Video games are not “just a hits business” — an investor’s guide

OMERS Ventures
Oct 2, 2018 · 20 min read

Written by Mark Goad, OMERS Ventures associate.

I believe there is an inaccurate framing of the video game industry as “just a hits-driven business”. While ‘hit’ games have always been an important part of the industry — video games and eSports have evolved into a diverse ecosystem for which investors need a new framework to assess opportunities.

You should read this piece if you are interested in deconstructing the current hype around video games and eSports that has seen billions of dollars of investment from traditional sports teams, traditional sports leagues, professional athletes, venture capitalists, pop stars, private-equity firms, media moguls, Fortune 100 corporates, and a diverse array of game publishers over the past few years.

I am not writing from the perspective of a professional gamer, although I did play in a few semi-pro Halo tournaments back in the day. Somewhat counter-intuitively, twenty years of weekly video game play was less valuable than a fundamental understanding of how multi-sided businesses function across social networks, traditional sports leagues, advertising platforms, and enterprise SaaS startups.

Key trends discussed:

  • The globalization and professionalization of video games;
  • The rise and consequences of cross-platform play;
  • eSports’ transition from tournaments to league play;
  • How cloud technology has influenced game distribution & consumption;
  • Emerging enterprise software ecosystems.

Readers Note: investor takeaways will be denoted in this format.

To start, I propose a 10 level, value-based framework to categorize investment from Platform to Player:

The framework combines aspects of the video game industry with the eSports industry in an attempt to categorize every business that I have come across over the past few months of research. While most industry players focus on one tier within the framework — an excellent example of vertical integration is Microsoft, shown on the right-hand side in green.

Microsoft owns the platform (Windows and Xbox), distribution (Windows Store and Xbox Games Store), game engines (Microsoft Direct), game developers (they have acquired numerous studios to make certain titles only available on Xbox), games (Microsoft’s Minecraft and Halo are two of the largest game franchises in history), eSports teams (sponsoring LA Valiant of the Overwatch League), pro-level accessories (ex: CAD $189 Xbox Elite controllers), and video game broadcasting service Mixer (acquired as Beam in 2016).

While Microsoft is a great example of vertical integration across the stack, their portfolio hardly scratches the service of emerging investment opportunities — so let’s jump in ⤵️.





















Level 1: Audience & Casual Players

2.2 billion people played a mobile, console, PC, handheld, or virtual reality game in 2017. That’s a lot.

The focus of the piece will be on what is known as the ‘core gaming’ segment — namely PC and console gaming — where almost all eSports activity occurs today.

Understanding the gamer persona is important to understand the value of these platforms for advertisers. While overly simplistic, the click-bait proclamations of “gamers are older and more female than you think” are true. More women are interested in video games as they graduate from pervasive mobile games into core gaming segments. As an example, the percentage of women PC gamers in the US has risen steadily from 28% in 2003 to 48% in 2014.

Unsurprisingly, a generation of young, Red Bull-fueled men did not take this perceived ‘invasion’ (cultural metaphor intended) without a characteristically immature reaction which culminated in the horrific 2014 #GamerGate saga and is the basis for modern Twitch star Ninja’s policy of not streaming with women gamers. While this history is not directly related to early-stage technology investors — it is important context of an industry still struggling to mature.

Despite this hostility, core gamers are on average 30 years old and earn a well-above-average USD $90k, making them a key demographic for most advertisers.


Stop asking the young person in your office “why do you like watching other people play video games?”.

Watching video games is better than watching traditional sports.

Professional gamers spend +100 hours/week playing their sport. Their skill, speed, and accuracy is incredible to watch.

Moreover, modern video game streaming platforms are magnitudes more immersive than traditional sports broadcasting. Not only can I watch a game unfold from the exact same view as my favorite player, I can watch a live video feed of their face and hands to see their expressions and lightning quick reactions in gameplay. I can hear their commentary explaining their strategy in real time, listen to their terrible insults, and feel their frustration when things go wrong. Further, I can interact with these global superstars and other fans in the chat window — and if I’m lucky — they might even read out my question and answer it in the middle of their stream.

