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Wednesday, Feb 28, 2024

Investing in Play

Companies in the gaming sector are facing some headwinds amid an overall decline in funding and industry-wide fallout from a pandemic-led hiring and expansion spree.

The gaming market is not dying, however, and many investors feel that it’s one the most lucrative consumer-facing industries out there. Griffin Gaming Partners certainly believes this, as one of few venture capital firms in the world that places all its focus, and its chips, on gaming. With more than $1 billion in assets under management, up from $235 million in November of 2020, Santa Monica-based Griffin is rapidly growing its portfolio of local and international studios and developers.

According to game industry advisory firm Games One, Griffin is currently the largest gaming fund in the world by assets under management. The firm led a $100 million series B round this month for Irvine-based gaming studio Second Dinner, and its portfolio includes Discord, West Hollywood-based Digital Insight Games, Palms-based Wave, Santa Monica-based Muus Collective Inc. and Culver City-based Scopely Inc. 

Griffin Gaming Partners’ offices.

Nick Tuosto, one of Griffin’s three managing directors and co-founders, said his firm’s specialty is unique, adding that the knowledge of the gaming market he shares with co-founders Peter Levin and Phil Sanderson has allowed the firm to deploy capital effectively while understanding both the funding and the operational aspects of its portfolio companies. Levin previously served as the president of interactive ventures, games and digital strategy at Santa Monica-based Lions Gate Entertainment Corp., Tuosto is an active managing director at investment bank LionTree LLC and Sanderson has invested in companies such as Discord and Century City-based Triller Corp. over his own 23-year venture capital career.

“We’re making great progress and we’re growing as an organization,” Tuosto said. “Everybody on the team loves games and this is something that’s this unique intersection of people’s passions and professions. I never would have envisioned, as a 10-year-old kid playing Nintendo, that there could be a career in video games, and it’s just so much fun and such a blessing to be able to help entrepreneurs succeed.”

The firm said it doesn’t have a specific ownership target but typically is a minority investor and is “flexible” on check sizes. Griffin announced a $10 million investment in Manchester-based developer and publisher ForthStar Limited this month and led a $3 million seed round for North Carolina-based Harmony Games Inc. in the fall.

Hollywood ambitions

Tuosto believes the healthy population of gaming studios in Los Angeles has access to one unique asset: Hollywood. With recent media adaptations of titles such as “The Last of Us” and “Halo,” development studios that can potentially turn out content capable of adaptation are more attractive than ever. Tuosto said he believes this is the “golden age of intellectual properties” and that media adaptations allow value to be built exponentially through the nexus between fans and consumers.

Swapan Dighe, foreground, speaks with Boyoung Kim at Griffin Gaming Partners’ offices. (David Sprague)

“I think it’s a really interesting moment to take stock of where we are as an industry,” Tuosto said. “Games used to be relatively insular, and if you go back 20 years there weren’t really any examples of crossover intellectual property activations … you’re starting to see this really steady drumbeat of successful franchises that are firing on all eight cylinders in lots of different capacities where that IP touches fans all around the world.”

Others in the marketplace

Griffin is the largest gaming venture capital firm in the world, though it shares local turf with a few other gaming-focused funds. Among these are Santa Monica-based funds Patron.xyz and 1AM Gaming LLC. David Kaye is the general partner of Calabasas-based F4 Fund, a $10 million pre-seed and seed gaming fund. He said he expects an increase in the “fanverse” approach to IP development, using “Five Nights at Freddy’s” as an example. The horror-themed video game was originally released on a community-sourced platform in 2014 and gained a strong cult following that spawned expansive fan-created content and, eventually, a commercially successful film adaptation that was released last year. Kaye wrote that it is incredibly “capital efficient” for commercial and creative partners to embrace gaming franchises with large fanbases and expects to see a rise in adaptations of community-led IP.

Tuosto agreed that there is value on the table even for owners of more “indie” IP, and said that “Five Nights at Freddy’s” is an example of how the fanbase attached to more “niche” content can draw in large audiences for adaptations. However, Eric Bellomo, an emerging-technology analyst for PitchBook Data, said most transmedia value continues to flow to established IP and franchises, rather than emerging games or studios.

“Transmedia entertainment is certainly a trend – and a potentially lucrative one at that –which can extend to indie games, but it’s more of a future, complementary revenue stream than something likely to drive early traction or returns,” Bellomo said. 

For the video games market overall, the state of investment has changed in recent years, and most capital is going to earlier-stage outfits. Bellomo said data indicates early-stage companies led in both deal count and value for the fourth quarter and expects that the trend will continue through at least the first quarter of this year. Griffin’s substantial series B round for Second Dinner, which was founded in 2018 and had previously raised only $30 million, reflects this: most money is going to younger companies, not older ones.
 
Early-stage winners 

“Given early-stage startups are further from exit markets, they can be more insulated from fundraising headwinds, but lengthy game development cycles offset this value somewhat,” Bellomo said. “We could see fewer deals for studios at the seed stage due to the intense competition for user attention and a shift to ‘pick-and-shovel’ SaaS offerings, but our conversations with investors indicate talented teams are still building within gaming and bringing innovative ideas to investors.”

Pitchbook’s data shows that more than 70% of all venture capital gaming deals in the third quarter of last year were early-stage, seed or pre-seed. Venture growth deals accounted for only 5.8% of deals that quarter, compared to 30% in the third quarter of 2020. 

Bellomo said that while investors have had to become more comfortable with longer game-development timelines, they will continue to prefer a fast “time-to-market.” Silver Lake-based Gardens Interactive Inc., for example, closed a $31.3 million series A funding round in July of last year but is still in the process of releasing its first title; Bellomo said investors likely valued its available demos, strong founding team profiles and its content’s potential to be an enduring, “forever” game.”

While smaller gaming startups gathered substantial cash, industry giants still had success stories last year: Nintendo Co., Take-Two Interactive Software Inc. and Electronic Arts Inc. all closed the year with higher share prices than they began with. Meanwhile, Microsoft Inc. finally closed its record-breaking acquisition of Santa Monica-based Activision Blizzard Inc. for a reported $68.7 billion.

Along with a rising interest in “pick-and-shovel” offerings – an investment strategy that funds the underlying technology of a product, rather than the final product itself – data shows that venture investment into Web3 gaming has declined and that mobile-first game developers are facing issues such as rising customer-acquisition costs. Griffin, though, focuses its investment interest on the global gaming industry and doesn’t have any “individual niches.” Tuosto said that Griffin sees nearly 3,000 gaming companies per year and makes about a dozen investments from among those, with an interest in keeping its portfolio concentrated and tight.

“All we do is gaming, and that’s really what we aspire to be: the definitive source of capital within the games industry,” Tuosto said. “There are only a handful of funds that are even focused on this category. Most of the time, venture capitalists are generalist in nature. It’s awfully tough to make sense of whether or not a deal is a good one or a bad one if you only happen to see a handful (of gaming companies) per year … we think it’s a discrete set of skills and data that needs to be leveraged to really understand this market deeply and be able to deploy capital effectively.”

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