Co-MDs reveal how GEM Capital is making the most of Cyprus’ emergence as a European gaming nucleus

Kirill and Roman Gurskiy, the co-managing directors of GEM Capital, one of the top venture capital firms in the global games market, talk about how video games are eating away at other entertainment revenues, while discussing the past year’s macroeconomic headwinds and Cyprus' potential to become a hub for a burgeoning new market.

"This year, we launched our second fund, amounting to US$50 million," announces Kirill Gurskiy, the ebullient co-managing director of GEM Capital, a venture capital firm headquartered in Paphos that has asserted its dominance as one of the top investors in the games market in 2023. He explains that the firm remains steadfastly committed to the strategy that has unearthed several hidden gems in recent years. Meanwhile, in the other virtual window of our Zoom call – travelling between Paphos and Nicosia was wasteful – is Roman Gurskiy, the other half of the co-managing duo and Kirill’s twin. A knowing smile appears on his face as he leans back in his chair, embodying the assured and unspoken understanding that permeates their relationship.

Founded in 2017 with a substantial fund, GEM Capital initially operated as a generalist, casting a wide net across industries to increase its chances of finding outliers. This approach resonated with the twins when they assumed the mantle of the firm’s co-managing directors in 2019, honing their skills in the transaction advisory department of EY Moscow. Being a generalist is viewed by many as a stepping stone in the consulting industry and the shift from professional services to venture capital is a common trajectory. Indeed, GEM Capital’s current management team predominantly followed the same path. The firm’s generalist strategy then divided into two branches: enterprise and entertainment ventures. The former comprised a range of investments, from nanomaterials to turnkey analytics, while the latter focused on game studios and game-related ventures. It included indie studios, small yet potent teams producing quality video games on tight budgets, AAA studios developing big-budget Hollywood games, mobile gaming companies and ecosystem platforms and technologies at the frontier of gaming. "Around 2019," recalls Roman Gurskiy, "we started receiving numerous pitch decks from game companies." And for good reason: standing at US$148 billion, with mobile gaming seizing the lion’s share, game revenues were three times bigger than global box office sales. "During COVID-19, we also discovered that the games market is insulated from crises. While most entertainment took major hits – look at the plummeting box office revenues – the games market became stronger," adds Roman Gurskiy. Indeed, the lockdowns and restrictions propelled Microsoft and Sony into record growth figures in gaming revenue streams, with the console sector alone generating over US$45 billion in 2020. It transpired that people sought solace in games from the harsh realities the world had imposed on them. Yet, for the brothers, this surge transcended mere escapism.

Almost every weekend over the last 10 years, they have met their childhood friends online to play League of Legends, a multiplayer online battle arena game. Their team’s name: Rainbow Ponies of Vengeance. Contrary to popular belief, gaming is not a solitary activity but reflects the same communal spirit embedded in gathering with friends after a gruelling workweek to shoot hoops in the neighbourhood court. Of course, the brothers have to remember to remove their VC hats when playing video games; otherwise, they will be embroiled in the humdrum act of deconstruction, trying to figure out what makes each game work. Still, as Kirill Gurskiy elucidates, working with video games does not feel like work at all!

Even as a generalist, GEM Capital focused on Cyprus, Eastern Europe and the Middle East and North Africa (MENA) region. In the world of games, these were considered developing markets and, as such, money did not flow freely. The volume of dealmaking activity was mainly directed by corporate venture deals, where established publishers absorbed smaller studios. "This is not what the founders wanted," remarks Kirill Gurskiy. The convergence of these factors catalysed GEM Capital’s switch from generalist to specialist – fortuitously bolstered by the brothers' innate fondness for gaming – and their wager that the burgeoning games market of Eastern Europe and MENA could rival established titans paid off. In 2019, it invested US$1 million in the indie studio OwlCat Games, which produced the role-playing game Pathfinder: Wrath of the Righteous that sold over a million copies, a respectable number for an indie production. In 2019, it invested in Cyprus-based AAA game development studio Mundfish becoming one of its first investors who spotted this diamond in the rough. Two years later, Tencent, one of the industry’s biggest players, led a Series B funding round of Mundfish, with GEM Capital also participating. This year, Mundfish released its much-anticipated title Atomic Heart, reaching five million players in just three weeks and becoming one of the most successful 2023 releases. More recently, GEM Capital wrote a US$5 million ticket for Sat Cat Studios, developing Replaced, a pixel-art-style cyberpunk thriller set in a dystopian alternative version of the ‘80s in the US, which is one of the most anticipated releases of 2024. A report from market intelligence platform InvestGame on dealmaking activity in the games market for the first nine months of 2023 ranked GEM Capital in the top ten VCs for the number of deals brokered (fourth) and deal value (seven) across nine deals worth US$21 million. It becomes all the more remarkable in the context of the tumultuous landscape of dealmaking in 2023, a year marred by convoluted circumstances and unprecedented uncertainty, culminating in a historic underperformance. Indeed, the macroeconomic headwinds have forced many venture capital firms to sit on large piles of cash, waiting for the dust to settle. Yet, amid this tumult, the firm eschewed the necessity for a wholesale strategic rethinking, only making minor adjustments. Pitch decks now must back their claims with concrete substantiations: demonstrable revenues, strong IP and an influential presence permeating the pulse of platforms such as Discord, YouTube and Metacritic. It also turned its gaze inwardly, injecting fresh capital into its existing portfolio comprising 14 game companies. Kirill Gurskiy argues that the absence of a radical shift in tactics in this environment validates the firm’s prevailing strategy.