^This is far more engaging than the traditional sports viewing experience.

In fact, the top ten video games had 591.4 million unique viewers in LTM August 2017 — more than the combined global audiences of:

  • HBO — 142 million
  • ESPN — 115 million
  • Netflix — 100 million
  • Hulu — 12 million

Fortnite’s unofficial #FridayFortnite challenge started by a YouTuber reached 8.8 million unique viewers alone — more than:

  • The season finale of AMC’s “The Walking Dead” (7.9 million)
  • The first round of the NFL draft (5.3 million)
  • The season premier of HBO’s “Westworld” (2.1 million)

Investor Takeaway: you already knew video games were “big” — but the relative scale and engagement to traditional media is shocking for most.

Level 2: Broadcasting, Community, Betting

A layer of consumer-facing businesses has emerged at the intersection of audiences and players to facilitate interaction, engagement, and of course, gambling.

From an investor standpoint — the major viewing platforms are largely solidified with Twitch (acquired by Amazon for USD $970 million back in 2014) and YouTube Gaming dominating the market with a combined +90% market share and 343% and 197% annual growth respectively. Playing catch-up, Facebook has attempted to seed its platform by paying streamers with a few hundred followers a reported USD $10,000 per month to play exclusively on the platform.

Investor Takeaway: We believe Twitch & YouTube will continue to benefit from strengthening network effects: more streamers → more viewers → more streamers → and so on.

The explosion in eSports audiences is driving some interesting venture capital activity at the Broadcasting, Community & Betting level:

Investor Takeaway: eSports represents a unique, natively omni-channel experience with a young, technically proficient audience. I expect to see increasing investment and innovation specifically within Community & Betting.

Level 3: Hardware & Accessories

Hardware in the PC gaming segment is dominated by legacy providers with products targeting the unique speed requirements and design preferences of gamers:

Aside from the horizontal manufacturers above, Razer is the leading vertical brand focused entirely on the needs of gamers building complete PCs and laptops.

Investor Takeaway: PC gaming hardware is the domain of legacy providers with massive capital reserves for production scale manufacturing and multi-generation research — we are unlikely to see massive disruption here from startups.

Accessories have long been available to augment consumer grade headphones, mice, chairs, and controllers for console and PC gamers.

One of the biggest trends in gaming is cross-platform play which allows PC gamers to play against console and mobile gamers. The problem with cross-platform play today is that PC gamers have a massive in-game advantage: an 81 input keyboard [I counted] compared to only 14 input keys on a standard console controller. This allows PC players a single-tap-per-function as compared to multi-tap-functions for console gamers, a huge advantage in split-second battles (not to mention the omni-directional mouse). In response, third-party manufacturers are building console and mobile controllers with more input buttons to level the playing field. The leading company in this space today is Scuf gaming (PE-backed by Chatham Capital) but special shout out to my transparent Mad Catz controller from the Halo 2 days.

Investor Takeaway: I expect to see increasing investment in performance-based accessories for both the PC and console gaming segments. However, hardware is (still) hard and while building consumer brands around physical goods has gotten easier with social ad targeting , it has simultaneously gotten more difficult for brands to stand out on platforms like Instagram. We are unlikely to see massive venture dollars invested at this tier.

Level 4: Services

We see emerging value creation within the services layer that helps eSports competitors and their teams with the traditional front and back office functions of professional sports teams: marketing, engagement, and coordination. Within the specific context of eSports — teams leverage this software to collaborate with their teams in live competition, engage with their fans, optimize their gaming networks, and train their [head]shots.


The eSports collaboration market is segmented by intra-game communication and inter-game coordination.

