Fewer venture capitalists are betting on game companies

The game-making business is risky, and that’s led to less capital available for startups in recent years.

Investment in gaming has dropped 7 percent in the first quarter of the year, according to advisory firm Digi-Capital. That’s on top of a capital market that has already declined 25 percent from 2011 to 2014. Total investment in games from venture capitalists was $1.4 billion over the 12 months leading up to the end of March. The problem is that the partners at most firms are risk-adverse, and it’s difficult trying to predict where to put money in a hit-based industry.

“The games investment market has narrowed to specific pools of capital,” Digi-Capital managing director Tim Merel said. “There are relatively few venture capitalists investing in games compared to other sectors — although the VC universe broadens slightly for games technology.”

While people making specific games for console and PC are struggling to find financial backers, it’s not nearly as bad for companies building tools that a lot of other studios use. VCs are willing to take a chance on something that could turn into an industry standard.

But beyond the tech, mobile is still getting the most attention. And that’s primarily coming out of Asia. Strategic investors in China, Japan, and South Korea are all putting cash into mobile developers and tech companies geared toward that part of the world.

“There is considerable presence [from investors] in follow-on investment rounds for developers with strong metrics and potential to flourish in domestic Asian markets,” said Merel. “Such investments have proven a good step toward long-term exit relationships, with some larger deals in recent years coming from Asian buyers who were early-stage investors.”

The withdraw of investor capital from gaming in most of the rest of the world, however, is one of the reasons so many studios have turned to crowdfunding projects on websites like Kickstarter. But that is hardly filling in the money gap.

“Crowdfunding remains a source of early stage funding,” said Merel. “But it accounts for less than 2 percent of total video games investment.”

And while recent Kickstarters have had great success, it seems unlikely that consumer-backed funding will ever fully replace venture capital.