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Game startup venture funding fell 83% in Q4 compared to a year ago, according to Konvoy Ventures, a venture capital firm specializing in gaming.

While the overall gaming market grew modestly — 2.3% to $184 billion overall in 2022 from 2021’s $180 billion — VC funding has not followed suit.

Overall market outlook

Konvoy reported $8.8 billion was invested in early to late-stage start-ups in all of 2021. However, in 2022 that fell to $5.3 billion — a decline of 40%.

Q4 2021 was the most active quarter for VC funding in games totaling nearly $3.2 billion. By comparison, Q4 2022 reported $533 million in investments, a decline of 83%. Q4 2022 was the least active quarter since early 2020 at the height of the pandemic. As Konvoy puts it, “2021 growth was an anomaly.”

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Web3 gaming was particularly affected by funding declines. In Q4 2021, Web3 gaming companies raised $1.4 billion, accounting for 43% of all game funding. In Q4 2022, that dropped to a mere $170 million, plummeting 88% year-on-year. Konvoy suggests this is because current Web3 games can’t match the quality of more traditional titles, tokens have limited utility and consumers are wary due to high-profile fraud cases. Per the report, “developers are building for web3 functionality and users instead of for gamers.”

Europe, North America and Asia lead the way in terms of VC funding for games. However, the number of deals and their total value is down across the board compared to 2021 and Q3 2022.

Europe appears to be the most resilient of these major markets. Compared to 2021, total funding grew by about 2% to $1.2 billion while the total number of deals increased by about 8%. Zooming in on Q4 shows that total deal value fell about 23% quarter-to-quarter and only four fewer deals were reported. Notably, two funding rounds for Homa Games and Yahaha accounted for $140 million of Europe’s $212 million total in Q4.

North America saw the steepest drop but remains the largest region by funds raised in 2022. In 2021, VC funding grew to an impressive $5.4 billion in total funding across 192 deals. In 2022, that corrected to $1.9 billion in funding across 174 deals. Q4 was relatively quiet compared to the rest of 2022 as well. Total funding was down nearly 60% compared to Q3 — from $481 million to $198 million. Almost all of this funding went to early-stage startups. Part of this drop is due to Limit Break’s $200 million funding round in Q3 which propped up the region’s funding stats.

In Asia, the total deal value remained relatively flat but the number of deals increased. In 2021, the region raised $2.1 billion across 228 deals. Meanwhile, 2022 saw $1.8 billion in funding over 243 deals. As a result, the average deal value fell almost 20% year-on-year.

What’s next

Given these lower funding levels, many companies may look for a buyout rather than an additional funding round. According to Konvoy, publicly listed gaming companies hold about $47 billion in cash and equivalents. Additionally, big tech companies with gaming divisions are also holding around $158 billion. Many of these companies — such as Microsoft, Sony, Netflix and Amazon — are racing to build content libraries for subscription services and may chose to use these reserves to acquire new IP and studios. Of course, they will have to balance this with increasing scrutiny from regulators around the globe.

Additionally, previously strong sectors are beginning to show some weakness. In addition to Web3 gaming showing a sharp decline in funding, mobile games — particularly hypercasual titles — are struggling to monetize as efficiently as they did due to data privacy changes from Apple and Google. Konvoy expects mobile game developers to shift towards “compet[ing] on content quality, not on how efficient or optimized their user acquisition channels are.” Ultimately, this will be good for consumers.

Despite the gloomy signs, Konvoy still expects the overall gaming market to grow to $201 billion in 2023. This suggests that VC funding woes will not drag down the rest of the industry. The full report, including more regional data, key deals and trends, is available here.

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