Sorting out the capital and talent flow behind Web3 games

Original Title: "The Capital and Talent Flow Behind Web3 Games"

Author: Simon, IOSG Ventures

As 2022 gradually comes to a close, the atmosphere is heavy with uncertainty, and the naked swimmers are fully exposed. In the gaming sector, during this winter, both capital and talent are voting with their feet, moving towards sub-sectors and projects that have solid foundational demand and can deliver products.

User Numbers

First, let's take a look at the user number trends in web3 games. It is worth noting that different projects have varying degrees of on-chain integration, different modules for interacting with smart contracts, and differing tolerances for multi-account users. Therefore, the user numbers obtained from on-chain data can only serve as a reference.

Total active wallet numbers: Unique wallet numbers:

From the overall user count, the number of wallet addresses is around 800,000, but the number of unique wallets is only about 400,000.

From the perspective of on-chain active addresses, Alien Worlds and Splinterlands account for about 50% of the address count, with active numbers around 200,000. However, compared to recently popular games like Beacon, the actual number of active players is only around 6,000. The player profile in GameFi still largely consists of multi-account users or multi-account user scientists. Horizontal comparisons of data make it difficult to draw directional conclusions, so this article intends to take a different approach and examine which sub-sectors talent and capital are relatively optimistic about.

This article reviews the financing trends and talent flows in web3 gaming for Q3 2022, exploring how capital and talent are making choices during this winter. (Financing data source: Messari fundraising data, filters: gaming)

Blockchain Gaming Funding in Q3 2021

Before reviewing the financing trends for Q3 2022, let's first compare it with the same quarter in 2021. In the same period last year, web3 gaming financing was extremely hot, with a total financing amount of $1 billion across 22 projects, while the total for Q1-Q2 was only $1.5 billion. The total financing amount in Q3 increased by 3400% year-on-year, and the number of financing projects increased by 400%.

In terms of the number of financings, most projects were concentrated in the seed round (approximately 55%), with relatively small deal sizes (approximately $3 million/deal). The financing amount from seed rounds accounted for 4% of the total financing amount from Q1-Q3 2021.

Investors were willing to participate in projects early through private token sales, but overall, they remained cautious about a newly emerging product form.

In terms of financing amounts, 70% came from 11 projects in the A/B rounds, the most notable being Sorare's $728 million (series A+B), Forte's $185 million (series A), Mythical Games' $75 million (series B), and Immutable's $60 million (series B). Other notable series B financings included Animoca Brands' approximately $140 million.

Overall, in Q3 2021, platform and infrastructure projects received capital favor, as they were seen as the cornerstone of future blockchain games. Game studios and pure gaming projects also garnered some attention, but the overall deal sizes were much smaller.

Due to the long development cycles of gaming projects and the ongoing validation of business models, infrastructure platform projects received a continuous influx of funding last year. However, from another perspective, if everyone is selling shovels, no one is actually digging for gold.

Thus, at the end of 2021 and the beginning of 2022, projects focused on game content began to enter the industry's vision. Compared to the previous generation of GameFi projects, we started to see more traditional game practitioners in the entrepreneurial teams' resumes, as well as teams that had transitioned from traditional game studios. Based on project budgets (which reflect the team's directional choices to some extent), they can be roughly divided into the following categories:

1) Small budget but ambitious developers:

Rooniverse, Playmint, First Light Games, Blockstars, Village Studio, Genopets, Galaxy Fight Club, Crypto Raiders, Gallium Studios, Heroes of Mavia, Horizon Blockchain Games, Lucky Kat Studios, Pixion, etc.

The team profile consists of pure crypto-native teams or those from the other end—some entrepreneurs from mid to light game studios/traditional game practitioners where web2 growth has slowed. They understand the industry they originally focused on and deeply comprehend the workload of game development + web3 integration, so they wisely choose relatively simple propositions, leaning towards creating small but beautiful NFT games, mostly in the hyper-casual category, with relatively low development costs.

For example, choosing a pixel art style project like Portal Fantasy:

These projects excel in game product development progress, allowing them to devote enough energy to polish the web3 aspects. Based on the current development progress and my experience, the blockchain-related experiences of these projects are the smoothest.

Although most web3 attributes remain at the level of "turning some game assets into NFTs and incorporating a dual-token model," there are occasionally some eye-catching innovative integrations, such as using crypto for low-cost value transfer in the glass root esport Fableborne:

2) 2A budget developers:

Laguna Games, Big Time Studios, Faraway, Azra Games, Metatheory, LavaLabs, Upland, Sipher, Illuvium, Gunzilla Games, Klang Games, Playful Studios, Iskra, Joyride Games, Gameplay Galaxy, etc.

The team profile here consists of teams with both crypto and gaming capabilities, where the core team has a certain background in mid to heavy gaming. They understand the pain points of the previous generation of GameFi games, such as poor gameplay, unattractive graphics, and insufficient content support, and thus begin to explore some mid-heavy categories, focusing on improving game quality, with most still in development.

These projects leverage better graphics and richer game content compared to the previous generation. During the past GameFi hype, this group of players, who mastered the crypto gaming script, continuously released art materials, engaged in community/NFT sales, and piqued the interest of players and the market, gaining considerable support.

However, as they switch to the product development stage, many projects find that the propositions they chose may exceed their current team's capabilities. Currently, only a few projects are on track to deliver phase products.

3) 3A budget developers:

Mythical Games, Shrapnel, Star Atlas, Sky Mavis, Sorare, Yuga Labs, Dapper Labs, The Sandbox, Animoca Brands, Limit Break, Xterio

These developers typically have backgrounds in web2 studios or successful web2 products as records and are the darlings of capital. They usually adopt a platform + content/infrastructure + content model.

