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2023 predictions for gaming startups

2023 predictions for gaming startups

Sent on January 6th, 2023.

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Happy new year everybody!

For my Indian readers, Long Term Game is on discount for January on Amazon Kindle. For all you non-India folks, you can get my book by going here.

Here are my predictions for gaming startups in the new year.

VC winter

We already saw in 2022 that most venture funds started pulling back on investing. Here are a few things that specifically happened in late 2022:

New companies raising first money with a solid team, but a me-too pitch got rejected. You’ve got to be doing something other than a match-3 game for web3.

Financing rounds got a lot harder. You’d raised a million or two in 2021, and now, before you show KPIs, you wanted to go for a $5m seed round. That just isn’t happening.

Everyone is saying they are open for business, but here is why there’s more hesitation.

Mobile gaming has reached a point where the existing CAC to LTV model doesn’t support new entrants with open arms. Existing games that’ve managed to scale before IDFA are doing reasonably well, but for new mobile games, it’s much harder to reach and build a new audience.

VCs want to back new IP, and if you can’t effectively market new IP on mobile, the VC model won’t work.

There are no recent benchmarks on what a great product, go-to-market and M&A could look like for a new company. Conviction to invest comes from the data, which leads to the excitement that guides VC, and currently, there’s a significant lack of excitement to fund gaming companies.

As we wait for the industry to pick up again, I believe that in 2023, investing will shift toward companies that can show traction. Seed starts to become more about proven KPIs or other striking market validation.

In general, tech startups are much less likely to raise before they can show traction. I believe that because of the tech crash of 2022, gaming’s first-money investors will become more demanding from teams to show initial traction with their gaming startups.

Initial traction should consist of some user-related KPIs. At a minimum, the numbers should be on user engagement with the game, how much they are playing it, returning to it, and enjoying it.

For that second round of financing, the $5m to $10m raise, investors will start to prefer some indication of revenue. Those companies need to cut costs immediately in Q1/2023 and go for revenue as soon as possible.

Advice for founders raising another round: how to keep lights on for 18 months and wait for markets to pick up? Maybe you need to raise funding with less favorable terms. Perhaps you need to cut costs? Whatever you do, make sure you can survive the next 18 months.

If you haven’t watched Joseph Kim’s interview with two gaming VCs, you should do it by going here:

Mobile winter continues

Every free-to-play mobile developer waits for Apple to roll out a better ad service for acquiring users. But I’m worried about the App Store search ads being much less effective than a collection of highly targeted in-app ads.

In November, Eric Seufert posted an interesting article on how mobile game developers can tackle the mobile advertising winter. There he writes:

As the unit economics related to user acquisition becomes more challenging, achieving workable CAC/LTV math requires reducing acquisition costs, improving LTV, or both. Building products for larger and broader audiences can potentially achieve the former but can also result in impaired monetization; the personalization can achieve both but requires specialized technologies and expertise, and it doesn’t necessarily close the gap.

One means of improving unit economics is to deliver more than one product LTV with the acquisition of any user: to manage a user’s journey through multiple products with systematic cross-promotion across a portfolio of games.

Mapping the post-ATT future of mobile free-to-play gaming

I’ve been cheering for out-of-the-box thinking on making CAC/LTV work. First, game developers need to start collecting email addresses to form a direct relationship with their customers. I know it’s cumbersome on mobile, but Supercell is doing it quite efficiently with Supercell ID. I’ve previously written about gaming IDs, which I believe is one of the best countermeasures to the mobile winter.

Hard time for new gaming

Web3 and cross-platform gaming companies will struggle to raise since they’ve yet to show benchmarks VCs can compare to and have no clear go-to-market winning strategy. These are also suffering a ripple effect from the lackluster mobile games business; mobile is still seen as the way to grow a cross-platform game, but since the mobile model isn’t working, how can you make web3 and cross-platform work at VC scale? Also, for many, web3 is currently synonymous with FTX, so that’s not helping things.

I think that AI will be the strongest magnet of venture-dollars in 2023. I am a believer in AI. It’s just not the tools; it’s what AI can disrupt that is consumer-facing. I believe that once we give AI to the consumer to create AI-generated MMORPGs and GTAs, we will see a true paradigm shift in gaming. Several new companies will launch products and services around AI-generated “game worlds.” I’m happy to back these companies in 2023 as great teams start tackling this new frontier.

Metaverse companies will consolidate

Over the pandemic, there was a rush to build many companies in the metaverse space. Some were Roblox “fast-follows,” and others came from the crypto space and made virtual land that you could barter with.

The metaverse genre wouldn’t be in a rut if it weren’t for the lack of traction that has been quite evident. When you enter any of these social sandbox services, you can see that the concurrent users aren’t there. You are walking in a space with no one to interact with.

I predict that some well-funded metaverse plays will see an opportunity to consolidate companies in this space to build up for the next funding cycle in 2024. The metaverse or social sandboxes is something that, when executed correctly, cough-where is the game-cough, we can see winners emerging.

M&A won’t pick up

We saw a significant slump in H2/2022 around the M&A activity in gaming. That slump will continue for 2023.

This is because public companies can’t go out and raise debt as they used to for acquiring companies. Capital is expensive again. But these public companies need to show growth. I’m constantly talking with corporate development people from big gaming companies, and they want to do deals.

But these deals are a lot smaller, with an approach to do acquihires. Not a lot of cash upfront; incentives based on earn-outs and performance post-acquisition. Again, this reflects VCs not being interested, as the current M&A deals are tiny.

Final words

I believe that 2023 will be a rough year for gaming startups. Final advice: founders need to talk to each other, exchange thoughts on the challenges, ask questions, and help each other. There will be better days.

The world breaks everyone and afterward many are strong at the broken places. But those that will not break it kills. It kills the very good and the very gentle and the very brave impartially. If you are none of these you can be sure it will kill you too but there will be no special hurry.

― Ernest Hemingway, A Farewell to Arms

(Image by Tumisu from Pixabay)