Little Room for Venture Capital to Invest in Gaming Firms
The amount of investments in venture companies stood at 1.90 trillion won (US$1.61 billion) in the first half of this year, up 16.3 percent from a year ago, according to investment banking (IB) industry insiders on July 23. It is a record for first-half investment.
However, the share of investments in the gaming industry plunged compared to last year. It dropped to 2.9 percent as of May, and the figure for the first half of this year must have fallen below 2 percent, given that there was no large-scale investment in gaming venture companies. A venture capital firm official said, “Investments in venture companies are surging as a whole, but investments in game developers are at standstill.”
Venture capital firms lowered the share of gaming companies in their investment portfolio because the current gaming industry ecosystem provides little room for them to invest in promising game developers. Large game developers directly set up subsidiaries or acquire other companies, depriving venture capital companies of investment opportunities. For instance, South Korea’s No. 1 mobile game company, Netmarble Corp., has more than 13 game developers as subsidiaries, including Netmarble Neo Inc. which is well-known as the developer of Lineage 2: Revolution.
Nexon Co. also holds a 100 percent stake in Neople Corp., which is well-known for Dungeon Fighter, and Boolean Games Co. Nexon GT Co. and Netgames Inc. are also subsidiaries of Nexon. An official from a listed venture capital firm said, “Large game makers created the industry ecosystem by directly setting up their subsidiaries and developing and releasing new games through these companies. It is difficult for venture capital firms to squeeze in to search for a proper investment target.”
As game developers tend to launch large intellectual property right-based games, the cycle of the rich-get-richer and the poor-get-poorer has taken roots in the gaming industry. This has also narrowed the room for venture capital companies to find an investment target. It is hard to make a bold venture capital investment in small and mid-sized game companies which do not have intellectual property rights. An IR official from a game developer said, “The size of the gaming market is estimated at 14 trillion won (US$11.86 billion) last year, but 11 trillion won (US$9.32 billion) of sales came from only 20 companies. In fact, smaller game makers are struggling to survive.”
Under the current circumstances, venture capital’s investment strategy in game ventures is becoming conservative. An officer from a venture capital company said, “Sine there have been large successful cases of investment, such as Bluehole Inc.’s ‘PlayerUnknown's Battlegrounds; and Pearl Abyss Corp.’s 'Black Desert,' from time to time, we just cannot reduce investments in the gaming industry. We are considering a strategy to invest in companies which have reached a certain level, such as series C and pre-IPO, rather than startups.” The strategy can lower the investment earnings rate but can significantly reduce uncertainty.