Mapping The Gaming and Esports VC Landscape

White Star Capital
Jul 6, 2020 · 14 min read
Figure 1: Gaming market map; Source: White Star Capital

Market Overview

Gaming has entered a new era

In recent years, it has become clear that the gaming industry is entering a new era. Not only has the industry moved beyond mobile, but cross-platform gaming experiences such as PUBG or Fortnite, in-game socializing environments (notably in metaverses), and subscription-based cloud gaming services from the likes of PlayStation, Google, Amazon, and others have become the norm.

A global, $150bn+ market, with increasing VC participation

Historically dominated by large incumbents and gaming-centric investors, the gaming industry has been evolving in recent years, well before COVID-19 tailwinds. The rapid growth in the sector has attracted a flurry of new companies building in the space, as well as gamers, viewers, fans and in turn a broader base of investors.

Figure 2: Gaming market size and growth, per geography; Source: NfX, NewZoo
Figure 3: Gaming market size and growth, per platform; Source: NfX
Figure 4: VC funding in Gaming, 2014–2020 (volume and deal count); Source: PitchBook, White Star Capital
Figure 5: VC funding per stage, 2014–2020; Source: PitchBook, White Star Capital
  • Guilded: April 2020 $7m Series A led by Matrix Partners
  • Superplus Games: April 2020 $5m Seed led by Makers Fund
  • Robin Games: March 2020 $7m Seed led by London Venture Partners
  • Genvid: March 2020 $33m Series B led by Huya
  • FanAI: November 2019 $8m Series A led by Marubeni
  • VENN: September 2019 $17m Seed led by Bitkraft Esports Ventures and Eldridge Industries
  • Polystream: April 2019 $12m Series A led by Intel Capital
Figure 6: Notable VC-backed success stories; Source: PitchBook, White Star Capital

COVID tailwinds will continue to accelerate value chain expansion

We anticipate the gaming industry to enjoy increased tailwind in the context of COVID, as gaming consumption spikes when more people stay home with limited options for leisure activities, and gaming increasingly becomes a go-to entertainment option for many consumers. As early validation to this hypothesis, Verizon published changes to its overall network usage in April (the latest available release at time of writing), highlighting that gaming-related traffic saw a 213% increase vs baseline, only behind traffic of work-related collaboration tools (e.g. Zoom). While time will tell where levels will normalize post COVID for the gaming industry overall, it is certain that immediate increase in penetration provides promising market conditions for the gaming companies of today.

Figure 7: Gaming ecosystem value chain; Source: White Star Capital

The sector’s expanding value chain attracts various levels of funding and business models per segment

While the mapping / landscape outlined above is non-exhaustive, we can study various business models and strategies across the space using this framework. Note that some startups may fit into multiple categories. Below, we analyze each segment of the gaming value chain and highlight the portion of VC funding they have attracted. Funding data is based on all $20m+ financing rounds since 2014 which covers over 80% of the sector’s total deal value. Similarly, the names mentioned below as top companies are largely contained to companies having raised VC funding over the same time frame.

Developer Tools:

  • Description: Making engines, software, analytics, and development tools geared towards game developers.
  • Top companies: Unity, Improbable, Genvid, Unreal Engine (part of Epic Games)
  • Percentage of funding: 14.83%
  • Key business model(s): SaaS, Enterprise Sales
  • Framework for analysis: How dependent are other software or game engines on the tools and services? How much developer traction does the company have? Are the tools applicable to a wide array of games?

Developer & Publisher:

  • Description: Developing new games and bringing them to market.
  • Top companies: Epic Games, Niantic, Roblox, Scopely, Peak (acquired by Zynga in 2020), Asia Innovations Group (a White Star Capital investment)
  • Percentage of funding: 48.01%
  • Key business model(s): Freemium, Advertising, Subscription, Direct Sales
  • Framework for analysis: What is the revenue breakdown between in-app purchases and add-ons versus advertising? What strategic partnerships exist for game distribution? How large is the gamer addressable market for this publisher / game title?

Distribution Platform:

  • Description: Providing access to games through platforms with digital download or subscription-based options.
  • Top companies: Sea, Blade, GameMine, PlayGiga (acquired by Facebook)
  • Percentage of funding: 6.99%
  • Key business model(s): Subscription, Commission
  • Framework for analysis: What is the revenue split offered to game publishers and how does that compare to that of competitors? What types of exclusivity agreements exist, even regionally, for certain publishers? What is the overall size of the marketplace?

Access Point:

  • Description: Manufacturing hardware and components for gaming.
  • Top companies: Razer, Parsec
  • Percentage of funding: 1.42%
  • Key business model(s): Direct Sales, Subscription
  • Framework for analysis: What unique IP sets these components apart from competitors and makes them geared towards gamers’ needs? What latency, especially for the cloud, can be achieved by the access point?

