Venture funding for gaming startups showed some positive signs in the first quarter of 2023 despite an overall decline from last year, according to a new research report from PitchBook.
The amount of capital raised by gaming startups in Q1 reached $1.1 billion across 140 deals, marking a 10.7% quarter-over-quarter increase in deal value. The number of deals grew 20.7% compared to the previous quarter.
However, when compared to the first quarter of 2022, both deal value and count fell sharply. Venture capital funding for gaming startups dropped 75.7% in value and 56.4% in the number of deals in Q1 2023 versus the same period last year. This extends a downward trend that began in the fourth quarter of 2021.
The majority of funding in Q1 went to startups focused on game development and content, which secured $321.8 million and $504.0 million respectively. Notable deals included Character.ai’s $150 million Series A round, Believer Entertainment’s $55 million Series A, and LandVault’s $39.4 million early-stage funding.
Meanwhile, consumer spending on games has been declining due to companies adjusting to the boom driven by the pandemic, according to the report. In the U.S., consumer spending on games fell 5% to $4.6 billion in the first quarter. Meanwhile, in Europe, PC and console game sales dropped 11% compared to a year ago.
Generative AI is Having a Huge Impact on Gaming Development Costs
The long-term prospects of the gaming industry may be primarily shaped by emerging technologies like generative AI. These algorithms can recognize patterns in large datasets to auto-generate original content, which has the potential to drastically expedite the development process.
Techniques like procedural generation are already being used to create game assets like trees and landscapes. However, generative AI could be further implemented to come up with assets and content much faster and more accurately.
This could have a major impact on an industry where blockbuster games often cost hundreds of millions of dollars and years to develop. For example, Grand Theft Auto V cost $265 million while Red Dead Redemption 2 cost $540 million.
Game development costs are also rising and they could reach $1 billion per game by the end of the decade. Generative AI offers the promise of higher productivity and lower costs for game developers of all sizes. At the Game Developers Conference 2023, generative AI was a major topic of discussion with nearly 30 sessions and announcements from companies like Ubisoft, Roblox (RBLX), and Unity.
Gaming Companies Are Laying Off Staff as Generative AI Solutions Boost Productivity
According to some industry estimates, generative AI could reduce the level of effort and manpower required to create games in the magnitude of 120-to-1. Meanwhile, companies may also be able to reduce their ratio of technical-to-creative personnel from 1:1 to 5 creative employees for every technical worker.
Technical workers may see the demand for their services drop as generative AI technologies are becoming more and more sophisticated and their capabilities are being progressively enhanced so they can come up with rough drafts of code for a game in a matter of minutes.
One example of this trend is Unity, the San Francisco-based videogame software developer, which recently laid off 600 employees – around 8% of its workforce – to reportedly position the company for long-term and profitable growth. In total, the company has departed nearly 900 people in 2023.
This cost-savings trend could also allow indie developers to produce more content with fewer resources, while larger studios can potentially launch one additional game per year or avoid delayed releases. While the technology is in its early stages, generative AI has the potential to revolutionize the creative workflows that drive the gaming industry.
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