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Earlier this month I was in London for ICE 2023. As usual, it was packed to the hilt. The scale of the event is testament to the burgeoning gaming industry.

But given the broader macro-climate, was it all just smoke and mirrors? Or are we a real canary in the coal mine?

Halfway through Q1 of 2023, one would be forgiven for thinking that the macro-climate and the access to funding and capital looks ominous for everyone. The borrowing costs set by the US Federal Reserve are a good barometer for global trends across the investing sector.

In November, the US Fed increased the target range for the federal funds rate by 0.75% to 3.75%-4%. Across the world, the cost of capital has continued to rise rapidly to combat high inflation. This impacts the spending and investment decisions made by all households and businesses.

Over the last year, we have seen the SPAC market largely fizzle out, reducing the likelihood of large-scale M&A unless the acquiring business has significant cash on the balance sheet.

When opportunity presents itself

For VCs however, the outlook looks more optimistic — especially in the gaming space when viewed as a portal into web3. While outside money for regulated gaming ventures is becoming more difficult to source, some investors certainly have dry powder ready to deploy when the time is right.

What does that mean in practice? Firstly, all parties are waiting for valuations to come back down to more realistic levels. For more speculative or early-stage companies or those chasing growth markets like the US and Asia, there’s been a significant decline in fast-moving investors, and probably for the good.

Two years ago, most VCs were imbued with a severe fear of missing out. Today, they are looking for fewer, more targeted opportunities, with most re-trenching to what suits “their fit”. But this is no different to other industries, including software firms who are used to easier money.

Yolo Investments general partner Tim Heath: “This downturn is healthy in the sense that the fundamentals were being ignored for too long. I am optimistic that the strong will survive and thrive.”

However at Yolo we’re confident there is an opportunity gap in this sector at the Seed to Series A level, to provide active growth capital to ventures with a proven business model who would benefit from a long-term partner to provide ecosystem support.

We especially think that firms able to bundle their gaming and entertainment offer into broader web3 services, such as banking and education, have a greater chance of success in this market. Jambo, an African web3 and fintech firm in whose recent $30m Series A round we participated, is a great example.

The company will use the funding to hire the engineers needed to build a web3 super app that will enable Africans to trade crypto, buy and sell NFTs, experience play-to-earn crypto games, bank themselves and access educational web3 applications.

Companies like this, bringing real value to growth markets, will not just survive the crypto and VC winters — overhyped though these seasons are — but thrive into the long-term.

End of the road

On the healthy side, I think a lot of the products and companies that are genuinely overhyped have seen their day over the past year, and we’re not likely to see more of them.

Without naming names, these are companies that used to raise easy money only to go on to become the fiftieth entrant to saturated markets — probably only attaining 2–3% market share. Their kind won’t be seeing the light of day again for a long period of time.

The strong use cases on the other hand will only get stronger. Social gaming, for example, has an extraordinary ability to leverage the network effects of traditional social media (Facebook, Twitter, etc.), and will only get more competitive in 2023.

Long-term value

I fundamentally believe in the long-term value proposition of the gaming sector. Games provide a form of escapism, immediate gratification, engaging content, and can provide a crucial portal into life changing applications in education and payments.

This downturn is healthy in the sense that the fundamentals were being ignored for too long. I am optimistic that the strong will survive and thrive, and we will be a more successful industry for it.

In short, there is a wealth of talent out there building innovative products so it would be wrong to say they are all overhyped. Like life, sourcing funding is often a matter of luck and good timing.

Some products might be great solutions in their own right — but their true value won’t be appreciated by investors intent on developing ecosystems that don’t cater to their unique place in the market.

The message is — don’t give up. For those who can stay the course through 2023, great things might still come to those who wait. See you all at ICE 2024.

This post first appeared on Medium.com.

Tim Heath draws upon two decades of experience within the iGaming and emerging technologies sectors as GP of Yolo Investments. An early adopter of Bitcoin in 2013, he was founder and CEO of the Yolo Group (formerly the Coingaming Group) until 2020. The group operates leading crypto gaming brands Bitcasino and Sportsbet.io, with the latter securing high-profile sponsorships with Premier League clubs Arsenal and Southampton.

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