One of the specialized tools that emerged to help eSports teams coordinate outside of the game is Guilded functions as a team’s ERP — a centralized communications and collaboration platform for scheduling, document management, media storage (saving sweet videos), player management, and recruiting. It is already a top app for Overwatch teams with more than 10,000 teams using the service. The company raised a USD $3.2 million seed round from Initialized Capital, Susa Ventures, and FUEL Capital in September 2017.

Video game communication is dominated by Discord, a free chat and voice communication app custom-built for gamers, with a premium ‘Nitro’ tier available for USD $4.99/month. CEO Jason Citron’s earned secret was traditional voice and chat applications that interrupt gameplay don’t work for gamers (imagine being on a killstreak and having a call pop up in your screen!!). Discord is generally considered to have low-bandwidth, high-quality VoIP audio and video that can allow users to collaborate outside of the game vs. in game communication channels offered in major titles/platforms where it can be difficult to connect players who are offline. In 2018, the company reached 45 million registered users, with 10 million daily active users. In April 2018, Discord reached a post-money valuation of USD $775 million and has raised a total of USD $152 million from leading Silicon Valley investors including Institutional Venture Partners, Index Ventures, Spark Capital, Greylock Partners, and Benchmark.

Also competing in the video-game communication services arena is TeamSpeak, a VoIP communication service marketed at gamers but also used by NASA and Boeing. The service touts complete user control, from basic UI layout to server configurations. According to data from Crunchbase and LinkedIn, the company has under 50 employees, was founded in 2001, and has not raised venture financing.

Investor takeaway: Gaming communication platforms like Discord have become social networks — disintermediating PlayStation Plus and Xbox Live which are inherently not cross-platform and struggle as independent mobile experiences. Discord represents the next important social experience channels for Generation Z gamers.


Similar to professional teams, eSports teams need to engage both audiences and advertisers

Curse, a US company acquired by Amazon’s Twitch in 2016 focuses on bridging the gap between advertisers and its 20.8 million unique monthly site visitors and global events advertising platform.

Special shout out to Bezos for quietly building a vertically integrated gaming empire starting back in 2014:

all running on 😏 AWS

Curse raised USD $71 million from Riot Games (creator of League of Legends), GGV Capital, and Uncork Capital. In 2016, the company transitioned from a World of Warcraft modification (mod) repository to voice and chat platform that integrates with viewing platforms like Twitch and YouTube for one-click content management. uses artificial intelligence to help eSports teams identify, segment, and engage their audiences to maximize sponsorship and advertising revenues. The company boasts major global eSports teams as customers, including Cloud9, Immortals, and Excelsior as well as eSport festival Dreamhack. was founded in 2016 in Santa Monica and has raised USD $10 million from Courtside Ventures, ChinaRock Capital Management, Bitkraft Esports Ventures, Catalyst Sports, and others.

Investor Takeaway: I expect to see additional investment and innovation at this layer as teams fight to own a greater share of their audience’s attention and wallets, away from major viewing platforms Twitch and YouTube Gaming. This is analogous to Ben Thompson’s Aggregation Theory in which value accrues disproportionately to the platforms which aggregate content (Twitch would be Facebook in this analogy) vs. those groups that create content (gamers would be the content publishers).


There are a number of network optimization tools designed to improve the speed and quality of internet connection for gamers, the most prominent of which are Haste and WTFast.

  • Haste (USD $4.4 million from BLH Ventures and angels) has built a specialized gaming network (analogous to a VPN) to optimize the packet delivery from gamer to gaming server by routing traffic through protected hubs while continuously monitoring network performance.
  • WTFast (USD $0.5 million from Bitkraft Esports Ventures, Valhalla Angels, and others) also a offers “lag-free” gaming experience and boasts major corporates as partners, including Amazon, ASUS, GameStop, and Linksys.

Investor Takeaway: While I am tempted to write off these services as network speeds continue their march towards light-speed with FTTH/5G — lag is still a real problem, even for professional gamers — likely due to a correlated increase in the size and complexity of modern games. For example, lag killed professional gamers who were competing in a July 2018 Fortnite tournament for USD $250,000 (video has NSFW language).