Esports Talent & Sponsor:

  • Description: Discovering, developing, and sponsoring esports talent.
  • Top companies: Cloud9, Immortals, aXiomatic
  • Percentage of funding: 1.71%
  • Key business model(s): Franchise Sales, Channel Partnerships
  • Framework for analysis: What is the potential and addressable market for team sale? What viewership and following do these pro-athletes / teams have?

Esports Platform:

  • Description: Hosting esports competitions and managing all event-related processes.
  • Top companies: International Esports Federation, ESforce, PlayVS, Envy Gaming, Wangyudashi, Skillz
  • Percentage of funding: 4.14%
  • Key business model(s): Sponsorships, Advertising, Commission
  • Framework for analysis: How large and diverse is the platform’s network of gamers, viewers and game titles? How capital intensive is the platform from a technology perspective and prize pool perspective? How easily can matching liquidity and players be achieved?

Esports Broadcasting:

  • Description: Streaming competitions through gaming-specific platforms, broadcasting channels, and even traditional TV networks.
  • Top companies: YouTube, MLG, Turner, Smashcast, ESPN
  • Percentage of funding: 0%
  • Key business model(s): Subscription, Advertising
  • Framework for analysis: Which specific audience is the broadcaster targeting? Is there a defensible moat vs more generalist broadcasting platforms? What audience scale has the platform reached?

Streaming & Social:

  • Description: Bringing together gamers and fans through live streaming and social communication.
  • Top companies: Douyu, Huya, Chushou TV, Mobcrush, Discord, Twitch (acquired by Amazon)
  • Percentage of funding: 22.91%
  • Key business model(s): Freemium, Advertising, Subscription
  • Framework for analysis: How many and which of the top influencers are streaming on the platform? Does the platform provide a solution for unmet social/communications needs?

New Sector Trends are Extending Gaming’s Reach Beyond Games

Esports is attracting significant and rapidly increasing ad spend

Historically, game developers and publishers were the exclusive channel for brands to tap into the gaming audience through in-game ads. The expanded value chain with esports and streaming unlocks multiple layers for brand exposure, and brands are increasingly finding the growing gaming audience attractive. Global CPG leaders such as Louis Vuitton, Estee Lauder, Puma, Adidas, Budweiser, and Volvo are allocating increasing resources to in-game ads, product placement, themed products, sponsorships, and ‘advergames.’ According to Deloitte, esports alone had a global fan base of 380m in 2018, with 37% representing males between 21–35 and 16% females within the same age group. In the US, 61% of esports viewers earn more than $50k per year and are increasingly averting attention away from traditional media. While esports is still in its early years, Goldman Sachs and Newzoo, a gaming market research firm, expect global ad revenues alone from this category to reach $1.8bn by 2021.

Figure 8: Select examples of marketing in gaming; Source: White Star Capital, press releases
Figure 9: Esports audience growth (2017–2022); Source: NfX
Figure 10: Esports monetization vs traditional sports; Source: a16z

Gaming now extends beyond gameplay, enabling entirely new marketing partnerships

New forms of marketing partnership inside the virtual gaming world are also making headway, notably as Epic Games’ Fortnite, which generated $2.4bn in 2018, is redefining games as a social experience platform. Today, Gen Z and millennials increasingly casually hang out inside Fortnite’s world as much as they play the game in original battle royale format. Notably tapping into this audience, rapper Travis Scott hosted a live virtual concert inside Fortnite in April as a platform for his upcoming album ‘Astronomical’. 12.3m gamers concurrently participated in this event, with 6m more watching the replay on YouTube during the same week; for context, that is 4x bigger than Rod Stewart’s Copacabana Beach — the largest concert ever on NYE 1994. Streaming of Scott’s music across Spotify and Google Play jumped 25%+ in the following weeks, with his latest single ‘The Scotts’ taking the place of Spotify’s biggest streaming debut in 2020.

Figure 11: Rapper Travis Scott hosting a concert within Fortnite; Source: Fortnite

Gaming as the next social network

Relentless adoption among the world’s most valuable demographic and rapid expansion of the value chain that promotes ad revenue are collective factors that ushered in a decade of prosperity for social networks like Facebook, Instagram, and Twitter. While social media giants like TikTok have increasingly rolled out various strategies pertaining to esports and gaming, these are all elements readily observable in the fast-growing gaming industry today. The key difference between current social networks and what gaming could potentially become, however, lies in the fourth dimension- the element of time.

The Metaverse further extends gaming’s audience and economic reach

Social networking as we know it relies on content consumed in the past tense. Photos, videos, tweets, are all a part of our lives that are captured first and then shared or consumed by others afterwards. Gaming, on the other hand, is inherently a real-time social experience, whether it is with friends playing together online or streamers broadcasting to their audience live. In this way, many describe the next Internet as a metaverse. Coined from science-fiction, the term denotes a shared, virtual space that is persistently online and active, mirroring our real physical world in the digital realm. It will have its own economy, complete with jobs, shopping areas, and media to consume.

