Virtual Insanity: Making Investor Sense of Virtual & Augmented Reality
Movie-makers explore opportunities for director-uncontrolled viewer perspective in VR movies; Visual effects engineers improve motion-capture techniques for inserting real life human holograms into virtual worlds; movie studios look to additive VR/AR ‘bonus content’ to help market their tentpole $100m+ theatrical releases; Game developers look to create ethereal escapes and immersive horror and shooter games; And, concert and sporting event producers look to engage (and monetize) fans on a new and exciting event viewing medium.
Such is the virtual and augmented reality entertainment technology landscape right now. Most venture backed startups around entertainment VR/AR have fallen into 4 buckets: cinematic VR, sports / live events, content creation tools & infrastructure, and gaming. We’re looking at all of them closely, alongside a few enterprise applications of VR/AR (particularly within training & education), but for the purposes of this article, I’m sticking to the entertainment biz.
Cinematic VR
This refers to storytelling and short films; i.e. content that’s success is dependent on creativity moreso than unique, defensible technology. We have seen a host of venture backed startups emerge in this category: Baobab, Penrose, Within (formerly VRSE), Felix & Paul, and, at one time, even Oculus’ internal ‘Story Studio’. For the most part, these companies have either been started by recently minted Harvard Business School MBA’s or by folks with significant past creative/technical show business experience. Investor-wise, strategics such as Comcast Ventures have been particularly active in cinematic VR investing; However, it was Sand-hill VC, Andreessen Horowitz, that wrote the biggest check to date for an early stage cinematic VR startup (i.e. for Within).
While I’m a huge fan of the content I’ve seen here (e.g. Within’s Clouds Over Sidra is particularly impactful), our approach has largely been one of ‘wait and see’ until VR headset distribution creates a significantly larger audience. This is because of the monetization challenge — i.e. who’s going to pay for this content in the long term? Most of the premium cinematic VR experiences I’ve seen to date have been brand-sponsored. Brands have sponsored this content for exploratory or ‘edginess’ value moreso than purposes of mass brand exposure, due to the limited VR audience at present. Similarly, as a result, advertisement supported business models will not work in these nascent days. My friend and past co-investor, Joe Kraus of Google Ventures, said not too long ago that 2017 is the year of survival for VR companies. I think this particularly holds true for cinematic VR companies that will eventually need to rely on larger audiences for direct monetization. I don’t think VC dollars should be funding movie production and that’s what cinematic VR companies look like to me right now. A sustainable production funding and monetization cycle for cinematic VR content will only emerge with a much larger audience.
Having been an early investor in the YouTube MCN ecosystem, I’m definitely open to making these kinds of ‘content’ platform investments, but not yet. YouTube’s audience was already quite large, big-balance-sheet-Google already owned it, an ad supported monetization infrastructure was already in place, and folks had the requisite hardware and networking capabilities (en masse) to make venture backed YouTube content bets work. While cinematic VR production companies aren’t the same as YouTube MCN’s, both require audience of sufficient size for venture investments to work. And even then, it’s the platforms for talent management, cross promotion, product placement, etc. that are preferable to straight up content investments themselves. In either case, it’s the limited audience for cinematic VR that prohibits near term investment from our fund.
Sports & Live Events
Sports and live events in VR have Next VR and Jaunt flying their heavily VC-backed flag. Active stakeholders are folks such as Peter Guber (head of Mandalay Entertainment, now part of NextVR) and David Anderman (former COO @ LucasFilm, now Chief Biz Officer at JauntVR). Both have deep media backgrounds and the domain expertise necessary to build media businesses in emerging distribution channels. For example, securing IP rights with top tier sports teams and entertainers is no small feat. If it was something that simply required a rolodex, Hollywood talent agencies, CAA or WME would have already locked down this category of future VR revenue stream. Past experience in building media businesses from the ground up is far more important for new CEO’s in media VR companies and I don’t expect it will be long before we see VR/AR plays from media moguls, Barry Diller, Peter Chernin, and Jeffrey Katzenberg (the latter of whom recently said he’s forming a fund to invest in VR). Strategic media investors such as Advancit Capital (i.e. run by Viacom’s Shari Redstone), Comcast Ventures, Time Warner Investments, and even Disney, have all been active in VR investing as they see a new immersive distribution medium through which to leverage existing IP libraries and in which to develop medium-specific original IP. Nobody plays the IP game better than big media behemoths and none are asleep at the wheel as VR emerges on the fringes of their traditional theatrical, television, and digital businesses. For potential venture investment, we would definitely look for startup CEO’s who had deep entertainment industry experience in developing content for new platforms and who built successful businesses on those platforms.