An emerging area of eSports services are analytics engines that capture game-play data and produce insights for teams and managers to improve their performance. (disclaimer — OMERS Ventures is an investor) offers users automated benchmarking of key game statistics relative to other players in post-game reports. Today, the company is focused on providing insights for Overwatch and is used by eSports teams including Team Canada, the Philadelphia Fusion, and the Angry Titans. The company has raised USD $4.7 million from OMERS Ventures, Extreme Venture Partners, Foundation Capital, ScaleUP Ventures, and others. is another Overwatch analytics engine that offers comprehensive post-game insights and detailed match breakdown for teams and individual gamers. The company was founded in 2017, graduated from Y Combinator’s Winter 2018 class, and has gone on to raise USD $6.6 million in venture funding from Accel, NextGen Venture Partners, and MCVC Partners. is a lightweight tool for PC gamers that records gameplay and allows players to drop bookmarks at key moments — like a death or kill — to review afterwards and assess their strategy. The company does not currently advertise automated analytics or insights — but with USD $15 million in venture financing raised from Shasta Venture, The San Francisco 49ers, Accel, and Founders Fund — I would bet this is on their roadmap. Currently, the website boasts players from leading global teams including Cloud9 and Fnatic.

SAP (disclaimer — my previous employer) has partnered with Team Liquid to provide in-game and post-game analytics to players and coaches across a number of titles. SAP has a history of providing sports analytics and management tools to traditional organizations and has set its sights on replicating these offerings for digital sports.

Investor Takeaway: I believe there is an incredible opportunity to ingest and analyze video game data — which is inherently easier to map than physical sports — to optimize player performance. If we play out the increasing professionalization of video games — training tools should automate away the much hyped Fortnite tutor.

Level 5: Superstars & Teams

The current trend to note at this tier is the transition of video game competition from one-off tournaments to leagues that increasingly resemble traditional sports. While winnings from eSports tournaments can rival any traditional sports competition (see below) the next stage of maturation is more regular professional match play.


Similar to traditional sports organizations, eSports teams can either be singularly focused on one gaming title or compete in multiple leagues — known as endemic eSports teams. For a traditional sports example, the Maple Leaf Sports & Entertainment group owns the Toronto Maple Leafs (NHL), Toronto Raptors (NBA), Toronto Football Club (MLS), Toronto Argonauts (CFL), and affiliated farm teams.

Top endemic eSports teams like Team Liquid and Evil Geniuses have won over USD $20 million each in prize money alone with teams competing in many different games. For an eSports example, Team Liquid has teams in the following 14 games:

As professional gaming leagues expand — we have seen an explosion of interest from technology investors and traditional sports organizations who want to own teams in key eSports leagues. The current hype is over the expansion of the Overwatch League with investors including Comcast and Robert Kraft (founder of Kraft foods and owner of the NFL’s New England Patriots and the MLS’ New England Revolution) spending up to a reported USD $60 million for the rights to own their local franchise.

The venture world was introduced to this conglomerate team concept by Cloud9, which raised USD $25 million from Peter Thiel’s Founders Fund and a mix of well known angel investors including Alexis Ohanian founder of Reddit & socially progressive celebrity husband of Serena Williams.

Investor Takeaway: I believe there will be incredible opportunities for investors to participate in eSports, while using an endemic, conglomerate structure to diversify away from the popularity of any one video game ‘hit’.


The key thing for investors to understand is the power and monetization strategies of eSports stars is incredibly similar to traditional sports stars, with one major difference. Both eSports and traditional sports players get paid by teams, tournaments, and advertising sponsors. But eSports players can generate a significant percentage of their income from donations and prime subscribers from Twitch (what Pateron tried to do). Donations or “donos” involve individual viewers gifting small amounts of cash (or $5k if you’re Drake) to cheer on their favorite players. On Twitch, viewers can also sign up to be prime subscribers to their favorite players to get special emojis and perks. Players keep half of the $5.00/month prime subscriber fee and Twitch keeps the other half.

