Lessons Learned: Raising a seed round for a VR startup
We recently launched Viro Media, a platform for developers to easily create VR experiences, and announced our $2.5M seed round from a great group of investors including SBNY, Lowercase Capital, ENIAC, Box Group, Betaworks, Presence Capital and others. This post recaps lessons learned from our process specific to raising capital for a VR startup. These lessons can be applied to any immersive tech startup (AR/VR/MR/XR/anyletterR).
(There are plenty of other great resources for raising seed capital for startups in general; we recommend starting with these articles: YC: A Guide To Seed Fundraising, NextView: How to Raise Seed Capital and Alex Iskold: 25 Epic, Must-Read, Blog Post about Fundraising.)
Lesson #1: Build Something
It is nearly impossible to raise capital without at least a demo or prototype. To get an investor’s attention you need to show not tell.
But this is even more important for a VR startup. The ideas you have in your head and sketch on paper, often break down once you implement them in VR. We had to scrap many, many ideas because they just did not work in VR the way we envisioned them working in our heads. So build something first, both to validate your idea and to get the attention of investors.
Lesson #2: Target the right investors, in the right order
We had more success fundraising once we viewed it as a process. Momentum is an important factor in raising money and targeting investors in this order helped move the process along.
Friends and Family: This does not necessarily mean your parents but your wider network of people who believe in you. Pitch people who know you and want to help you achieve your dreams. Having even a small commitment gets the ball rolling.
VR/AR/Frontier Tech Funds: These funds have to invest their dollars into VR startups. The operators at VR funds live and breathe VR and deeply understand all aspects of the industry. Oftentimes, VR Funds will be your first soft commit and provide validation for your startup when meet with other investors. A couple we recommend:
Presence Capital: Amitt Mahajan is easily the best investor in the VR space; read everything he has written.
The VR Fund: Tipatat knows everyone in the space, see this industry landscape overview as proof. (Though can we get Viro added to the next version?)
Others: Boost VC, Colopl, HTC Vive X, Super Ventures, Signia Ventures, Maven Ventures, Anorak VC
Seed Funds: There is a lot of seed money in the ecosystem as the number of micro VC’s continues to grow. But these funds invest across verticals so compared to non-VR funds, the company that pitches before and after you is probably a mobile/SAAS/web company that has more users and revenue. While you are competing against a wider range of startups, these investors are still looking for home runs. There are many seed investors who believe VR will be the next big thing and are actively looking for the right VR startups to invest in. Below are some seed investors we met who fit this criteria:
Matt Mazzeo (Lowercase), Vic Singh (ENIAC), Josh Guttman (SBNY), Peter Rojas (Betaworks), Anarghya Vardhana (Maveron), Matt McIlwain (Madrona), Alice Lloyd George (RRE), Kyle Russell (a16z), Bubba Murarka (DFJ), Nabeel Hyatt (Spark), Dylan Flinn (CAA), Dessy Levinson (645 Ventures), Michael Dempsey (Compound)…
Robert Scoble has a great list of VR investors which you should use to fill out your list of target investors.
We recommend targeting investors who have publicly shown interest in VR. We had zero success with investors who thought VR was too early or were unfamiliar with the nuances of the industry. It can be hard to make a compelling pitch when 80% of the meeting is spent defending the industry. Your mileage may vary but it was a time consuming lesson learned for us.
Lastly, we found investors at multi-stage funds (invest at seed/A/B/etc) were hard to close at the seed stage, even those who had high interest in VR. Perhaps it is because they have the capital resources to wait for later rounds or have a higher risk of potential portfolio conflict for an emerging industry. If you invest in the Friendster of VR, you probably can’t later invest in the Facebook of VR. But we still recommend meeting with investors at these funds because some of the best feedback we got was from them.
Lesson #3: Meet in person, avoid phone calls and video chats
Until we get to the point where any meeting can be held in VR, try to meet investors in person. Seems obvious now, but in retrospect we definitely wasted cycles and lost out on opportunities by doing calls rather than pushing to meet in person. We had zero success in converting phone calls or video chats into investments or even follow up meetings.
One issue is that investors want a log line or elevator pitch for your company, Uber for X or Amazon for Y, to quickly understand what you do. This can be extremely difficult for VR startups who are trying to build new paradigms for a new computing platform. “Microsoft Paint for VR” will never capture the wonder of actually using Tilt Brush. But experience it in VR and people immediately understand it, changing the dynamics of the meeting.
So how did we avoid phone calls? After failing at many calls, we finally just told people that meeting in person was better for VR so they could see the product and that we would travel to them. Surprisingly most people who got VR understood the need to experience the demo/product to understand the company.
Lesson #4: Know what you are gonna do with the money
Another one that seems obvious but in the case of VR, there is a subtext to this question. Most investors were actually asking, what if VR does not take off until 201X? If we invest in you and your team, how will you make it last through the trough of disillusionment? Have an operating plan that shows how the capital lasts 18 to 24 months with clear milestones.
This is an excellent post from Mattermark that details their burn rate: How We Spend Money at Mattermark: What Goes Into Our Burn Rate? Scale down their numbers to match your planned headcount. Know what levers you can move to adjust your runway (months of cash remaining) and how those changes will affect your milestones.
Lesson #5: Storytelling vs Pitching
While we used a relatively standard pitch deck format for familiarity, we focused on storytelling rather than pitching. For instance, a common question from investors is, “What problem are you solving? What is the customer pain point you are solving?” It can be hard to answer this question, not because VR does not solve problems, but because people are often unable to quickly grasp 2nd order consequences. VR is a paradigm shift that will fundamentally change computing and to understand the problems you are solving requires a mental leap.
Looking back, the movie and TV screens we use today will be seen as an intermediate step between the invention of electricity and the invention of VR. Kids will think it’s funny that their ancestors used to stare at glowing rectangles hoping to suspend disbelief. — Chris Dixon
Pitching is a straight line narrative that takes someone from step 1 to step 5. Storytelling is an arc that helps others see the world you envision. It is important to take people on this journey so they have the right framework to understand your solution.
Lesson #6: Consider applying to an accelerator
Startup accelerators can give you the right momentum to raise money from investors. They provide structure, mentorship and focus; culminating in a demo day in front of top tier investors. There are many high quality accelerators but we will highlight two that are actively working with VR companies:
Techstars: This program is global and it is highly likely that there is a program near you. Some recent graduates include IrisVR and LiveLike VR, who are revolutionizing architecture and live sports, respectively.
Y Combinator: Michael Seibel, CEO of YC, earlier this year wrote a blog post calling for more VR companies to apply to YC:
I think we are no more than two years away from an explosion of new consumer startups and I cannot wait to start funding them at YC.
Final Thoughts
The growth of the VR industry will not be linear but will happen in leaps and bounds. VR technology is getting better everyday through rapid innovation resulting in a quickly evolving ecosystem. Start building your VR company today so that you are ready to ride the next wave.
If I were starting a company today, I would look at the home screen of my phone and ask how many of these apps will have to be rebuilt for VR and which of the traditional incumbents are going to be too slow to adapt. — Michael Seibel, CEO Y Combinator
If you want to build the next generation of immersive, mobile VR applications, across platforms like Daydream, Cardboard and Samsung GearVR, then try out Viro Media today for free! -> Sign Up!
Let us know if we can help in any way. We are super excited to see a rich and diverse ecosystem of VR experiences for consumers.
