The increasing prominence of gaming hasn't yet fully translated into proportional investment activity from venture capitalists, despite the substantial size of the games market. The past year has witnessed an extraordinary surge in gaming’s popularity, driven by the disruption of traditional entertainment caused by the COVID-19 pandemic and the growing appeal of virtual platforms such as Animal Crossing and Fortnite, bringing people together in digital spaces.

Investors specializing in later funding stages have demonstrated significant interest in gaming-related businesses. This is evidenced by substantial capital infusions into well-established gaming companies; for example, Scopely recently secured a $340 million investment, resulting in a valuation of $3.3 billion. However, venture capital funding generally hasn’t adequately recognized the gaming industry and the wider synthetic market, considering its importance within the entertainment landscape and broader culture.

Consider LeBron “Bronny” James Jr., son of the renowned NBA player, who recently began a professional career—not on the basketball court, but as a gamer with the highly popular FaZe Clan team. Alternatively, observe Unity, the developer of a leading game engine, whose stock value has almost doubled since its initial public offering in mid-September, rising from $56 to $100 per share.

Data from SensorTower reveals that gamers allocated $36.8 billion to games via the Android and iOS app stores during the first half of the year. Furthermore, the number of new game downloads has also increased. The analytics firm reported 28.4 billion new game installs in the first six months, representing a 45.2% year-over-year increase in gaming downloads during the second quarter alone.

Bitkraft, a venture firm uniquely focused on the entirety of the gaming ecosystem, recently finalized its latest fund, securing $165 million in investment capital. The firm, which added a former managing director from Goldman Sachs earlier this year to capitalize on opportunities within what they term “synthetic reality” investments, exceeded its initial $140 million target by $25 million. This represents a distinct approach within the investment landscape.

“Throughout my 23 years in the games industry, I’ve consistently believed in the potential of video games to not only dominate the entertainment sector but also to become a significant component of society—creating the digital identities that increasingly shape our self-perception,” stated Jens Hilgers, founding general partner of Bitkraft. “We are experiencing a period of accelerated growth… this crisis has propelled the games industry forward by several years, making it an even more compelling time to invest.”

The public offering of Unity, and its expansion into markets beyond gaming, appears to validate Hilgers’ perspective and highlights the considerable opportunities that remain within the realm of synthetic reality for both businesses and entertainment.

“Their strategy of providing free access to gaming tools for hobbyists is a clever approach to gaining market share,” commented Alice Lloyd George, founder of Rogue Ventures, a new firm concentrating on emerging technologies and gaming investments.

Lloyd George drew a comparison between Unity’s business model and that of its primary competitor, Epic Games, noting that both companies have ambitious goals. “Both are aiming to extend the application of their game engines beyond traditional gaming,” Lloyd George explained, adding, “Unity is particularly well-positioned due to its strength in the mobile market, which prepares it for advancements in AR and VR, and provides essential entry points for developers in those fields.”

Engagement and the future of entertainment

Scopely’s co-chief executive, Walter Driver, emphasizes that the appeal of gaming lies in the bonds formed between players—a key factor driving investor confidence and the company’s multi-billion dollar valuation. He highlights that interactive experiences provide a sense of connection that’s highly valued. “Both players and investors recognize the importance of the relationships cultivated through these platforms,” Driver explained. “Unlike traditional media, these experiences foster a sense of identity and community.”

The gaming world, along with its related streaming and esports sectors, is naturally social and increasingly captivating for a new audience. This explains why Representative Alexandria Ocasio-Cortez’s Twitch stream of Among Us, designed to encourage voter participation, was a logical and effective strategy. These media formats are fundamentally interactive and centered around user engagement, offering simultaneous accessibility to both professional players and those who enjoy gaming casually.

Furthermore, games currently represent the most widely consumed form of entertainment globally. As Gene Park, a columnist for The Washington Post, pointed out in his coverage of AOC’s record-breaking stream, “The reason over half a million people tuned in to watch a congresswoman play a video game for three hours is simple: nearly 3 billion people worldwide participate in video gaming.”