Those numbers can add up quickly for the world’s top streamers like Fortnite’s Ninja, who has ~150,000 prime subscribers which is worth over USD $500,000 per month. This income comes before his other sponsorship deals and tournament winnings.

Investor Takeaway: unless we see a Fantex clone, we are unlikely to see major investment opportunities for technology investors at the Player tier.


The Overwatch League is the first eSports initiative to follow the traditional sports team model with franchises for major cities around the world, live events, and salaried athletes. Along with all the revenue streams of traditional sports leagues — ticket sales, media rights, licensing, ancillaries, etc. — there are unique opportunities to monetize virtual merchandise. For example, fans will be able to buy a “skin” so that when they’re playing Overwatch at home, their hero will be wearing the jersey of their city’s team.

The real reason eSports leagues are receiving attention and investment from traditional sports organizations is because of the stark contrast between the average age of their viewers, shown below.

eSports viewers are 3x younger than PGA Tour, LPGA, and Horse Racing viewers and represent the next audience marketers and content providers will need to engage and cultivate.

Level 6: Games

Yes — video games themselves can be a hits driven business.

The 10 titles in the framework above have sold more than 600 million copies (with a special shout out to Fortnite) led by Tetris, which has sold 170 million copies since it was released in June 1984. Similar to how the movie industry has shifted towards a focus on mega-franchises — those multi-generational video game titles like Mario, Pokemon, Call of Duty, Grand Theft Auto, etc. have predictably massive consumption, while most other games follow a more polarized outcome distribution (known as ‘hits’).

Generally, the market is dominated by first-person shooters (FPS) and third-person shooters (TPS) with sports and role playing games coming in as runner up genres.

This would not be a VC post without discussing the cloud ☁️ — which has permeated every industry as the preferred method of software distribution and consumption — including video games. The trend for investors to understand is that the traditional model of video game consumption has shifted from a single, upfront purchase of a physical disc for about USD~$70 to the current model of freemium video games with in-game purchases of downloadable content (DLC).

DLC can include things like additional maps or areas within maps; more powerful weapons or items; player experience upgrades; new or past favorite characters and skins; and hardcore game level modes.

An example of DLC gone wrong is with EA’s Star Wars Battlefront II — in which players could either buy key characters Luke Skywalker and Darth Vader for around $20 or play 80 hours (way too much) to unlock the characters. After complaints surfaced online about the time and cost, EA responded that its intent was to “provide players with a sense of pride and accomplishment”. This comment by EA has the dubious distinction of being the most downvoted comment ever on Reddit (683,000 downvotes as at September 2018).

Fortnite is a study in DLC done right. The game itself is free — but players can pay to download special characters, skins, and game modes. The Epic Games title is reported to have earned over USD $1 billion over LTM May 2018 with USD $318 million coming in the last month alone.

Investor Takeaway: the changing consumption model for video games, while an important industry trend, is unlikely to directly affect early-stage technology investors unless you are investing in game developers (below).

Level 7: Game Developers

Video game developers range from large public entities like Activision Blizzard, Electronic Arts, Ubisoft, Tencent and Nintendo; large privately held studios Epic Games (Fortnite); and smaller indie studios like Toronto’s Big Viking Games. The investing profile of these studios mirrors the polarized distribution of outcomes for games — if a studio makes a ‘hit’ they can have a spectacular outcome.

Investor Takeaway: investing in studios hoping for a USD $5.9 billion acquisitionlike King Mobile is a ‘hits’ bet — wager on friends.

Level 8: Game Engines

A game engine is a software development environment used to build video games. Engines have evolved significantly as PC and console hardware power has ramped up over time to render increasingly complex worlds (great overview here).

The gaming engine market is highly consolidated. Top engines include PE-backed Unity which raised USD $400 million from Silver Lake, DFJ Growth, Sequoia Capital, and others, which owns an estimated 45% of the gaming market, followed by Epic Game’s Unreal Engine which owns approximately 17%.