Figure 12: Tim Sweeney, founder and CEO of Epic Games commenting on Fortnite’s reach; Source: Twitter
Figure 13: Facebook’s sandbox VR universe was announced in Q3 2019; Source: Facebook

New Technologies are Ushering in the Era of Gaming 2.0

Cloud gaming is revolutionizing access and distribution

The most anticipated technology disruption in the gaming industry today revolves around cloud gaming where gamers no longer access titles through dedicated hardware (PC, console, mobile). As access to software-based game titles shifted from physical goods (CDs) to digital (virtual download), hardware-based access points will also shift towards digital avenues. The transition of processing power from local hardware devices to remote cloud stands to disintermediate both the distribution platform and access point layers of the gaming value chain.

Virtual reality as a new access point for gamers

Virtual reality (VR) is becoming a new category of access point (with its own distribution platform) for gamers, extending games’ functionality beyond early augmented reality (AR) successes such as PokemonGo. While historical tech development has largely revolved around hardware, the ecosystem is maturing with a pronounced need for software and content to catch up. New gaming engines and dedicated game developers will be crucial for this genre to offer a truly differentiated experience.

Blockchain enables scarce digital goods and new business models

Blockchain and digital assets represent the third area of infrastructure level opportunities within gaming. The technology enables scarce digital in-game goods, marketplaces for those goods, low payment processing costs for in-game economies, and portability of in-game items across games and marketplaces. There has been increased blockchain adoption by industry giants like Atari (Atari token), Ubisoft (Blockchain Entrepreneur Lab) or Animoca (Sandbox), as well as startups enabling new business models (e.g. SoRare, Planetarium) for IP owners, developers and publishers, which White Star Capital will explore.

Building A Gaming Thesis as a Generalist VC Fund

While we may still be a few years away from the Metaverse becoming a predominant form of the Internet, White Star Capital believes that gaming is at the forefront of this likely evolution. As investors, we study opportunities for long-term growth that provide exposure to macro shifts such as the one we now face with the gaming industry. And through this lens, we explore several topics that are poised to disrupt the gaming value chain as the market evolves into its future state.

Games as social networks: players that reinforce network effects

While it is challenging to identify future winners in game development (e.g. Epic or Roblox) due to fickle consumer preference and capital intensity, White Star Capital seeks opportunities above and below this level in the value chain through developer tools and distribution platforms. As heavily-capitalized game developers and publishers continue to iterate on new content applied to new platforms and technologies, we anticipate increased need for enterprise tools that optimize user acquisition and retention similar to those leveraged by today’s social networks. Infrastructure tools and distribution platforms that eliminate platform-dependency and bring more aggregate gamers into the ecosystem will also be explored.

Live streaming and esports that strengthen gamer engagement

White Star Capital views this segment as a market born by extension of gaming network effects. Streaming and esports further enhance gamer engagement and build communities surrounding the gameplay experience. And as more users spend time associated with games both inside and outside titles, more organic content is produced to keep other members in the network engaged. We explore tools that support the institutionalization of esports in areas such as player discovery and development. Streaming and broadcasting platforms are occupied by a handful of early movers (e.g. Twitch, YouTube Gaming, Mixer) owned by major tech incumbents (e.g. Amazon, Alphabet, Microsoft respectively) without much feature differentiation, pointing to further opportunities for unbundling.

E-commerce parallel in gaming

While game titles traditionally relied on narrow, platform specific, distribution platforms (Steam, PlayStation Store, Xbox Store, Mobile App Stores) in the value chain, they are increasingly bypassing this layer through a direct to consumer approach, resembling how e-commerce companies increasingly bypass brick and mortar retailers. Today, companies like Epic create their own native digital stores and acquire gamers directly for titles, whose fabric increasingly extends beyond that of titles in its historical definition, like Fortnite. Furthermore, streamers and professional gamers play the role of influencers, inviting their audience to purchase games and play alongside them. Conventional social networks (as acquisition platforms) replaced the role of physical retail for e-commerce, and grew the existing addressable market. White Star Capital explores players that displace the distribution platforms for game developers & publishers.

Enabling new experiences through gaming 2.0 technologies

Cloud, VR, and blockchain are gaining traction within the gaming industry. With such developments in mind at the infrastructure level, White Star Capital sees opportunities in infrastructure and developer tool opportunities, which enable traditional game developers and publishers to easily deploy new titles leveraging these technologies, vs needing to internally develop proprietary in house back office capabilities.

Conclusion

While this remains a challenging and fast-evolving space, we believe we are undoubtedly entering a new era within gaming. Gaming no longer solely refers to specific hardware, games or gameplay. Increasingly, the lines between entertainment, e-commerce, social media and gaming are being blurred. New areas within the gaming value chain are rapidly expanding and enabling new tech integration and business models. VCs with limited experience in the space are waking up to the fact that early-stage opportunities now extend beyond developers and publishers.

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White Star Capital