Because the world stayed indoors through the pandemic years and actively seemed for distractions to compensate for social isolation, gaming in all codecs was a boon and none may escape their addictive attraction. India, too, was at a unfastened finish and took to gaming as by no means earlier than. The nation recorded about 455 Mn on-line avid gamers in 2023, per a Statista report, an 8% YoY improve.
The quantity is prone to surpass 491 Mn by the top of 2024. Extra curiously, about 90 Mn avid gamers paid for on-line video games final yr though India is historically a utilitarian and price-conscious market.
The adoption of interactive media is surging as properly, pushed by the rise in non-money gaming and over-the-top (OTT) audio/video content material. Regardless of a slowdown in digital promoting spend, a dangerous guess on behavioural shift now that life has returned to normalcy and a regulatory upheaval impacting the real-money-gaming (RMG) house, the outlook stays sturdy. Not less than many game-makers are doubling down on their companies and aren’t in a temper to chop again anytime quickly. In essence, gaming and interactive media is rising as a dawn sector in India, with immense potential and promise.
One of many early stage traders leveraging the India alternative is Lumikai, a specialised VC fund focussed on gaming and interactive media.
The fund is led by founding basic associate Salone Sehgal, who has donned many hats throughout her 18-year profession as an entrepreneur and a worldwide investor. She was the principal at London Enterprise Companions (LVP), a seed-stage fund backing the gaming ecosystem, with a monitor file of investing in 40+ corporations and reaching $20Bn+ in shareholder worth.
Sehgal is the cofounder of TrulySocial, a UK-based venture-backed gaming firm. Its imaginative and prescient is to reinvent the gaming expertise for the feminine viewers by creating social worlds via interactive narratives and bringing in world celebrities, influencers and types for a touch of glamour.
She additionally labored for world bulge bracket banks and monetary establishments like Barclays, Morgan Stanley and KPMG. In the midst of her work, she executed M&A offers value $10 Bn+ throughout sectors.
Sehgal believes that her expertise as an entrepreneur and a VC, in addition to the time she spent working throughout world markets such because the EU, and North America, gave her an important vantage level to observe and perceive the gaming business.
“It did two issues. First, it helped me construct a really massive world community. Second, it enabled me to take a look at the tendencies from a worldwide perspective and see what was occurring within the Indian market. That’s exactly what drove me to return to India in 2019,” she added.
As a part of Inc42’s ongoing Moneyball collection, we had an unique interplay with Sehgal to delve deeper into Lumikai’s funding thesis for India’s gaming and interactive media house and the key sauce to assist startups succeed. Listed below are the edited excerpts.
Inc42: Lumikai entered the Indian market in 2020. Was it the proper time to launch a gaming and interactive media fund?
Salone Sehgal: I might say so. Round 2019, we noticed inflexion factors in India just like what had taken place in China in 2007. Smartphone proliferation led to excessive information consumption, and a mean particular person consumed about 30 GB of knowledge. It fuelled the rising adoption of video games and media.
So, we thought it might be a good suggestion to usher in horizontal and generalist enterprise funds right here for no less than one VC cycle. However because the market deepens, so does the VC business, and we now have extra verticalised methods to make sure higher outcomes. That’s how we began our early stage investments in gaming and interactive media. It’s a privileged and unique alternative.
Whereas 2020 felt like the proper time for such a fund, Covid-19 struck us on the similar time. As folks needed to sit at dwelling for months, interactive media took off in a giant manner throughout all sub-segments, from gaming and apps to interactive audio streaming [think Spotify or Apple Music] and extra. The whole lot began to undergo the roof.
As a consequence of our world publicity [I was both a founder and a funder], we may zero in on this chance to launch a fund and construct a group round it. Fund I got here in 2020 with a corpus of $40Mn, as we aimed to assist pre-seed to Collection A stage startups with cheque sizes ranging between $200K – $1.5 Mn. We began deploying in early 2021 and rolled out Fund II value $50 Mn in 2023, simply after a span of three to 4 years.
In case you take a look at digital media and leisure [including interactive media], the Indian market is no less than value $25 Bn. Out of that, video games, anime, VFX and the like account for $12 Bn. This section is rising at a CAGR of 20% and is anticipated to hit $30 Bn within the subsequent 5 to seven years. We have now forayed into this class as a really early stage investor and need to make a major influence.
Inc42: How did the primary fund carry out earlier than you determined to lift the second? What sort of investments did you make?
Salone Sehgal: Up to now, Lumikai has backed 15 corporations utilizing each funds. This consists of corporations corresponding to All Star Video games, AutoVRse, Bombay Play, BuyStars, Cloud Feather Video games, Eloelo, Giga Enjoyable Studios, Home of X, Loco, Qurious Bit, Singularity, Stealth, Studio Sirah, Tremendous Nova, and Vobble.
The thought is to take a position between $80 Mn and $90 Mn within the interactive media ecosystem right here.
