Valuations decline causing a drop in gaming deals during first quarter

According to a quarterly report released by Digital Development Management, the $180 billion video game sector has seen a decline in corporate valuations, rising interest rates, cooling stock markets, and economic instability, causing investor “cautious sentiment.” The first quarter of 2023 experienced a significant setback, with falling investment values across mergers and acquisitions (M&A) and initial public offerings (IPOs) in North American and European markets.

DDM provides investment services, representation, consulting, and research to clients and notes that during Q1 2023, the total value and number of investments and M&As were low, among the lowest in recent years, and were the third-least “exit” in the 14-year data collected by DDM. The number of investments in gaming companies remained strong, but its value declined by almost 41%, signaling declining valuations for certain types of startups.

Investments in blockchain-based gaming companies still have strong investor interest, with all 10 of the industry’s most active investors pursuing opportunities in this subsector. However, only 31% of new investment funds expressed interest in investing in blockchain. The report indicates that the “crypto winter” has caused fear in the market, albeit creating investment opportunities. Investments in this subsector fell by 29% and 31% by value and volume, respectively, in Q1 2023.

Investments in the gaming sector declined further amid the ongoing economic and regulatory uncertainty caused by the COVID-19 pandemic. The report speaks to industry investors and research analysts who said they expected gaming investments to remain volatile, with some predicting the market to ease significantly from the fall through 2024, driven by interest in artificial intelligence tools.

The report concludes by noting that the purse strings seemed to have loosened somewhat, with new entrants to the market, such as Hollywood media companies seeking growth opportunities, and tech giants such as Apple and Alphabet with large gaming assets, willing to invest in large deals. Saudi-backed firms are also aggressively entering the entertainment and gaming markets, despite Chinese companies pulling back on international deals.

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