First Stage Investor

Investing in Video Games

Investing in Video Games
By Adam Sharp
Date April 9, 2020

Even before the COVID-19 quarantines and stay-at-home orders began, video gaming was a hot sector. It was growing at an impressive 9.1% CAGR (compound annual growth rate), according to a Technavio research report.

Now, with most of the world stuck inside their homes, the industry is skyrocketing. Just the other day my daughter attended a virtual birthday party, which was held in a game called Roblox.

Sales records are being broken. And gaming platforms are struggling to keep up with the heavy usage.

Not surprisingly, video game stocks are holding up far better than most other companies. And venture capital funding for video gaming startups is soaring.

Video games aren’t my particular area of expertise. So I invited my friend John Fanning Jr. to provide some perspective from within the industry. John has a deep understanding of this world. And his gaming startup, Zelgor, is currently raising money on Netcapital.

How do you see COVID-19 affecting the video game industry?

There has certainly been a sizable bump to the video game industry as a result of everyone being forced to stay home. App Annie has already reported a 20% increase in mobile game downloads and a 20% increase in time spent on mobile apps. I think it’s something that’s pretty intuitive to people – more time inside means more time for playing games!

You also can’t underestimate the impact of sports being shut down. Time usually spent watching sports is suddenly now available to play games. As people feel more and more isolated, many will turn to video games as a means to interact socially.

Many parents seem to be encouraging their kids to play video games while everyone is forced to stay at home. Do you see this being a temporary phenomenon?

Right now, a lot of parents are understandably overwhelmed. They are struggling to figure out how to manage their own careers from home while taking care of their kids around the clock. Video games can act as natural babysitters. And it creates a win-win situation where the kids are having fun while the parents have the necessary time to themselves.

The great thing about video games, especially right now, is they’re a great way for people to connect virtually. When I’m playing Fortnite, I’m not necessarily playing by myself, but with three other friends who are all highly engaged and actively communicating and working together toward a common goal. It’s essentially a more engaging way for friends to talk virtually.

Games can also be educational. They teach important skills, like problem solving, determination, focus and teamwork. Hopefully the relationship between parents, kids and video games in our current environment will help parents better understand the positive impact of games moving forward.

Are certain sectors of the game industry poised to succeed more than others?

I would expect to see a user spike across all gaming platforms – but especially on mobile. Mobile is the most accessible game platform in the world. The global games industry is worth more than $150 billion. And mobile makes up $86.5 billion of that. Many expect that in the next few years, mobile will account for more than half of the global games market. I would expect the current climate to accelerate that trend.

As people – especially kids – continue to play games on their phones more than ever, it’s important for companies like ours to build games that appeal to a large, family friendly audience.

We believe that now is the perfect time to invest in games because companies like ours can acquire customers and keep them forever. The cost of acquiring customers is low, and people are increasingly looking for things to do with no sports and no school.

Are you changing Zelgor’s strategy at all due to current circumstances?

The biggest change we’ve made is exclusively raising all our capital online.

When it comes to fundraising, we’ve historically used a combination of traditional methods with convertible debt financing and raising capital through online funding portals.

Back then, raising capital for us involved a lot of in-person meetings and relationship building face to face.

With COVID-19, we’re now leaning on the Netcapital platform more than ever to raise our current round.

We’ve had success using Netcapital in the past. We even saw one of our investors sell some of her shares at $1.49, generating close to a 6X return using Netcapital’s secondary marketplace (the original shares cost $0.25).

The funds we raise in this round will help us launch our first game, Noobs in Space. It’s an opportunity for First Stage Investor members who may not have had the opportunity to invest before to jump on board the Zelgor mothership before takeoff!

Which publicly traded gaming companies do you think are well-positioned here?

Any well-established (referred to as AAA in the industry) game company has the resources to take advantage of this huge spike in video game activity. Activision Blizzard (Nasdaq: ATVI) might benefit nicely from the highly popular game Call of Duty: Warzone, which came out on March 10. Nintendo (OTC: NTDOY) has rebounded nicely as well after the release of its newest game, Animal Crossing: New Horizons, on March 20. In general, I’d monitor game companies that are scheduled to release new games in the next month or two. Those companies are best positioned to take advantage of the current climate.

One company to keep an eye on is Tencent (OTC: TCEHY). It has a massive portfolio of highly successful video games. And one of its subsidiaries, Riot Games, is launching a new game called Valorant this summer. That said, with so much volatility in the public markets currently, some investors might be looking to place their bets in the private markets instead.

For those who are looking for private investments in games, I’ve got just the company for you! If you’d like to invest or learn more, visit Zelgor’s page on Netcapital.

Thanks to John for taking the time to talk with us. I think his analysis is spot-on. John’s gaming company, Zelgor, is currently raising money on Netcapital. You can check out the deal here. And here are some screenshots of Zelgor’s first game, Noobs in Space.

Noobs in Space

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