With a growing number of individuals turning to games for entertainment, particularly due to their capacity to provide a communal and engaging experience during times when in-person gatherings are limited, the focus shifts to enhancing these experiences to promote continued participation.

This leads to the concept of the “metaverse,” a topic that has generated considerable discussion. Matthew Ball offered a particularly concise and insightful explanation in an April essay exploring the pandemic’s impact on gaming.

Ball writes:

Opportunities in the infrastructure of gameplay

Lloyd George observed that much of Silicon Valley views gaming as a business reliant on successful individual titles. However, games like Fortnite demonstrate characteristics more akin to Software-as-a-Service (SaaS) models. Analyzing their performance reveals they often exceed average metrics, boasting gross margins of 73% and exhibiting strong net revenue and player retention rates.

This perspective gains further validity as an increasing proportion of transactions occur within games and online environments. Nicole Williams, a partner at the New York venture firm Compound, identified several investment areas poised to benefit from the growing consumer interest in gaming and its emergence as the primary entertainment choice for a new generation.

Williams highlighted cloud gaming as a particularly promising market. Companies providing infrastructure and analytics, such as Dixper, GameBench, GameStream and Polystream, will compete with consumer-facing startups like Playkey and Antstream to capture a share of a market projected to reach $4.8 billion by 2023, a significant increase from this year’s $500 million, as reported by Newzoo data analytics.

Alongside cloud gaming’s expansion of gaming’s accessibility, Williams emphasized monetization strategies and the application of artificial intelligence and advanced tooling to refine gameplay mechanics. These areas are both centered on crafting a more captivating and immersive in-game experience. In-game economies have become a crucial component of the gaming industry, particularly for free-to-play mobile games that have driven substantial industry growth. The substantial revenue generated by titles like Kim Kardashian’s mobile game and Fortnite—with over $1 billion of Fortnite’s $2.4 billion revenue stemming from in-game item sales—demonstrates players’ willingness to spend on virtual goods.

Williams pointed to several startups capitalizing on these trends: dmarket, focused on developing marketplaces and economies for in-game items; Blacknut, creating a gaming subscription service similar to “skinny bundles” for television; Pragma, enabling games to share back-end systems for cross-game interactions; and forte, building infrastructure for decentralized in-game economies.

Lloyd George also believes a significant opportunity exists in enhancing the interoperability of virtual world assets across different games. “A streamlined system for trading goods and services hasn’t yet been established, especially across different games,” Lloyd George stated. “Economies should be more flexible, allowing players to move their virtual wealth between metaverses.”

Finally, the integration of artificial intelligence into gaming offers the potential to improve world creation and develop non-player characters with more realistic behaviors. These AI engines could facilitate the creation of dynamic game universes that evolve independently of developer-driven narratives. This type of immersive gameplay could leverage existing intellectual property and assets from established franchises like “The Lord of the Rings,” and may even be a key component of Amazon’s planned immersive game set in Tolkien’s world, announced last July.

Gaming Tools Expanding Beyond Entertainment

As the principles behind engaging gameplay are increasingly implemented in sectors ranging from finance to marketing, entrepreneurs are capitalizing on the widespread appeal of gaming across generations. This involves integrating gaming elements into diverse applications and leveraging game development tools in other industries. For instance, while “The Mandalorian” and “The Jungle Book” utilized Unreal Engine for set construction, Sketchfab is developing a marketplace for three-dimensional assets created with game engines, suitable for various augmented reality and virtual reality applications.

“There’s a significant potential for economic and societal advantages as we move beyond the boundaries of the physical and digital realms. I view this as a natural progression of the internet itself,” explained Moritz Baier-Lentz, a recent investment partner at Bitkraft. Bitkraft’s founder, Jens Hilgers, has dedicated his career to the growth of the gaming industry and believes that current technological advancements are finally realizing a vision long held by industry experts. “I’ve consistently maintained a strong belief that video games will not only dominate the entertainment landscape but also become a substantial component of society—a space where video games shape the digital identities that increasingly define our understanding of ourselves,” Hilgers stated. Bitkraft’s primary focus is on technologies and interfaces that “effectively merge the physical and simulated worlds,” as highlighted by Hilgers.