Gaming
Our fund, Signia Ventures, was the first investor in Playdom, Funzio, Cie Games, and Super Evil Mega Corp; We’ve had the good fortune of working with some pretty amazing developers in the past. We no longer invest in mobile games as the mobile gaming platform is mature and distribution is largely ruled by licensed IP and heavy paid marketing spend, vastly different to the environment of easy user acquisition and organic virality from 2008–2012. Today, the popularity of VR among game developers is visceral. Lines going out the door at the Game Developers Conference for VR sessions, daily investor decks inboxed from VR game devs, a heavy initial focus on gaming from the major VR headsets (Oculus, Vive, PSVR), not to mention gamers being among the earliest adopters of any new tech platform; All of this makes for a fertile crescent of VR innovation.
VR games will soon present an interesting investment opportunity. Gamers have a high willingness to pay for good quality, premium content. Already, Survios’ Raw Data, a VR game for the Oculus and Vive, is doing more than $1m per month in paid downloads. CCP, the Icelandic game developers behind Eve: Valkyrie, another VR title, will soon be ‘break even’ after their giant $30m VR development investment. The Wave VR is an impressive ‘Rockband’ style multiplayer game, unsurprisingly, developed by senior devs on the original franchise and recently backed by Kleiner Perkins, RRE, the VR Fund, and Presence Capital. The latter incorporates ‘social’ into VR casual gaming and if it maintains its trajectory, I wouldn’t be surprised if somebody like sleepy Zynga awoke from corp dev slumber to make an acquisition as an entry point into VR.
The opportunity for VC’s to invest in console game developers has typically been challenging due to the way game developer / publisher economics traditionally worked. There was already too big a cut coming off the top from the big box publisher, making VC returns hard to come by. It remains to be seen how the potential co-investment ecosystem plays out for Sony PSVR. Moreover, if I had to guess, next year’s Microsoft Xbox: Scorpio console will likely be compatible with the Oculus Rift, due to hardware upgrades on the console’s side and to software improvements at Oculus that allow the Rift to play on dumber hardware. In either instance, I haven’t really seen console specific developer pitches come through my office. That may very well change as VR game devs build for several platforms to maximize audience draw in these early days of eyeballs, thereby making non-console platforms an exciting co-investment opportunity. Or, Sony and Microsoft become more like Oculus and Valve in how their developer grants, VC coinvestment plans, and platform fees work.
There will be some ‘VRcade’ investment opportunities that arise. The Void raised $50M from Chinese strategic, Shanda. Zero Latency VR will be an attractive target in the same space. Other ‘experiential rides’ such as Sleep No More and Escape the Room could move into Mixed Reality compatible experiences. As my recent trip to Japan indicated, I think VRcades are going to be pretty big. That said, the real estate leases and expensive up-front capex of these companies can make them challenging investments for early stage VC’s. Still, I continue to watch the space closely.
We’re looking at a few higher end gaming opportunities right now and have been really intrigued by what we’ve seen. Finding the Venn diagram overlap of game developers with category defining game design experience and technical chops to push the boundaries of immersive hardcore gaming; That’s my raison d’etre as a gamer/investor at present.
Infrastructure
Infrastructure startups are emerging around head/positional tracking (e.g. Eonite Perception), haptic feedback (e.g. Axon VR), and offloading of device compute to the cloud, enabling more impressive overall VR experiences (e.g. Cloudgine; Improbable Labs). There is opportunity here as we’re still on version 1.0 VR headsets — i.e. headsets that are expensive, require expensive PC’s or add-on hardware to work, and/or require a 16 ft x 16 ft unencumbered space to feel truly immersed. Typically with most infrastructure businesses, startups can run the risk of being made obsolete if, for example, headset manufacturers have been secretly working on a better, faster version of their product, already well funded and packaged up for the next hardware release. Even if that’s not the case, infrastructure tech gets copied by competitors (usually in China these days) and becomes industry best practice before long. Other times, best-in-class infrastructure companies are swallowed up by headset manufacturers themselves as ‘acquihires’. These rarely offer home-run investor returns.
However, sometimes it’s possible to become an embedded, defensible part of the software stack, and that’s where we’ve been investing over the past 2 years. This is where an infrastructure player thrives over time like Dolby, or infers higher quality experiences with ‘Intel Inside’ branding. Enduring businesses and platforms can be built here if they do the (initially) small thing they do, really well, better than others, and maintain their competitive superiority over time. In these instances, there’s no point in platforms reinventing the wheel and competing with the startup, instead preferring a vendor relationship with them as ongoing service providers.
