.

The gaming industry is expected to increase in value to $315 billion by 2026 which is attracting significant venture capitalist interest. While VC deal activity has notably declined since the highs of the second quarter of 2022, this is not surprising given the stagnant economy and the impact that rising interest rates have had in halting deal activity across the venture capital industry:

According to PitchBook, while venture capital funding for games continued to stagnate during the second quarter of 2023, the total deal value increased 12% from the 1^st quarter and the number of closed deals declined 29%. As is to be expected during times of economic uncertainty, those deals were concentrated in late-stage companies that had already proven their viability. 

Collectively, they raked in over $600 million in investment or approximately 56% of the quarter’s funding total. Likewise, along with more selective investments, there have been fewer exits by gaming companies in 2023 as during the 1^st half of the year, there were only 19 exits valued at $200 million—a figure that is on pace to be one of the slowest years for exits since 2012.

Gaming content and development startups are where the action is as they have attracted the most venture capital funding. Gaming content startups encompass game publishers, studios, developers, online gaming platforms, and increasingly gambling entities; and developers include gaming engines, developer tools and technology services. From the third quarter 2022 to the second quarter 2023, 328 gaming content startups raised almost $2.9 billion in financial investment; and development startups raised $1.7 billion via 108 deals. 

However, while more money has been going to content startups, the average deal size for development companies of $15.8 is almost twice that--$8.8—for content startups. This suggests that development startups are more technology-intensive and hence more capital-intensive. That is not surprising as the content of a video game is a lot like a motion picture requiring labor-intensive activities like script development and art direction. In addition, new technologies like generative artificial intelligence are impacting how development startups must make their investments.

Along with gaming, esports has emerged as a promising venue for venture capital investment. Esports refers to professional or semi-professional competitive online gaming that has been organized with specific goals and prizes. 

It has risen in tandem with the rise of traditional sports and the video games that have emerged from it such as Madden NFL which can now be regarded as an important transitional product between physical sports, video games and esports. Esports is so popular that it is now the fastest-growing sport in the world with the League of Legends World Championship Finals attracting more viewers than the Super Bowl. Not surprisingly, the global esports market is valued at $1.7 billion as of 2022 and is projected to grow by a whopping CAGR of almost 28% between 2023 and 2030 so that the esports market will reach almost $12 billion in value by 2030. 

According to the 2021 Newzoo Global Esports and Live Streaming Market Report, the global esports audience is estimated to be approximately 475 million people with the most consumers being in China—93 million—followed by the US and Brazil so this market is decidedly global; and is estimated to reach approximately 575 million by 2024. Just like the traditional sports business, esports generates massive revenues. Global esports revenues were approximately $1.1 billion in 2021 with $833 million of that or 75% coming from sponsorship and media rights. 

Unlike online search which struggled to find a path to profitability until Google developed a unique business model focused on highly personalized digital ads, esports benefits from the ability to replicate the already successful business model deployed in the world of traditional sports while also being able to host digital ads in the online worlds in which the games take place. It is the best of both worlds.

Venture capitalists have taken note of the growth of the esports market and funds have been pouring in. $4.5 billion was invested by venture capitalists in 2018 with VCs making up 56% of that total followed by family offices (17%), strategic investors (15%), and private equity (12%). 

Venture capitalists are attracted not just to the large and growing size of the esports audience but to its intensity as esports fans often actively participate in online forums, fan events and the like which makes them appealing to advertisers. It is also home to a young demographic that is also appealing to advertisers and brands seeking to capture long-term customer loyalty. 

