My ten-year-old nephew asked me for five bucks the other day.
I figured he’d spend it on baseball cards or candy bars. So I was taken aback when he told me what the money was for: “I need to buy gems so I can level-up.”
He noticed the confused look on my face. “Duh!” he said. “For my video game.”
Duh is right. I should have known. Many of today’s most popular games are free to play, but offer paid digital items to make the game easier to win or more fun. The market for such purchases is massive. This year, it’s expected to be worth about $168 billion.
The problem is, as soon as a player moves to a new game, their purchases become worthless. You see, digital items are “locked” to specific games. It’s like buying an expensive TV that only works in your current home. If you move, you can’t take it with you.
But a new startup is creating a solution. Essentially, it’s created “eBay for gamers.”
And today, I’ll tell you about it — including how you can invest in it for a potential 10-bagger.
A $196 Billion Mega-Industry
In just seventy years, gaming has become one of the world’s largest sectors.
It got started in 1952, when American physicist William Higinbotham at the Brookhaven National Laboratory designed the first video game. It was called Tennis for Two.
Today, more than three billion people (often referred to as gamers) play video games. According to Newzoo, a research company focused on the gaming sector, the global games market is currently worth $196 billion. By 2025, it will reach $225 billion.
Not long ago, gaming companies made money from selling physical copies of their games — for instance, $49.99 for the latest action or racing game.
But these days, video games are mostly digital. They’re played on tablets, smartphones, and over the internet. Furthermore, many are free to play.
So how do companies in this market make money?
Simple. They offer “in-game” purchases.
You see, in every video game, the player has an objective. It could be to defeat an opponent, win a race, or tally a high score.
But for a small price, gaming companies offer resources to gamers to help them achieve these objectives. These resources might make the game easier to win, or more fun to play. And they’re referred to as “in-game purchases.”
For example, in the mobile game Clash of Clans, players need “gems” to build villages and compete in battles. Gems can be earned, for free, during gameplay. But it’s easier to just buy them.
Most in-game purchases are relatively inexpensive, usually less than five dollars. That’s what encourages players to make many purchases. But these small purchases can add up:
- In 2019, NetEase, one of the largest video game companies in the world, brought in $6.6 billion in revenue from in-game purchases. Fortnite alone generated $1.8 billion.
- In 2020, gamers spent $118 billion on in-game purchases.
- This year, sales of in-game items are expected to reach $168 billion.
But there’s a problem…
The Problem with In-Game Purchases
As soon as gamers stop playing a certain game, they lose the investment they made in it. As mentioned earlier, it’s like buying an expensive TV that only works in your current home. If you move, you can’t take it with you.
And with more than three billion gamers worldwide, these unused purchases likely add up to hundreds of millions of dollars, possibly even billions.
Gamers are becoming increasingly frustrated with this predicament.
But now a startup is creating a solution…
Gameflip is a gaming company based in San Jose, California.
It’s created an online marketplace that enables gamers to buy and sell digital assets — everything from in-game purchases to collectibles to actual games.
This platform enables gamers to simply and safely “flip” gaming assets.
In brief, this is eBay for the video-game industry.
The company generates revenue from buyers and sellers for each transaction:
- A buyer “purchase fee” of up to four percent.
- A seller “sales commission” of ten percent.
- And seller “cashout fees” — i.e., when a seller withdraws funds out of his or her account, they’re charged a fee that ranges between one and two percent.
This is a big opportunity. And now the company is raising money from investors like you.
Specifically, it’s raising about $1.2 million at a valuation of about $35 million.
The minimum is $250. Should you consider an investment?
The Pros and Cons of an Investment
On the “pro” side:
- Huge Opportunity. If Gameflip can facilitate the exchange of one percent of all in-game purchases each year, that would equal $1.6 billion in transactions, and $176 million in annual revenue. At those levels, the company could potentially be valued at about $400 million — which would give early investors a shot at earning 10x their money.
- Domain Experience. The co-founders previously developed titles with top gaming brands, and their prior gaming startup was acquired.
- Strong Traction. Gameflip has built a community of six million people; enabled $140 million worth of transactions; and raised more than ten million dollars from investors including Bullpen Capital (an early investor in home runs like FanDuel and Wag) and LightBank (an early investor in Fiverr, Sprout Social, and Benzinga).
But there are “cons,” too. For example, Gameflip’s products and technology aren’t patent-protected. So hypothetically, a larger competitor could jump into this opportunity and try to replicate Gameflip’s business.
Do Your Research!
And that’s just one of the reasons that I’m not recommending that you go and blindly invest in GameFlip.
This is a risky early-stage venture. It faces an uncertain future. So you need to do substantial research before making an investment decision.
But if you believe a solution is needed so gamers can simply sell (“flip”) their digital items to other gamers, GameFlip could be a great place to start your research!
Please note: Crowdability has no relationship with any of the startups we write about. We’re an independent provider of education and research on startups and alternative investments.