Pando

Looking to raise money for a gaming company? Skip Sand Hill Road and go to Asia

By Dennis Keohane , written on July 13, 2015

From The Gaming Desk

There isn’t a more complex, confusing, or unreliable market for investors these days than the video gaming industry.

There were the quick rises and often even faster declines of companies like Zynga, which was trading at $2.65 on Friday and has been under $5 for 3 years now, and Turbine, which recently shut down the DC Universe game Infinite Crisis.

There were the recent high-profile failures of the PC version of the Batman game Arkham Knights.

Even King Entertainment, the maker of Candy Crush Saga, has had to deal with questions about its profitability. And King is considered a success story.

After a surge of excitement around mobile games and social games five years ago -- after Zynga went public in 2011, four years after being founded -- US investors have realized just how much of a crapshoot the whole video game industry is, from mobile gaming applications to AAA video game studios.

Sure, there is a monster market hungry for established game titles and seemingly willing to pay almost anything for in-game features. And yet, even established game studios, like Blizzard and Riot Games, are on tenuous ground, poised to make a business-threatening mistake at every turn. Riot, for example, recently had issues with the jungle in League of Legends, though according to Kotaku it may have fixed them.

Fortunately for nerds in basements everywhere, there’s still one place that’s hot on backing the latest game, platform, or studio: Asia.

As a recent CB Insights’ breakdown showed, companies like Alibaba, Tencent, and DeNA are continuing to pump more funds into the space than their US counterparts, paying no heed to the mistakes made by those who jumped on previous gaming industry investment trends.

According to CB Insights’ numbers, investment in gaming companies had plateaued overall. Although gaming startups have raised close to $1 billion since 2010, the deal flow only saw a 9 percent increase in 2014, and has fallen off of a cliff this year. And, for good reason. Everyone has been burnt by the gaming industry.

But companies in China and Japan are still backing gaming companies, especially those making mobile games, predicting that the space will be worth $100 billion by 2017, according to games market research site Newzoo.

The CB Insights data shows that Alibaba invested $120 million in game developer Kabam at the end of 2014 at a $1 billion valuation. In the last quarter, telecom giant Tencent put $60 million into Pocket Gems. CB Insights pegged Tencent as the second-most active investor in US mobile gaming companies over the last five years, with 500 Startups being the most active. Indeed, Tencent’s 2011 acquisition of Riot games was one of the first high-profile investments it made in a US company.

Additionally, Japanese multinational telecom organization SoftBank has been active in the space, acquiring Finnish mobile gaming company Supercell in 2013. As reported on Pando today, SoftBank is also busy backing Asia’s leading Uber spoilers. It seems to be dominating investments in the Valley’s hottest category and its coldest category at the same time.

Gaming, virtual reality, and in-game payments have always been stronger and more consistent markets in Asia than the US. Is this more of the Asian financial bubble working its way into startups, or do Asian investors just know more about this market than Americans? The best answer to that question will come from returns in another five to ten years.

In the meantime, expect the activity to intensify. DeNA, which has also backed US gaming companies like Astro Ape Studios, is poised for a big 2015, as it plans to roll out a mobile integration of Nintendo’s most popular games. The industry is coming full circle, with one of the most famous Japanese gaming companies ready to make a comeback through mobile. US investors want little to do with it.

To be fair, several VCs in the US are still wading into the gaming waters, but not as heavily in the mobile space. Spark Capital, for example, which has backed Proletariat and OMGPOP, continues to have an interest in financing companies in the gaming space, which may have a lot to do with the influence of partner Nabeel Hyatt, who led Zynga in Boston for awhile. The firm’s involvement in Oculus VR may also signal its future interest in companies building games and software for what some in the industry believe is the next big gaming platform.

That’s important, because many of the Asian deals mentioned in the report seem to be for later stage companies. Someone has to fill the pipeline if there’s going to continue to be a US gaming market.