Investor Takeaway: given the massive capital requirements and extensive research & development required to build a modern gaming engine — I don’t expect to see much opportunity for early-stage venture investors here.

Level 9: Platforms

Distribution mechanisms for video games can exist as extensions of the underlying gaming platform or decoupled marketplaces that exist separately. Coupled distribution networks are more common in console gaming, as Xbox, PlayStation, and Nintendo all operate their own stores via their online networks, and mobile gaming in which apps are distributed by the Apple App Store or the Google Play Store on those respective platforms. PC gaming is an example of a decoupled gaming distribution in which users can access separate services like Steam,, and others for many different gaming titles, or go directly to game developers’ websites to download their specific content.

Valve, the privately-held company behind Steam, the Steam-Machine console, and hit games Half-Life, Left 4 Dead, and Dota 2 amongst others, is one of the most interesting private companies in the United States. Originally started in 1996 as a game developer by two former Microsoft employees, the company has expanded beyond game development to build Steam, an online PC game marketplace that sells games to its 125 million active users (6 million of which are daily active users). In 2011, the company was reported as having the highest profit per employee of any privately held company in the United States. In January of 2018, the company was subject of acquisition rumors by Microsoft, who would be looking to purchase rights to Xbox specific games as well as combine the PC game marketplace with their existing offerings.

Investor Takeaway: although major titles like Fortnite have been able to circumvent platform distribution channels to avoid paying the 30% pound of flesh demanded by Apple, Google and alike — I believe it is unlikely to see a further decoupling of distribution channels from core console and mobile platforms as the key distribution channel. In PC — distribution will remain fragmented and continue to be owned largely by Steam (estimated 70% of all online video game sales).

Level 10: Platforms

Broadly, we can segment gaming Platforms into PC, console, handheld, mobile, and VR. Generally, we see the incumbents on a cycle of incremental innovation updating PC, console, and mobile platforms — the domains of large public companies like Apple, Google, Microsoft, Sony, and Nintendo. However, as new technology platforms emerge we see the unique opportunity for new players to take a leading position — with the most recent example being Virtual Reality.

Within VR, Oculus is a rare example of a small team that raised just USD $91 million from venture investors to build a meaningful product for an emerging technology platform, innovating faster than industry incumbents. The Oculus team was taken out by Facebook for USD $2 billion in 2014. Of course, that acquisition was about much more than gaming, as VR represents a future paradigm for virtual human interaction, but this thesis for emerging technology platforms extends into other consumer realms of social, entertainment, media, and alike.

Looking Ahead

Broadly, we see the most interesting investment opportunity at the highest tiers of the framework, with innovation percolating closer to the growing number of video games players and audiences. I believe we will see increasing venture dollars flowing specifically towards:

Level 2 — Broadcasting, Community, and Betting;

Level 4 — Services

Level 5 — Superstars & Teams

Game studios will produce evergreen investment opportunities as cultural forces shape new game phenomenons, like the current battle royale hype. Like I said, a portion of the industry will always be a ‘hits’ business.


I hope you have walked away from this article with a better understanding of the existing incumbents and high-trajectory start-ups in the eSports and video game world.

I look forward to connecting with those companies I have missed and investors who share a different perspective.




GG everyone!

OMERS Ventures

OMERS Ventures is the venture capital investment arm of OMERS, one of Canada's largest pension funds with over $95 billion in net assets. OMERS Ventures is a multi-stage investor in growth-oriented, disruptive technology companies across North America.

OMERS Ventures

Written by

OMERS Ventures is a multi-stage VC investor in growth-oriented, disruptive tech companies across North America and Europe.

OMERS Ventures

OMERS Ventures is the venture capital investment arm of OMERS, one of Canada's largest pension funds with over $95 billion in net assets. OMERS Ventures is a multi-stage investor in growth-oriented, disruptive technology companies across North America.

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