We make frontier bets [explore untapped but innovative startups] and canopy an enormous vary, together with content material, recreation streaming and social app platforms, gaming infra [say, tool stacks for automation], blended actuality, GenAI, spatial computing and recreation growth studios creating informal, hypercasual, or mid-core video games and extra. We goal to seek out category-leading bets and catalyse their progress with specialist capital and sector-specific technique as a result of that’s what we perceive finest.
We additionally work on recreation methods the place the ideas of interactive recreation mechanics can be utilized to disrupt quite a lot of industries like edtech, fintech or healthtech. We have now a enterprise referred to as Supernova, which is in immersive recreation mechanics and has created an AI tutor to disrupt the edtech house. This 24/7 interactive AI tutor has been developed to show spoken English to youngsters. It’s the corporate’s first instructional module and the enterprise is rising extremely quick.
As for our funding thesis, we now have been constant all through. There’s not a lot distinction between Fund I and Fund II. The primary fund focusses on very early stage startups and we could write small cheques as little as $200K. Or it could go as much as somewhat over $1 Mn for a primary cheque. Then, we could have sufficient capital for follow-on rounds. We principally follow this technique.
Inc42: How has the Indian gaming ecosystem advanced up to now three to 4 years?
Salone Sehgal: The ecosystem has grown considerably in 3 ways. The primary is expertise progress. Once we entered India, we thought there could be hardly 100 offers on this house. However we grossly underestimated the entrepreneurial expertise. Within the final decade, we noticed main gamers like Zynga, Glu Cellular, EA, Ubisoft, GSM Scopey and RocQ within the gaming house alone, and so they operated on this nation. Additionally, a number of groups now deal with P&Ls between $50 Mn and $100 Mn.
We have now seen profitable exits, and the variety of corporations securing substantial enterprise capital has additionally gone up. A brand new wave of entrepreneurial expertise is now rising. They need to construct their very own corporations and are very bold. This expertise inflow has modified the ecosystem enormously. Extra corporations are developing, and we now have already evaluated greater than 1,800 startups.
Subsequent comes funding. Home gamers initially hesitated to place their cash within the interactive media. However that has now modified. We have now 30+ world co-investors and the likes of Common Catalyst, Lightspeed, Hearth Ventures and Peak XV [the last two are India-based venture firms] did offers with us. Lumikai additionally partnered with Griffin Gaming, Courtside Ventures and Play Ventures to infuse extra capital into the follow-on rounds for the businesses we now have backed.
Lastly, we now have seen some very very aggressive methods for the Indian market. There are corporations like Krafton saying: Hey, we need to make investments $150 Mn in India. Then it launches titles appropriate for the Indian palate to realize traction. Or consider Mixi Inc, a Japanese conglomerate now wanting on the India market, each as an investor and a associate [read mentor]. Sony, too, not too long ago introduced a partnership with Airtel for working a 24×7 anime channel for the Indian market.
All this tells us that the work we now have been doing for market training, evangelism and analysing market numbers is paying off, and we are able to see the progress.
Inc42: Indian startups corresponding to Nazara, Dream 11 and MPL have cornered the market. However most ecosystems listed below are nonetheless very area of interest. What early-mover benefit do you foresee as a VC?
Salone Sehgal: Broadly talking, if issues are finished proper within the media and gaming enterprise, corporations can begin monetising very early.
In an ecommerce or B2C enterprise, when a consumer visits a platform however doesn’t spend – doesn’t make a purchase order or purchase a subscription – that particular person turns into redundant. However a recreation or a media enterprise is all concerning the consideration financial system. If it has excessive retention energy and a consumer lands there, there shall be a number of methods to monetise. One can get advert income, leverage IPs, or promote subscriptions. So, the consumer will get monetised in each attainable manner. This differentiates gaming and interactive media from different industries.
This is essential for our portfolio corporations. We have now 15 of them, all younger corporations, most of that are producing income. It might be finest if one got here in early to again such corporations. Different traders recognise them solely after they begin to generate profits and switch a revenue.
The business has develop into extra profitable now that UPI permits customers to do micro-transactions. As an illustration, the ARPPU (common income per paying consumer) in India is about $19 [around INR 1,600] a yr. However micro-transactions value INR 29-30 are inclined to work for the lots to purchase add-ons and improve their gaming experiences. It will definitely results in very excessive margins.
Moreover, gaming corporations can higher leverage advert monetisation because the eCPM fee [effective cost per mille indicates how much an advertiser pays per 1K ad impressions] in India has elevated. In 2008, it was once 30-35 cents. Now, it has exceeded $1 and even $1.5. So, one can examine the likes of Chartboost so as to add extra worth and set the pricing accordingly.
Inc42: You’ve gotten additionally funded world startups. How does it differ from investing in gaming and interactive media in India?
Salone Sehgal: Investing in India requires a aware enterprise method. First, we now have to search for category-leading bets and discover out if they’re constructing for India or the world. If they’re focusing on world prospects, how do they plan to compete with the worldwide finest? That could be a key criterion for us.
