Maria Kochmola and Ilya Eremeev: Video games have grown into the entertainment industry's most lucrative segment

With a sizable US$50 million pool, The Games Fund has positioned itself as one of the top early-stage investors in the video games market globally, placing its bets on the rich talent pool of Eastern and Central Europe.

Maria Kochmola and Ilya Eremeev, two of the firm's four founders, who also act as Managing/Operating Partners, shed light on their investment strategy, the emergence of Cyprus as a hub for game development, and the current landscape of the video game market amidst broader economic challenges.

“If you had told your parents 20 years ago that you worked in games, they would have been so disappointed!” jokes Maria Kochmola, one of the four founders of the early-stage VC firm The Games Fund, who also acts as a Managing/Operating Partner. “But now, it is a prestigious job and games are the most available type of entertainment for millions – if not billions – of people. Times have changed.” On the other window of our Zoom call – the duo split their time between New York and Cyprus – IIya Eremeev, the firm’s other Managing/Operating Partner (and founder), chimes in, “It’s hard to tell who is a gamer anymore; video games have become part of popular culture.” In the past two decades, video games have grown from a niche hobby into the most lucrative segment within the entertainment industry, with global revenues in 2023 almost reaching US$200 billion; this exponential growth has naturally garnered the interest of a wave of investors, looking to tap into the market’s potential.

Maria Kochmola and Ilia Eremeev walked different paths before fate intervened – guided by the hand of Ilya Karpinskiy. Kochmola, a conventional financier with a background in venture capital and private equity, was beckoned by Karpinskiy in 2017 to be the first hire for a rather new concept: to establish an investment arm within the global gaming giant My.Games, a subsidiary of Mail.ru, focused on Eastern and Central Europe. For his part, Eremeev had eschewed higher education and worked straight out of high school as a 3-D artist for various gaming and outsourcing companies – among the many assets he built were droids for the Star Wars: The Old Republic game. Transitioning to game design, he eventually assumed managerial roles, overseeing game studio operations and became the third person tapped on the shoulder by Karpinskiy. The bet bore fruit, with Kochmola mentioning that they invested in over 35 studios, six of which were later acquired by My.Games. “It was Ilya Karpinskiy’s idea to start The Games Fund. And as in My.Games, we were among the first investors specialising in the video game industry for Central and Eastern Europe,” she adds.

Having launched the firm in 2021, they set an initial target to raise US$30 million, their expectations tempered by the scarcity of gaming-focused investment vehicles in the region, coupled with their novice status as managers and founders. As Eremeev notes, "We were some random people pitching for a weird market." Yet, within just three months, they had exceeded their target, expanded the fund to US$50 million and raised the whole amount by year’s end. This success was buoyed by support from major gaming corporations across the United States, South Korea, Singapore and Europe, alongside UK investment banks and prominent game studio founders. “We have 14 investors, so you can imagine how many times we heard ‘no’ before getting 14 to say ‘yes’! Now, everyone's talking about the Eastern European game development ecosystem and we can include Cyprus here from a game development perspective – we're all connected,” Eremeev states.

In recent years, Cyprus has emerged as a hub for games studios, mainly comprising Eastern European founders and developers. Naturally, a favourable tax regime, access to the EU and an established regulatory framework for venture investments, aligned with top-tier market practices, has sweetened the deal. Yet, the island is not alone in providing such enticing offerings. So, how did it succeed where others failed? Kochmola argues that it is a blend of fortuitous timing and the pivotal role played by Wargaming's arrival on the island more than a decade ago – by 2023, the AAA studio employed some 450 people in Cyprus – which served as a catalyst for the local market. Indicatively, there is now a burgeoning community of over 2,000 active game developers, alongside founders and managers, on the island. “We saw that only in a couple of places like San Francisco," Eremeev highlights. "When you go to a restaurant in Cyprus and you hear people talking about startups and video games, or you just meet a random person with whom you are already somehow connected within the industry, it gives you a sense that you're in an environment of like-minded people. It's really empowering." Reflecting on the palpable sense of a shared vision among Cyprus’ gaming enthusiasts, coupled with the streamlined investment regulatory framework, Kochmola notes that a portfolio company of the firm – Limassol-based mobile game studio KEK Entertainment – secured US$8 million in 2023, led by Korea Investment Partners, marking one of the biggest deals of the year in the game content segment. For the uninitiated, South Korea is one of the foremost players in video games, with the local market valued at over US$12.4 billion, while Korean teams reign supreme in the e-sports arena. “We also met several gaming companies recently who said they want to come to Cyprus and organise events here because the community is so strong,” she adds.

The Games Fund focuses on early-stage game ventures, adopting a broad-minded approach to business models (both free-to-play and premium) and platforms. Indicatively, the fund’s allocation currently splits into 65% for mobile games, 35% for PC and consoles and 5% for companies developing industry technologies. “We want to invest in games for gamers,” Eremeev says, explaining the firm's motto. “We are hardcore gamers ourselves; we both plug in to play League of Legends, we have high rankings in Fortnite, and we're playing Hell Divers II religiously right now. So, we want to work with like-minded people who really like and understand games.” Bridging grassroots insights and industry giants through their investors, he argues, gives them a deep understanding of the market dynamics. Interestingly, the firm avoids investments in emerging technologies like VR and AR, deeming their development trajectory incompatible with the fund’s exit timeline. Similarly, Web3 games are considered too fraught with uncertainty.