Consumers are forecast to spend an astronomical US$187.7 billion on games this year (it covers the entire market), eclipsing cinema fivefold and the money allocated to streamers like Netflix by a staggering 70%. Mobile gaming retains its throne, accounting for slightly less than half, generating a princely US$92.6 billion. However, the brothers suggest that a paradigm shift is on the horizon, hinting at the challenges mobile gaming’ reign currently faces. The advent of Apple’s Identifier for Advertisers (IDFA), a privacy feature introduced in 2021, has made it difficult for advertisers to target users with personalised ads on mobile apps. A report by Consumer Acquisition highlighted that the IDFA change had led to a 15-35% loss in iOS revenue across mobile app advertisers. Inevitably, it will affect mobile game apps, they posit. At the same time, Roman Gurskiy underscores the inherent vulnerability of mobile gaming’s perpetual struggle against the myriad apps vying for users’ attention. "When I'm sitting on the bus, I can either watch TikTok reels or play a mobile game, right? So naturally, mobile games compete with all entertainment spheres," he notes. As an aside, recent advancements in wearable technologies for the Artificial General Intelligence (AGI) era might signal an app-free future. Notably, US-based startup Humane has unveiled its new gadget, a high-tech brooch that supplants most smartphone functionalities. The world's hottest startup, OpenAI, is also poised to create a new AI-centred gadget. Against this backdrop, Roman and Kirill Gurskiy believe that console games will emerge as the torchbearers not only within gaming but also across the entertainment sphere. Particularly instructive here is the shifting dynamic between moviemaking and gamemaking. A decade ago, film and entertainment studios leveraged successful movies by translating them into games to broaden the IP’s revenue streams. In 2023, Hogwarts Legacy generated US$1.3 billion in global sales, making it the second most successful title under the Harry Potter IP; however, it was untethered from its literary origins, expanding the wizarding world solely through video games. The buzz around Netflix’s 2023 showstopper, The Last of Us, adapted from the eponymous game developed by US-based Naughty Dog, is further proof that the tide is turning, with games becoming the dominant IP. As the demographic of console players matures, witnessing a proliferation of individuals in their 30s and 40s outnumbering their younger counterparts, the growing potential of games' intellectual property signals the trajectory in which financial currents are inclined to flow. Kirill and Roman Gurskiy fervently believe that Cyprus can ride this wave.

"There have been about five conferences dedicated to IT and games in Limassol this year. Can you find another city in Europe doing the same? Probably not that many," remarks Kirill Gurskiy, indicating the emergence of Cyprus as a nucleus for games on the European map. The island’s allure stems from recent policy changes that have magnetised games studios and the broader IT industry; since 2022, over 50 ICT companies have set up shop on Cyprus' sun-drenched shores. Among the policies are the 50% saving on income tax for foreign employees and the decrease of the naturalisation period from 7 to 5 years – in November 2023, the Parliament voted in a proposal to shorten the naturalisation period to 4 years for c-level executives. Add to that the Cyprus IP Box regime, which offers an 80% exemption on profits earned from using intangible assets such as patents, copyrighted software and utility models while taxing only 20% of IP income. Sweetening the deal further, Kirill Gurskiy notes that the cost to develop games in Cyprus is considerably less than in the US or some Western European countries, driven partly by the relatively lower cost of living in the island. The considerably lower valuations of early-stage gaming startups in the region also present an attractive upside for investors. “And, of course, the community is becoming stronger. Being able to talk to people with similar interests facilitates an inflow of brainpower. There are at least three weekly meetups for games and IT in Limassol alone; that’s a lot. And it seems this trend will continue,” he highlights.

The strategic geographical positioning of the island continues to play a vital role, the brothers argue, by serving as a convenient hub for the firm’s portfolio companies that have received investment from the US and South Korea, two of the biggest games markets. Similarly, Cyprus’ proximity to the Gulf countries, which have splashed out billions on infrastructure to lure startups, adds to its appeal. “And let’s not forget the weather! It’s much easier to build a multi-billion-dollar games studio next to the sea!” Kirill Gurskiy quips. In recent years, the firm has been actively championing the island as a capital for the market, aligning with non-profit TechIsland, the largest tech organisation in Cyprus, which has pushed for policy changes to make life easier for foreign companies and their employees relocating to the island. The firm's proactive efforts extend beyond rhetoric as most of their portfolio companies are based in Cyprus. During a recent trip to South Korea to engage with the foremost local VC, the brothers found themselves privy to an escalating enthusiasm for investments in Cyprus-based game companies. US-based investors have expressed the same enthusiasm. “If you see that one of the Top 10 investors in games in the world is based in Cyprus, then obviously something good is happening here,” says Kirill Gurskiy, his tone humble yet confident, hinting at the promise of greater things yet to come – certainly, being armed with a US$50 million fund leaves little room for doubt!

This interview first appeared in the December edition of GOLD magazine. Click here to view it.