Both of our announced VR/AR investments to date have been within this category and we continue to look for strong technically driven teams in this space, particularly around interesting applications of computer vision.
Another area of particular interest right now is the intersection of VR/AR and artificial intelligence. Once we’ve captured a real life human performance or likeness in 3D, why not use the same deep neural networks and machine learning that are applied to autonomous vehicles, or chatbots on various messengers, to give VR/AR holograms a mind of their own? Yes, I’m thinking Jarvis from the Iron Man cartoons, Bishop’s sister ‘Shard’ from the 90’s X-men cartoons, or Russel Crowe’s Jor-El in the recent Superman movie; i.e. giving bodies to bots. Yes, holograms will require animation and rigging of digital humans. And yes, this is what the gaming industry has long claimed mastery over. The same way Binary VR, MSQRD, and Snapchat’s Looksery face filters map AR masks perfectly onto your face using only a regular smartphone camera, I want AI and face recognition software to capture me speaking a few phrases, or better yet, scan my social media photos to see my various facial expressions. Then scan past conversations I’ve had on messengers, texts, emails, etc. to create the intelligence layer. Finally, intelligently morph my hologram’s face as required. When combined, we have an AI-driven, semi-autonomous hologram. If you’re out there working on this idea, please get in touch! I want to invest!
Augmented Reality
Augmented reality is a harder egg to crack for media investors. The only meaningful (publicly known) media investor involvement to date has been Thomas Tull’s Legendary Entertainment who invested in Florida based dARling, Magic Leap. However, rumors surfaced in the not too distant past that as part of his company’s acquisition by Dalian Wanda, he was selling some of his position in a secondary share sale. Disney has a close relationship here too. The LucasFilm San Francisco compound’s ILM division, hosts an offshoot of Magic Leap’s team as part of ILMxLabs, possibly Disney’s brightest minds in VR and AR. I’d be surprised if we didn’t see Warner Bros’ Spielberg-directed Ready Player One didn’t have a real life VR and AR experience to accompany it.
Other AR platforms, such as Microsoft HoloLens and Meta, certainly have entertainment and media applications, but the former is initially being marketed as an enterprise device and the latter is still too early to prove its mettle. Much of AR’s potential depends on Magic Leap coming to market in a soon enough time horizon, with a big enough splash. Investors have stacked their Jenga-tower expectations (and preferences) and the longer Magic Leap remains in stealth, the shakier consumer AR’s forecast becomes. That said, Tim Cook recently said that AR was a key focus for Apple. In recent memory, Apple has joined a product category after it’s already been defined, usually with vast improvements and beautified design. They’ve certainly been acquisitive in the ‘infrastructure’ of AR over the past couple of years, snapping up Metaio, FaceShift, Emotient, and Flyby Media. Apple entering the AR headset market would be the kind of platform VC’s would bet on, and bet big.
The nearer term market (and investment) opportunity in augmented reality exists within lighter use cases than those of Magic Leap or HoloLens. Snapchat face filters (using Looksery’s technology) count as AR, so I’m excited by what Snap Inc Spectacles hold in store — more for purposes of socializing the idea of wearing tech on your face, than for immediately available, advanced AR applications. I’m also curious to see what the RealSense & Movidius divisions of Intel push to the smartphone ecosystem for AR. Depth sensing mobile phone cameras open up a whole host of SLAM-enabled environmental mapping for intelligent digital overlays. We’ve already seen a bunch of startups toying around with SLAM-sensitive smart device cameras for interior decorating, apparel sales, and toys-to-life (e.g. Lego) entertainment, for example. I’m on the look out for innovative, mobile-first startups that take advantage of depth-sensing computer vision.
Are You Not Entertained?
Before my career as an investor, I worked at Warner Bros and at a venture backed startup that spun off from New Line Cinema. I’ve been actively hunting for VR opportunities in the media and entertainment industry. At first glance, given the initially limited audience, I was inclined to keep my fanboy enthusiasm behind closed doors. But, focusing on particular industry niches and segmenting the industry as above, has unearthed some real gems for our portfolio so far. I couldn’t be more bullish on VR and AR, as a fanboy, consumer, and investor and I’m looking forward to doing a lot more here!
(This post was originally published on Re/Code on October 5th, 2016: http://www.recode.net/2016/10/5/13168266/augmented-virtual-reality-vc-investor-opportunity-entertainment-landscape)