In addition, there are many different ways that this audience can be monetized including advertising, ticket sales, merchandising, media rights, sponsorships and online streaming platforms. This in turn makes it relatively easy to build lucrative strategic partnerships with brands, media companies and even traditional sports franchises. It is also a powerful application milieu for the latest technologies so it is a natural venue to integrate the activities of many different types of tech startups in a venture capitalists’ portfolio. Investors tend to invest in 5 major investment categories in esports:

• Media platforms and advertising: YouTube, Twitch, Facebook, and other social media entities will pay specific esports teams to stream on their platforms. The venture capitalists’ objective is to win financial gain from broadcasting licensing fees.
• Consumer products: The purchase of branded merchandise while watching esports is easy as it is a digital environment so all one has to do is press a button. This has great appeal to merchandisers and advertisers.
• Team organizations: Ticket sales, merchandise sales and broadcasting rights all generate revenue which enhances the value of a venture capital investment in esports.
• Third-party event coordinators: These coordinators host events, pay teams for brand events via sponsorships including streaming content—and the ticket and merchandise sales as well as media rights all generate revenue for them.
• Developers: Esports is a technology driven business. The software engineers and hardware makers who design, develop and maintain the esports platforms are the foundation of the business. The companies that they operate and the studios that they are affiliated with are key.

However, most VCs invest in specific esports teams, develop an esports division out of an existing franchise or establish a new team on their own. In many respects, at a time when the valuations of traditional sports teams are in the billions, which places them outside the reach of only but the wealthiest investors, esports is now the only arena in which investors with far less capital can hope to have a meaningful ownership stake in a sports franchise. 

Success Drivers in Gaming and Esports

There are a number of factors that are driving the explosive growth of gaming and esports. Firstly, the technology stack has matured. Low-cost, high-speed internet is now ubiquitous particularly in the largest esports market which is China and 5G is rapidly rolling out which has made the streaming of 4K and even 8K content much easier while facilitating the fast interaction required to play the games seamlessly. 

Again, China is the global leader in 5G technology. Also, companies like NVIDIA have mastered the art of rapidly providing the high-quality graphics cards that gaming and esports users demand. There is a very solid ecosystem that is responding to the capital-intensive “infrastructural needs” of consumers which allows startups to innovate on the content and development side. 

Secondly, a key event has been the COVID-19 pandemic. Due to the fact that so many people were forced to be inside for so long without access to external sources of entertainment, they became even more avid users of videogames and esports. The pandemic acted as a catalyst to accelerate the shift towards digital forms of entertainment which has greatly benefited the industry. 

Another factor is the growth of fantasy sports. Indicative of how sports crazed so many people across the globe are, the global fantasy sports market which was valued at approximately $27.5 billion in 2023 is projected to grow at CAGR of approximately 14% to almost $90 billion by 2031. 

The growth of fantasy sports also represents a significant behavioral change. People don’t just want to watch sports, they want to interact with them on an intellectual basis by gamifying how they are involved with it. They are obsessed not just with the athletes but with the business of sport itself. Digital technology makes it possible to satiate all of those desires. One can play whatever sport at whatever time in whatever place—and in a style and manner that is best suited to a particular individual’s skill level. There are also many different activities including educational ones that can be gamified which makes gaming and esports socially beneficial as well. At the end of the day, sports is the most global form of entertainment and the opportunity to leverage digital technology to modernize how we interact with it is a can’t miss business proposition which is why so many venture capitalists are interested in both gaming and esports.

Arguably, the biggest game changer in the gaming and esports market is the ongoing legalization of online gambling. The financial opportunities are incredible. The global online gambling market is currently valued at $95 billion in 2023 but is projected to reach $107 in revenue by 2024. With a CAGR of approximately 6.5% between 2024 and 2028, it will reach $138 billion in revenues, with online sports betting comprising roughly half of that:

Just as important along with the great revenue is the number of users, as the online gambling market is projected to have 243 million users by 2028. In the US, gambling on traditional sports has already become so mainstream that even ESPN has partnerships with gambling entities. This same model has come to esports. DraftKings enables betting on fantasy esports. It is also already possible to bet on esports leagues.