There shall be extra questions. Have they discovered a white house? Is there a specific area of interest to discover and develop that can assist them compete with business leaders? What’s their proper to win – the flexibility to navigate a aggressive marketplace for short- and long-term success? Can they leverage one thing intrinsically invaluable, say, best-in-class consumer acquisition experience or a deep understanding of their goal market/client base for whom they’re creating?
Here’s a living proof. When Eloelo was constructing an India-first resolution, it had in thoughts Tier II and III Bharat customers, with girls accounting for 40% of the viewers. These are the elemental lenses we have to apply.
Suppose a startup is constructing a worldwide product from India. In that case, Lumikai would attempt to present entry to world finest practices, expertise, efficiency advertising experience and extra. These are the lenses we apply when figuring out goal corporations for funding.
Inc42: How would you assess the Indian authorities’s stand on gaming and interactive media from a regulatory perspective?
Salone Sehgal: Issues have improved within the final two years, particularly within the interactive media house, as the federal government has broadly finished a couple of issues proper. From information privateness legal guidelines to digital safety compliance, issues have been laid out proper.
New tax legal guidelines have additionally are available in. From October 1 [2023], the finance ministry applied the amended provisions to levy 28% GST on full face worth of bets. If an organization is in real-money gaming, incomes on cash-based outcomes, it has to pay that tax, nevertheless it doesn’t apply to all codecs. No tax is levied on video games that are IP- or act-based, with provisions for in-app transactions. Additionally, eSports is now recognised as a bonafide sport, which is sweet information.
As the federal government has demarcated the verticals and created particular guidelines and tax legal guidelines round them, it has introduced rather more readability.
The authorities additionally perceive it is a bona fide dawn sector and must be legislated and taxed in a sure manner. The AVGC [The Animation, Visual Effects, Gaming and Comic] promotion job power additionally talks quite a bit about selling India as a hub for know-how growth in animation and VFX by leveraging AI. It gained’t be for video games alone but in addition for films and the general arts and media panorama.
All these are a step in a extremely good path for the interactive media business.
Inc42: Given the market tendencies and regulatory panorama, what ought to be the main focus areas for a gaming/interactive media startup?
Salone Sehgal: Step one is deciding whether or not to construct a venture-scale [powered by VC money] enterprise or a self-generating, self-sustaining one. Each have totally different paths. As an entrepreneur who has gone down the trail of constructing first, I might advise younger corporations to take that call first.
For these seeking to construct a venture-scale enterprise, it’s essential to know the chance panorama for creating, let’s say, category-leading bets. As a result of these are the bets that entice traders.
Extra queries will observe. If they’re constructing for world markets, what untapped alternatives or white house have they recognized? How do they place themselves as class leaders if they aim the native market? What distinctive insights do they possess that may assist them construct very massive and invaluable entities? What actual issues are they fixing for his or her customers?
The following parameter: How does a enterprise construct best-in-class services, as Indian customers are very discerning? Not like China, we’re not a walled backyard. We’re uncovered to the worldwide finest. And when customers are uncovered to the perfect merchandise, apps, mechanics, or artwork aesthetics, Indian corporations should be capable to service them on a par with that high quality. Something lower than that, and other people will say: Hey, I’ve already used Instagram, or I take advantage of one thing else. What’s so uniquely interesting in your product?
I feel startups ought to rigorously contemplate these components. Though capital is offered and one could be daring, they need to additionally needless to say they’ve corporations to construct. Subsequently, they have to take into consideration income era and distribution first.
I additionally advise startups to begin pondering extra on how they’ll combine AI or GenAI into their growth pipelines. They should establish which areas they’ll use AI neatly. It may be in growth, advertising, high quality examine, testing, debugging, information analytics amongst others.
Startups must also contemplate integrating AI/GenAI into their growth pipelines. This know-how has an enormous potential and companies must establish how it may be neatly used for growth, testing, debugging, high quality checking, advertising and information analytics, amongst different areas. In actual fact, this generally is a game-changer for startups constructing an interactive media. It is going to save time, improve effectivity and construct higher merchandise.
Inc42: Lastly, do you see particular challenges for the startups on this house? What are your plans for 2024?
Salone Sehgal: A few challenges are there, I might say. The primary problem shall be round expertise – our capability to draw and retain them. Discovering the perfect expertise could possibly be troublesome, because the skillsets listed below are extra specialised. However that is necessary.
The second is considering distribution first: How does an organization attain its customers, and when and the way can it handle consumer acquisition prices? These are the areas founders ought to assume very deeply about.
At Lumikai, we now have already broadened our thesis. We have now made three investments from Fund II and can announce a couple of extra within the coming months. Then, we are going to most likely look into three extra offers this yr.
Presently, we’re actually enthusiastic about corporations leveraging GenAI and pondering distribution-first. We’re additionally bullish on corporations that wish to construct for India and from India for the world. As founders get extra bold, it turns into very fascinating for traders focussing on innovation, high quality and world attain.
[Edited by Sanghamitra Mandal]