Blockchain Gaming Funding in Q3 2022

Looking back at Q3 2022, the financing situation underwent significant changes. Due to the broader environmental issues, Q3 web3 gaming financing saw a year-on-year decline for the first time. Although the overall number of financings in Q2 2022 increased by 260% (58 vs 22), the total financing amount actually decreased by 19% ($875 million vs $1.1 billion), and both financing amounts and numbers also saw declines compared to the previous quarter.

In Q3 2022, approximately 69% of the financing numbers and 36% of the financing amounts were concentrated in seed rounds. Series A accounted for 14% of the financing numbers and 20% of the financing amounts, while Series B accounted for 5% of the financing numbers and 38% of the financing amounts. Overall, the data reflects a shrinkage in the deal size of seed rounds ($7 million in Q3 22 vs $12 million in Q1 22), with projects that raised seed rounds in 2021 starting to raise Series A rounds (with average round sizes between $20-$25 million).

On one hand, as the sector matures, investors are more confident in betting on early-stage projects; on the other hand, as more content-oriented studios emerge (which rely more on traditional gaming investment logic), strategies to diversify investments and avoid single-game risks are becoming increasingly popular.

About one-third of seed round financings exceeded a $7 million deal average, with Animoca Brands Japan, Klang Games, Xterio, and Meta World even offering seed rounds greater than $30 million. Essentially all Series A rounds exceeded $10 million, with Gunzilla Games, Iskra, and Planetarium Labs offering Series A rounds greater than $30 million. The remaining deal value consisted of two Series B financings, namely Limit Break's $200 million and Animoca Brands' $110 million.

Among the numerous financings, the most notable is Limit Break, originally Machine Zone (which was acquired by Applovin in 2020). The project is valued at $1.8 billion, and the $200 million pre-launch financing is quite rare even during the market's peak. Behind the success of Machine Zone is the mature methodology of engaging and monetizing whales (big spenders in SLG), and with this mature methodology, Limit Break is adept at enabling web3 whales to participate in the community as owners and elegantly monetize their value.

Machine Zone:

Overall, the web3 gaming financing market has entered a new stage. Companies favored by investors are no longer platform and infrastructure projects but studios capable of ultimately delivering engaging content products. Infrastructure and platforms are more like solutions that content companies bring along (perhaps to cater to token fund preferences and inflate valuations?).

However, this does not mean that investors have lost interest in infrastructure companies; rather, it is because there are now many more roads than cars, leading to an imbalance in supply and demand for infrastructure projects, while there are still not enough blockbuster content projects, and both developers and players have yet to uncover new demand points.

In summary, the landscape of infrastructure is moving towards a phase of maturity. Whether it is gaming layer 3, wallets, gaming marketplaces, or gaming SDKs, existing infrastructure projects have begun to show some oversupply, and they are starting to draw clear boundaries and compete fiercely for market share in their respective niches.

Interestingly, when I asked an entrepreneur of a game why they chose infrastructure company A over B, and whether there were any technical considerations behind it, the response I often received was, "Because they reply quickly."

It is foreseeable that as the pricing and technology of solutions struggle to further help infrastructure projects gain advantages, the next phase of gaming infrastructure will begin to focus on soft powers such as BD capabilities, customer service quality, and IP inventory.

Talent Migration from Web2 Games to Web3

After discussing the movement of capital, let's take a look at talent:

For a long time, traditional gamers have been puzzled about why gaming insiders have not ventured into web3 gaming companies and web3 games, whether they are developers, publishers, or channels, with a strong sentiment of observation.

Fast forward to Q3 2022, I believe that on one hand, the traditional gaming industry, which has long suffered from regulatory woes, has a completely understandable wait-and-see attitude towards web3; on the other hand, whether players acknowledge it or not, this wait-and-see sentiment is dissipating. The most direct manifestation of this is the migration of talent from traditional gaming to web3. This migration can be summarized into four forms:

1. Traditional gaming industry leaders establishing web3 gaming companies (Xterio, Laguna Games, Limit Break, etc.)

2. Exiting traditional gaming to join already established web3 gaming companies (Mythical Games, Sky Mavis, Forte, etc.)

3. Traditional game developers joining newly established web3 gaming companies (Immutable, Polygon, Forte, etc.)

4. Traditional gaming talent being reassigned within traditional gaming companies to new web3 gaming departments (Ubisoft, Square Enix, Konami, Netmarble)

Whether through the method of migration or recruitment data, it reflects talent's preference for companies capable of producing high-quality content.

The migration of talent will be slow but steady. For the industry, this not only means that web3 games will become more enjoyable but also that the industry will not face various situations of reinventing the wheel. Experience and practices from the traditional gaming industry, such as R&D pipeline management solutions, game prototype iteration methodologies, and marketing strategies, will serve as the most fertile nutrients for the newly cultivated land.

A simple speculation: aside from economic systems similar to Ponzi, will there be more enjoyable and sustainable economic models emerging around the commercialization and operational systems of traditional F2P games, such as non-spending, low-spending, medium-spending, and high-spending?

Conclusion

Despite the overall environment leading to a further shrinkage in both the number and amount of financings in Q3, it is undeniable that the sector is continuously maturing. I expect that the performance of Q3'22 and the flow of talent will only be indicators; in the foreseeable future, financing activities and talent movements will return to rationality.

This is a market correction. As the tide recedes, some hot concepts from the speculative phase will be validated or falsified, and investors will become smarter in choosing projects to bet on. Builders will also move towards areas that have not yet been occupied and can meet real user needs.

Although it is a cliché: to meet those real user needs and the most everyday use scenarios, all content products will ultimately return to the rationality of content being king.