Other popular esports titles to bet on include Call of Duty, Fortnite, Valorant, Overwatch, Rainbow Six Siege, Rocket League and FIFA. Applications like Rivalry and BetUS among others make it possible to bet on esports. Only half of US states allow legal and regulated betting on esports so there is still great room for growth. These states include:

• Arizona
• Arkansas
• Colorado
• Connecticut
• Delaware
• Illinois
• Indiana
• Iowa
• Louisiana
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Montana
• Nevada
• New Hampshire
• New Jersey
• New York
• Ohio
• Oregon
• Pennsylvania
• Rhode Island
• Tennessee
• Virginia
• Washington DC
• West Virginia

While gambling does have its downside, it is probably better for it to be regulated and under the purview of policies that can be adapted to deal with new realities as they emerge than to refuse to acknowledge that it does and will happen. This is best for investors and society at large.

VC Investors in Gaming and Esports

There are a number of venture capitalists who are increasingly focused explicitly on the gaming and esports markets while mainstream venture capitalists are also diversifying their portfolios to include startups in these segments. Probably the biggest recipient of venture capital in the gaming world has been Epic Games, which developed the highly popular games Fortnite and Gears of War. Epic is also a technology leader in video game development through its Unreal Engine which is the leading game engine in the world. 

The company, which is currently valued at $32 billion, has attracted billions in investment from China’s Tencent Investment (the corporate venture capital arm of Tencent) which owns 40% of it, as well as Sony and Kirkbi A/S (the parent company of the Lego Group) who own 5.4% and 3.2% respectively. A smaller stake is also owned by Andreesen Horowitz. 

That investors in Asia, Europe and the US have all made significant investments in Epic Games speaks to the global nature of the industry and where the future is going. The large investment by a top Chinese company is about far more than money; it is a strategic alliance that gives Epic Games tremendous advantages in navigating the largest gaming market. 

However, it should be noted that the Chinese government has become increasingly concerned with the gaming industry. Citing concerns about gaming addiction and insufficient attention by students to their studies, the Chinese government, which has substantial authority, is increasingly restricting playing time for children under 18 and delaying approval of new video games. Just as fears of a financialized economy led the Chinese government to essentially put an end to Ant Financial, the gaming industry and its investors must tread lightly in China and implement safeguards to address valid concerns that are relevant not just to China’s market but elsewhere as well.

A great aspect of the venture capital investment community in gaming is that it is truly global and not overly concentrated in Silicon Valley. Indeed, Epic Games, the most prominent US company in the space is based in North Carolina. A key investor is Hong Kong’s Animoca Brands which has 133 investments and $1.5 billion in assets under management. Founded in 2006, the company has invested in the successful gaming studio Sky Mavis as well as in Atari’s blockchain gaming division.

Denver’s Bitkraft Ventures, which was founded in 2015, has also had success. It has made 98 investments and has $566 million in assets under management. It is an investor in large gaming studios like Epic Games and CCP Games. Other gaming investments include Manticore Games, Frost Giant, Anzu, Carbonated, Koji and Voicemod. 

The company investments in startups at all stages and its portfolio includes gaming studios, esports startups and developer tools. Singapore’s Makers Fund which was established in 2017 has made 93 investments and has a billion dollars in assets under management. Gaming investments include Theorycraft Games, Smitten and Xterio. It has had a number of successful exits including Typhoon Studios which was purchased by Alphabet. The company also invests in esports startups and includes the prolific esports team TSM in its portfolio. Relatively new is Shima Capital which was founded in 2021 and is based in San Francisco. The company has made 79 investments and has $200 million in assets under management. 

Its focus is on Web3 gaming investments and it is primarily active in early-stage investment. The largest traditional venture capital firm making investments in this sector is Andreesen Horowitz, which is based in Silicon Valley. 

It launched a dedicated gaming practice and fund in 2022 and has made 75 investments with 3 exits. Its median round size is $20 million. Notable investments include Roblox, Dapper Labs and Sky Mavis. New York’s Galaxy Interactive, which was founded in 2018 is also a major player with 73 investments and $735 million in assets under management. 

It has had 2 exits and the median round size is $8.3 million. The company makes investments at all stages. Galaxy Interactive is a division of the venture capital firm Galaxy Digital which is focused on interactive content. Based in London and founded in 2013, Velo Partners invests in gaming and gambling ecosystems across mobile, social media, and Internet space. It typically invests in early stage or Series A rounds. 

