VCs team up with creators amid games funding pullback

Games venture capital funds have been dealt a challenging hand amid broader market turmoil over the last 18 months. After placing many (potentially inflated) bets in 2021 and 2022, funds are on the hunt for returns. The venture-backed games industry is looking for ways to stack the deck in their favor. Increasingly, gaming funds are looking to content creators to give themselves a strategic advantage when evaluating prospective investments.

Some gaming-focused venture funds like a16z Games are formalizing these venture partner-style relationships with dedicated creator programs. Others, like 1AM Gaming are building informal relationships with creators through specific investments. 

Rigging the discovery odds

Venture capital funds are leveraging relationships with creators primarily for their taste-making abilities. From established studios to indie startups, game developers understand that creators are an essential discovery engine for new games.

Breaking into the games market has never been harder. The barrier to entry for building and shipping titles is lower than ever before thanks to generative AI and other development tools. These developments are speeding up the rate at which new games and content are shipped. According to a recent study from Video Game Insights, nearly 14,000 games launched on Steam in 2023, up 70% since 2019. It’s also much harder to make a profit. Only around 700 (5%) of these 2023’s releases made over $100,000 in full game revenue.

“Not only is the games market getting more competitive, so is the go-to-market strategy for games,” said Louis Gresham, cofounder of 1AM Gaming, an early stage gaming fund with $120 million in assets under management. “It’s increasingly more difficult to see a profitable return on marketing spend regardless of what platform you’re targeting.”

While game studios can afford to spend their marketing dollars on one-off activations, the growing costs are hard to justify for lean startups. After all, creator activations aren’t guaranteed to have enduring value beyond a media buy. Instead of (or in addition to) burning runway on creator marketing, founders can build long term partnerships through investments.

“The genesis of the a16z Games Creator Scout program was born from a series of conversations held with creators themselves, said Lester Chen, partner, gaming creators at a16z Games. “It became immediately apparent that creators were not only expert tastemakers, but also getting early looks at dozens of games at an early stage. The relationship between a studio/publisher and a creator is most often transactional, where the creators would agree to play the game and create content as the main value add… This got me thinking, ‘Why weren’t these individuals sharing in the success of the game companies themselves?’”

VCs leverage creator insights

Not only does creator buy-in help rig the discovery deck in a startup’s favor, creators bring other valuable insights to the table.

“Creators have the ability to not only discern what investment opportunities are going to work for players, but then they also have the platform to introduce a game to their audience and help it find a position in the market,” said Gresham. Unlike the a16z Creator Scout program, 1AM’s creator strategy is less formalized. Rather, the firm is working closely with creator collective OTK through a shared investment.

Like other kinds of subject matter experts, VC funds are seeking out creators for their unique insights into player tastes and the content landscape.

“When you’re creating content, especially live content, for thousands of people and constantly looking at their feedback, it gives you a window into the gaming community. [Fans] tell you what they’re enjoying, what games are hyped, the games that fail and why,” said Ben “CohhCarnage” Cassell, veteran Twitch Streamer and creator scout for a16z Games. Notably, Cassell is also a co-owner of Mad Mushroom, OTK’s creator-led publishing label.

This real-time community feedback is incredibly valuable to investors. Even if investing professionals keep up on industry trends, opinions can change overnight. Chen endorsed creator’s abilities to spot successful games, often months before they exploded in popularity. 

Similarly, investors are unlikely to have as much familiarity with content platforms and their best practices as full-time creators do. Cassell told GamesBeat that in addition to reviewing business plans and sharing feedback, he regularly helps studios navigate the streaming landscape. This includes advising companies on their Twitch strategy, in-game or platform plug-ins and how to interface with the community.

Additionally, creators lend credibility to startups through their backing. Unlike investors who are beholden to limited partners, creators are instead checked by their communities. Creators are aware of how valuable this trust is and aren’t likely to risk their audience on unsound projects. As a result, startups gain social credibility with gamers, further boosting their odds of success.

Why VC partnerships are value-adds to creators

While VCs are seeing the upside of bringing creators into the fold, creators are also mutually benefiting from these relationships. 

“Over time, creators begin to want to diversify their income especially as they get older and have a family. We have different opportunities and resources,” said Cassell. “Investing is enticing for someone like me because it’s a multi-stage attack on things that interest me. There’s the opportunity for financial gains down the road that don’t involve me working 180 hours a month.”

In addition to diversifying their holdings and the potential of passive income, creators also have the opportunity to give back to the games industry. Through investing, creators are backing developers and games they believe in.

Understandably, navigating the world of venture capital can be intimidating for creators without investing experience. Teaming up with an established fund can help creators learn the ropes from the pros.

“The Creator Scout Program equips creators with the freedom to make their own independent investment decisions while having a16z, and a network of other scouts, to use as a sounding board,” said Chen. “Most creators aren’t equipped with the vocabulary to even have conversations around angel investments, advisory positions, or equity in a company, and time is a primary constraint for a creator so the ability to sit down and ‘learn investing’ isn’t typically viable — and this is where we come in.”

Part of bringing that expertise and manpower to bear is helping creators find the right projects to invest into.

“From OTK’s perspective, building relationships with venture funds helps open doors. Their teams have visibility on a lot of different startups, game studios and technology,” said Tips Out, cofounder of OTK and creator scout for a16z Games. “As a creator-led multimedia company, we’re able to leverage VC relationships to not only help fund our projects at OTK, Mad Mushroom, and Mythic Talent, but also to help us identify cutting-edge market opportunities and business verticals that would otherwise be opaque.”

VCs and Creators: stronger together

Fundamentally, a variety of forces are squeezing venture funding in the games industry. Reports estimate games venture capital funding fell roughly 70% to 75% from 2022 to 2023. 

As investors pull back, picking the correct investments is essential. While some larger funds might be able to continue a shotgun approach, smaller funds like 1AM must be precise. 

“Working closely with creators, whether it’s through direct venture partner-style relationships or being on a cap table with them, is a really good thing for the games industry. Together, we’re more likely to funnel dollars to the right things,” said Gresham. “Creators are second to none in their ability to introduce a new game to potential players. VCs are supposed to be the absolute best at helping startups build enterprise value and then ultimately delivering returns to shareholders. We’re never going to be able to tap into the appetite of players as well as creators. But creators are never going to be as plugged into building the financial value of a business as we have to be as VCs.”

Creators and VCs offer two key perspectives to founders as they build the games of the future. Together, they are hedging their bets, sharing knowledge and driving value to the most promising prospects.