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Games Entertainment

Games Industry Venture Capital Plummets 22

Posted by simoniker
from the advanced-chocolate-cake-delivery-system dept.
Thanks to ElectricNews.net for a synopsis discussing the difficulty of raising venture capital for the games industry. They reference a Wall Street Journal article mentioning that only USD37 million was invested in games-related firms in the US in 2002, down from USD66.9 million the year before and a peak of USD295.3 million in 1999. According to the article, apart from the wider downturn in VC activity since the late 1990s: "'Historically, in the games business, a lot of companies really succeeded by hitting it big with one blockbuster,' says Jon Callaghan, managing director at Globespan Capital Partners. 'As a VC, it's very hard to invest in that.'"
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Games Industry Venture Capital Plummets

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  • by iq in binary (305246) <iq_in_binary@@@hotmail...com> on Saturday July 05, 2003 @02:24AM (#6371357) Homepage
    The most important factor of an analyzation of any entertainment based industry is this: When there's no extra money, what money is there isn't going to be spent on luxuries.

    When you're jobless and worried about next month's rent, or tight on the line with cash as it is; are you really going to go out and spend precious money on video games?

    Unless you're completely irresponsible with your cash, no! America's economy, while slowly on it's way back up, still does not afford the people of America (most of them, anyway) enough cash to spend on luxuries.

    The reason 1999's VC numbers are so high is because 1999's economy was arguably the best it had been in decades. Since then it has been a downhill turn.

    This is not to say video games are dead, just that they're on the DL until our economy gets back on it's feet. When jobs are as plentiful as they were in 1999 (I was 14 and making more money than my working mother, that is a good economy), video games will skyrocket yet again, trust me.
    • by Anonymous Coward
      The games industry last year grew at a rate of 35% revenue wise.

      http://sanjose.bizjournals.com/sanjose/stories/2 00 3/02/10/daily34.html

      Your entire reply was written as some "Well you can't expect people to buy games when times are tough", blissfully ignoring that this is exactly what people are doing. The article is discussing the lack of VC funding, not the lack of game sales.

      • Yeah, the problem is that it's just too risky to fund games. Is my mind all wrong, or were some of those full motion video spectacles still being made by 1999? After burning money on a few of those it's no wonder captial goes elsewhere, it was probably their first attempt at game funding as well. Take out obvious duds like that and it's still damn hard to tell what games will become hits and what won't. Just too much venture for the capital ...
      • As well as a %33 increase in unit prices since '99.

        That %35 isn't necessarily a good sign. Consumer wise, the gaming industry hasn't grown much at all (been on the decline, actually).

        I draw this knowledge from experience, I've managed video game stores. A good friend of mine is an owner of a game depot franchise, see: former employer.

        Forgive me for enlightening the /. public to something most people hardly think about, Jackass.
    • The most important factor of an analyzation of any entertainment based industry is this: When there's no extra money, what money is there isn't going to be spent on luxuries.

      Actually, the game industry traditionally does well in times of recession.
  • by Jouni (178730) on Saturday July 05, 2003 @04:46AM (#6371627)
    Greg Costikyan [costik.com] had pretty heavy things to say about the current state of the games industry in his brilliant blog [costik.com]. He also published his thoughts in a PowerPoint [costik.com] after his Digital Genres presentation.

    It's a tough time in the games industry, and anyone contemplating getting in should do the research thoroughly. While the risks are high, I believe game development could be refined into long term sustainable, profitable business by re-thinking the process of game creation.

    Meanwhile, even government organizations like TEKES [tekes.fi] in Finland have started to seriously support the development of games and related technology and IGDA [igda.org] has already networked thousands of game developers together. Individual developers may fall, but game development is still a growing industry [idsa.com].

    And we all heard about the return of shareware [cnn.com]. PopCap's Bejeweled [popcap.com] may not turn the heads of VCs with it's content, but a million copies sold is no peanuts.

    Maybe if I finally updated my Palm games [hybrid.fi] (/shameless plug) I could get rich quick, too. :-)

    Jouni

  • by MightyTribble (126109) on Saturday July 05, 2003 @09:06AM (#6372127)
    Let's take a step back, here, and consider who VCs *are*, and what they *want*.