Kippo, a new dating application developed by Los Angeles-based Covalent Inc., is another venture aiming to bridge the gap between the physical and simulated worlds. The company successfully secured $2 million in seed funding. While the app’s functionality resembles that of Tinder or Bumble, connections and user profiles are built around a shared passion for gaming and video games, rather than solely on physical attributes. David Park, a co-founder of the company, conceived the idea as a deliberate contrast to his previous startup, Riya—a dating app exclusively for celebrities and high-net-worth individuals.

“The initial concept was, ‘What if we created a platform that was the opposite of Riya—a dating app for enthusiasts, gamers, and those with specialized interests?’” Park shared in a recent interview with TechCrunch. “This represents a substantial and highly engaged demographic, one that genuinely needs a service like this.” Park envisions his company’s app as a space for gamers who invest more effort in developing their online personas than their physical appearances. “Younger generations are dedicating increasing amounts of time online, often exceeding the time spent in the physical world,” he noted. “The virtual and physical worlds exist concurrently. I observed that existing social media platforms haven’t fully capitalized on this; they function as supplements to the physical world but haven’t created compelling engagement within themselves.”

Since its launch last December, Kippo has amassed 40,000 registered users and 30,000 monthly active users. The company also received seed funding from the Korean and U.S.-based venture firm Primer Sazze Partners. “Our strategy for Kippo is to evolve it into an MORPG [massively multiplayer online role-playing game],” Park explained. “We aim to provide users with the experience of discovering connections within this virtual environment… we are integrating social interactions directly into the virtual world… we’re not simply a tool for arranging dates; we are a platform for dates and all forms of social engagement.”

Similar to how Kippo is innovating in the dating space, Aglet, a startup originating in Germany, aspires to do the same for sneaker enthusiasts. The company is building a gamified social network that seamlessly connects the physical and digital worlds, offering benefits to users in both realms. Their focus is on establishing a virtual sneaker marketplace and providing real-world discounts on sneakers at participating retailers.

This initiative aligns with a broader trend within the fashion industry—from renowned designers such as Marc Jacobs, Sandy Liang and Valentino releasing styles in Nintendo’s popular game, Animal Crossing: New Horizons; to HypeBae’s virtual fashion show within the game; and various collaborations between Epic Games’ Fortnite and brands like Supreme (which occurred before the pandemic)—to engage with gaming culture and maintain relevance. Gaming avatars are increasingly appearing in fashion through partnerships like Gucci’s collaboration with the startup Genies, and a partnership between the fashion house and Aglet is also in development.

Living in a virtual world

Hilgers believes the merging of physical and digital environments is establishing a novel form of “synthetic reality,” highlighting the integration of experiences for consumers across both realms. “We observe that expertise developed within the gaming industry holds potential for application in sectors like education and e-commerce, leading to a considerably enhanced user experience and service quality,” Hilgers explained.

However, the convergence of the artificial—or digital—and the tangible will extend its influence beyond gaming, impacting the production of characters, musical compositions, and artwork utilizing the same technologies that drive game engines. “A growing proportion of the global population is dedicating an increasing amount of time to simulated environments,” Hilgers noted. He anticipates that as automation reduces the demand for traditional work, more individuals will focus their efforts and find fulfillment through activities within virtual worlds.

“What will constitute employment for people? What forms will compensation take? The solutions likely reside in the possibilities of future, potentially simulated realities. The initial foundations for discovering meaning and purpose will be found within the worlds originally created by video games,” he stated. “Employment establishes structure… It offers incentives and serves as a central point in one’s life. Virtual realities will increasingly offer opportunities for work, purpose, and contribution to a larger number of people globally. We are only beginning to understand the scope of this potential.”