It sometimes collaborates in its investments with the RNG Foundry gaming accelerator for early-stage investments. To date, it has made 37 investments.  Also in London is London Venture Partners. Its thesis is to focus on pre-seed and seed investments in the gaming ecosystem of North America and Europe. These investments include Treehouse Games, Knock Knock, and Coda.

Uniquely, 1Up Ventures is based in Kirkland, Washington. It specializes in investing in game developers and has made 47 investments to date including in Lost Lake Games, Drop Fake and Lightforge Games. It focuses on seed and Series A investments. Dune Ventures is a rather intriguing gaming-oriented venture capitalist. While many VCs have been criticized for being too short term oriented and putting excessive pressure on startups to scale fast so they can cash out, Dune believes that patient long-term capital investments are the best way to generate value.

Consequently, the company deploys a permanent capital vehicle investing off a large balance sheet and is focused on partnering with entrepreneurs who want to build companies over longer periods of time. They want to see a focus on building products and services that will last. This is refreshing. The company is focused on pre-seed, seed and Series A and Series B investments in content studios, social platforms and gaming technology infastructure. Although it invests globally, it is primarily focused on the New York City area and its investments include First Light Games, Oooh TV and Kanga. 

Based in both Cambridge, Massachusetts and Denver, Colorado, Konvoy Ventures is focused on seed and Series A investments in the underlying infrastructural technology, tool and platforms that enable modern gaming and esports. This is both unique and essential. As such it has made investments in Bunch, GameFam and Hiberworld amongst others. 

Their investments are a good indicator of where the gaming industry is heading. Technology-wise they are focused on network infrastructure that enhances online experiences by facilitating superior Internet connectivity; digital identity; analytics tools that help to understand audiences and the way that they interact with content; creator economy products and services that unlock value for creators and their audiences; XR—AR/VR/MR/3D asset enablement technologies, infrastructure, and tools; artificial intelligence to optimize game development and user experience; and gaming “x” which is the utilization of gaming mechanics across both consumer and enterprise applications. Konvoy is one of the more intriguing venture capitalists in the gaming space. 

As mentioned earlier, Tencent Investment is a major investor in Epic Games. However, it has also made many other investments. Founded in 2011, it has made 70 investments and 4 exits. It has a median round size of $13.3 million with those funds focused on investments in esports, gaming studios and online gaming services. 

Venture capital investors from Asia also include Singapore’s Play Venture’s and Indonesia’s Avstar Capital. Play Ventures has 79 investments with $300 million in assets under management and it has made 3 exits. It typically makes $3 million in investments per round, and is focused on early-stage startups including gaming studios and gaming services. Among its gaming investments are Thirdwave, Azra Games and Fractal. Avstar which was founded in 2016 is focused on the problematic blockchain and crypto gaming space. 

It has made 75 investments with a regional orientation on Southeast Asia although it does invest in all stages of startups. Finally, established in 2012 and based in Kuala Lumpur, Malaysia is GameFounders, which is the first truly global gaming accelerator network with hubs in both Asia and Europe. To date, it has made 64 investments and provides startups with access to over 150 mentors. Asia, which is home to the largest and fastest growing segment of gaming and esports consumer is gradually taking a leading role in venture capital investment in the sector.

Gaming is arguably the most strategically important segment of the information technology sector. Its consumers are usually early adopters of the latest technologies—particularly with regards to graphics, displays, audio and even haptics—and their high standards makes it possible to advance and refine them before deployment to the highly lucrative enterprise verticals. 

Gamers are also so passionate about their hobby that they are willing to pay a premium for the latest technology before it goes mainstream.  There are also enormous numbers of them so startups and their venture capital backers are highly incentivized to develop products and services for the gaming market knowing that they will be well compensated financially if they penetrate the market. 

It is also global and intimately connected with two of the largest industries in the world—sports and gambling—so the monetization opportunities are both gargantuan and diverse. All of this appeals greatly to both technologists and venture capitalist seeking the immense financial rewards of one of the true grand slam opportunities in the market.