More than $ 700 million was invested in game startups in the first quarter, though that amount is down from the year-earlier period, according to data collected by Sergei Evdokimov, investment associate at Mail.ru Games Ventures.
It was a big dip, but it’s not bad for a quarter with so much turmoil. In an email to GamesBeat, Evdokimov said we shouldn’t panic about it because lots of game investments never disclose the amounts raised. The public data is very spotty, and this number shows us a lot of activity in Q1, even though the coronavirus triggered lockdowns and stock market crashes in March. The data on games is very spotty, but it’s all we have to go on. We’ll see data from other sources, but, for now, let’s take a look at what Evdokimov has collected.
The volume of game merger and acquisition deals was $ 1.6 billion in the first quarter, compared to only $ 1 billion for the full six months of the first half of 2019. That was driven by big deals such as Scopely’s acquisition of FoxNext. Meanwhile, the first quarter investment amount of $ 700 million was down about 2.7 times from $ 3.8 billion in the first half of 2019 — where we can assume the average was $ 1.9 billion per quarter.
Last year, Evdokimov said that game investments totaled $ 7.2 billion, up from $ 6.8 billion the year before. Investors spent $ 2.8 billion on game acquisitions in 2019, which is a significant drop of 85% compared to $ 22.8 billion in 2018.
The largest deals so far this year include Scopely’s acquisition of the FoxNext Games assets from Disney (rumored at around $ 250 million). Roblox raised $ 150 million at a post-money valuation of $ 4 billion. And Scopely itself raised $ 200 million at a $ 1.9 billion post-money valuation. In the first quarter, 20 gaming deals closed in California, with startups raising about $ 428 million. 10 more VC deals closed elsewhere in the U.S. for $ 40 million.
Sweden’s Stillfront Group acquired Storm8 for $ 300 million. Embracer Group bought Saber Interactive for $ 150 million. And Tencent acquired two-thirds of Funcom for $ 100 million.
Impact on investments
Evdokimov said the data showed that aggregate VC fund deal flow remained strong in Q1 and was largely unaffected by the economic slowdown brought on by COVID-19.
Such dealmaking activity despite the recent economic slowdown is explained by a longer lead and closing time compared to the public market, meaning that many deals announced in March were negotiated prior to the economic downturn.
However, he said we should expect a decline in the venture fund deals over the next few months.
The reasons for this include macroeconomic uncertainty caused by oil price volatility, a sudden rise in the unemployment rates (more than 16 million people out of work) and new data of COVID-19 patients. Add to that a lack of in-person meetings, which slows down sourcing and negotiation activity.
Registering companies and getting government approval for the deals could also face delays, and we could also see limitations on due diligence procedures impacting the deal quality.
Above: Big game platforms have seen their share prices drop.
On the other hand, he said that strategic investors (like big corporate players and platform companies) have shown a strong improvement in financial position over the past few years. The bigger companies have also experienced huge growth in the gaming software sales (as many people are stuck at home), and they may react differently and increase their stakes in promising gaming companies at much lower valuations.
He said shouldn’t expect the immediate increase in corporate investment activity since the majority of large gaming corporations will take time to determine the consequences of economic deterioration on stock prices
He also said production may face delays. And it will take time to automate remote working processes, and properly assess the changing player behavior.
Overall, most likely VC funds will focus on keeping the existing portfolio companies afloat and provide capital to their portfolio rather than establishing new relationships, he said.
At the same time, some strategic investors will pull back\, focusing only on the existing portfolio, but those with the dedicated investment teams and strong financial position will continue investing prudently.
Moreover, he said it is the right moment to continue consolidating the market by acquiring later-stage companies that are likely to observe substantial valuation reductions being often valued relative to public peers, which fell in price.
When it comes to game investments, the environment has changed in favor of venture capitalists, rather than startups, in my own view. Valuations are going to falling in the coming months, as they do during recessions. Entrepreneurs may have to deal with the fact that their companies are less valuable than they were just a short time ago, based on what I’ve been told by game investors.
To invest, seed investors have to believe that some other investors will be ready to commit Series A and Series B rounds to their startups. And those investors have to believe that exits are possible, mostly through acquisitions. But the investments have still been flowing, and it looks like games are faring better than other forms of entertainment in Hollywood. One of the paths is obvious: smaller companies can sell out to strategic investors.
Initial public offerings
Over the last decade, game IPOs have gone through three-year repeating cycles where one huge year is followed by two quiet ones. The last high came in the record year for game IPOs in 2017, with substantially low games IPO activity in 2018 and 2019. With the way the stock market is going — down because of the coronavirus — you can bet that we won’t see many IPOs this year.
According to the three-year repeating cycle, Evdokimov said we should theoretically anticipate growth in total money raised through IPO at the start of 2020.
Nevertheless, only one tracked IPO happened on March 4, 2020, by the video game holding company Nacon, previously the gaming division of BigBen Interactive, which encompasses activities carried out as a publisher-developer of video games and a designer-distributor of premium gaming accessories.
The IPO of Nacon on the regulated market of Euronext Paris allowed the company to successfully raise about $ 109 million.
Evdokimov said we should have expected growth in game IPO activity at the start of 2020. But the IPO window closed quickly as the enormous volatility hit the stock market.
Starting the end of February 2020 all entertainment software companies saw a significant drop in share prices, followed by a gradual increase over the last several weeks from March 20 onward.
The uncertainty raised from a sharp decrease in oil prices and the coronavirus outbreak has reshaped the 2020 IPO timeline. Assuming markets will stabilize in the second quarter, more companies will tentatively target fall IPOs. Nevertheless, it’s going to be a dreadful year for public offerings as fears about the scale of the macroeconomic downturn will hurt investor sentiment and impact public markets.
Optimism for what lies ahead
Above: Stocks of game companies fell during the pandemic — then rose.
Evdokimov found some reason to be optimistic. First, he noted the strong surge in interest around video games during the pandemic. It has led to an increase in video game sales worldwide, a boost in the amount of time spent playing, and higher numbers for live game streaming.
As more and more people around the world self-isolate and get introduced to the world of interactive entertainment, he expects more new gamers to become accustomed to playing and eventually paying in video games. Not only does he project the short-term positive dynamics, but also long-term favorable changes in the gamer audience.
Second, M&A activity will probably grow. The recent announcement made by Embracer Group (formerly THQ Nordic) of raising $ 164 million to make further acquisitions of development studios and publishers is a positive indicator.
Finally, he said today’s venture industry is more sustainable and liquid relative to the previous economic downturns. Plenty of VC funds (Play Ventures, Makers Fund, London Venture Partners, Bitkraft, etc.) and huge private equity groups (Andreessen Horowitz, KKR, SilverLake, Blackstone) are interested in entertainment. On top of that, corporate venture capital funds are putting additional capital in the gaming startups. Growth in the secondaries market (i.e. secondary public offerings where shareholders can sell to others) also provides more liquidity opportunities for stakeholders.