In 2023, while the video games market far outpaced movies and music, with mobile games accounting for slightly less than half of the pie, it was not immune to macroeconomic headwinds, with investment volumes slumping to a three-year low by the year’s third quarter. However, Kochmola attributes the downturn in Web3 games to attempts to blend gaming with the financial and ownership benefit of blockchain, heralded as the evolution of video games – attracting the attention of tourist money, which then disappeared from the market as Web3 games failed to deliver. “If we are talking purely gaming investments, excluding the Web3 category, that drop was not very significant,” she explains. However, that was not the only challenge facing the market: from industry giants like Ubisoft to small mobile game studios alike, 2023 was marked by significant layoffs. However, Kochmola argues that the layoffs were an expected side-effect of the irresponsible hiring practices of the previous few years, compounded by the efforts of big studios to increase their profit margins. Despite being perched atop the entertainment industry, year-on-year market revenue growth in 2023 was marginal (+0.6%) when adjusting the high multiples from the boom years downwards. Still, the current talent exodus, which includes skilled developers, does not necessarily signal ominous times ahead. On the contrary, it might solve a persisting issue: talent shortage. “It’s probably one of the best times for companies to bring in the best people to their teams,” she explains. Indeed, the market's talent pool is poised to widen further with the convergence of moviemaking and gamemaking.

In recent years, movie and television studios have successfully cracked the code for adapting game titles. Movie productions like Gran Turismo and Super Mario Bros have garnered critical acclaim and box office success, while series such as The Last of Us and Arcane have captivated audiences, ranking among the most-watched shows on their respective platforms. The collision of these two worlds is facilitating an exchange of talent, which has also informed the firm’s strategy to invest in, besides experienced founders, people without a traditional gaming background; two of its most recent investments include Roar Games (US$1.8 million), founded by a team of CG artists, and Limassol-based Obelisk Studio (US$2 million), which pivoted from an art outsource company to game development. Eremeev highlights an intriguing observation regarding Steam's wish-listed games, where a significant number are developed by so-called ‘No-Name’ developers. These individuals hail from diverse backgrounds such as music, film production and advertising, bringing fresh perspectives unencumbered by gaming industry norms. Meanwhile, the advent of user-friendly platforms for game creation, like Unity and Unreal Engine, and AI-co-pilot tools known as Large Language Models, has dismantled technical entry barriers, with the duo predicting a wave of new studios entering the market in the next few years. Expanding on AI tools, Eremeev, drawing on his experience as a 3D artist, mentions their potential to liberate creative endeavour from the mundane, programmatic tasks of character creation, while also envisioning AI-driven gameplay elements such as game masters, mirroring real-life Dungeons and Dragons sessions. Kochmola, however, stresses that while AI can significantly cut the development costs associated with AAA games, which render them marginally profitable or even unprofitable, large game companies would most likely be risk-averse, given the ongoing controversy surrounding the Intellectual Property (IP) ownership of AI-generated art. Still, the potential to increase the productivity of smaller studios and enable novices to enter the market is palpable.

The convergence of the two segments also points to another possible direction for the future of the market: IP is becoming more important than the game – or better yet, video games will be just one of the many gateways to deliver an experience. “The most successful games are the ones you will experience an attachment to, even when you're not playing them. It becomes part of your personality. You can identify yourself as a schoolteacher, married and father of two and a League of Legends player,” Eremeev says. Indeed, mobile games represent untapped potential for Intellectual Property. Despite the issues facing the segment, mainly created by Apple’s App Store fee structure and the company's switch from targeted advertising to privacy, having introduced IFDA (identifier for advertisers) in 2021, the duo believes that the segment will find workarounds. Besides, Monopoly GO!, a mobile game by studio Scopely (one of The Games Fund’s 14 investors), hit U$S2 billion in revenues just 10 months after its launch in 2023, refuting any suggestions that mobile games are going to lose their throne as the industry’s darling. “I think we will see many IPs being transferred to the mobile genre, especially when today’s smartphones can run complex games with amazing graphics. The future of games will be cross-platform,” Kochmola says. This concept will not only allow players to seamlessly transition between devices – be it smartphones, consoles or PCs – without interrupting their gameplay experiences but it will also enable studios to produce platform-suited games based on the same IP. Eremeev also argues that browser games are poised for a comeback, adding more fuel to the cross-platform movement.

An InvestGame report covering deal activity in the market for 2023 ranked The Games Fund as the fourth most active investor globally, having entered nine deals valued at US$25.8 million. This not only proves their thesis that Eastern and Central Europe – with Cyprus as one of the main hubs – is ripe with great game studios but also dispels any notion of dark clouds gathering over the market. “And we have amazing games,” says Eremeev. “It is unprecedented how many great games were released last year. The thing is, making games in general has never been this easy but making good games is as hard as ever, considering the competition. On the other hand, it's become a lot easier to find people, with more variations, able to create great games. We believe that fundamentally, the gaming industry is super healthy and strong.”

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