    VCs are people with a *lot* of money, who do all the traditional investing strategies and then take a *part* of their fortunes and invest in risky enterprises. They know (or ought to, going in) that there's a high chance the money will not give a return. There's also a chance the money will give a *dramatic* return - much higher than their other, more traditional, investments. For the article to say that 'one-hit wonders' aren't part of the VC mindset boggles the mind - that's *exactly* what most VCs want - a quick ( 3 year) high rate of return on their initial investment, then take the money out and do something else.

    More likely, I think, is that VCs have been steered away from games development companies (despite the tremendous growth in the games market in spite of the economic downturn) because the large VC firms that handle their money *don't understand the market*. This isn't too surprising, since most institutional VCs I've met don't seem to be too bright in the more traditional industries, either.
  • by Doctor Cat (676482) on Saturday July 05, 2003 @01:39PM (#6373058) Homepage
    One thing I've noticed in the 21 years I've been in the game industry is that most of the stocks are way too unstable to make it look like anyplace a sensible investor would put their money as far as I'm concerned. Even the successful companies with several hit games can have hugely variable cash flow, dramatic reversals in their financial health over the course of a year or two, or even just huge overspending on new "promising" projects that don't pan out, negating the value of the huge sales of their hit titles. There's a few exceptions like Electronic Arts that are fairly long-term stable and valuable, with a broad enough portfolio and conservative enough management to produce good results for people who'be bought and held their stock over the years. But I've seen wild roller coaster rides through the 80s and 90s in the fortunes (and stock prices) of companies like Activision, Acclaim, Microprose, etc. Even when the sales are there, the kind of experienced management to turn that into a stable company that's investor-friendly is usually absent.

    In response to things a couple of other people have said... It's been fairly well known that people still spend on entertainment during economic downturns since the Great Depression of the 1930s, when the movie industry flourished. A lot of people were poor, but if they could scrape up a nickel or a dime for a saturday of escapism (including serials, cartoons, and newsreels in addition to one or more main features), they often would.

    As far as "one hit wonders" - venture capitalists are smart. They know that if some company is going to turn out just one hit game, it's a better investment to be funding that one game through a deal with the developer than it would be to invest in the whole company and have the earnings diluted by the expense of several money-losing titles... But more to the point, the most desired "exit strategy" for the venture capitalist, taking the company public and cashing in the stock, does NOT work well with a "one hit wonder" publisher. The way to maximize the amount of investor dollars that a game company can raise at IPO, you want at least 3-5 hits, preferably all of them "franchises" where you keep turning out sequels and/or add-ons that can be expected to keep generating a healthy revenue stream for years. A one hit wonder publisher might attract some foolish investors, a strong publisher with several good product lines will attract foolish investors AND savvy investors too. Which means more money, which means more profits for the venture capitalists. I've talked to VCs, believe me - they are interested in building stable (or at least stable-seeming) long term businesses, not something that investors could see is a "flash in the pan". They want to get OUT of the business quickly, sure, but they want to be able to sell it to other people who'll be willing to believe the business will stay around and keep making profits for years to come.

    Anyway I'm not surprised investment would die down in the computer game industry - I'm just surprised it took so LONG. At one point, there were about 3000 new PC games coming out a year, with only a tiny fraction of them breaking even or turning a profit. I think that's dropped down to more like 2000 or less. Which is probably a good thing. The fact that there was so much "stupid money" being pumped into the game industry is why the retailers shifted more towards breaking even on sales to consumers, and making their profits from Market Development Fees (thinly disguised bribes) from the game publishers. If there's less stupid money input into the system, maybe it'll eventually go back to the slightly saner way it used to work.

  • ...given the fact that venture capital available that year was absurd (more was available than in all the rest of human history).

    There was too much money chasing too few ideas (resulting in sock puppets selling dog food on the internet). Some of it chased games, but most people realize that VC is not suited to investment in the games industry (as pointed out in the post).

    1999 was stupid and silly. I was there. I remember.

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