For all of the investors preaching that augmented reality technology will likely be the successor to the modern smartphone, today, most venture capitalists are still quite wary to back AR plays.
The reasons are plentiful, but all tend to circle around the idea that it’s too early for software and too expensive to try to take on Apple or Facebook on the hardware front.
Meanwhile, few spaces were frothier in 2016 than virtual reality, but most VCs who gambled on VR following Facebook’s Oculus acquisition failed to strike it rich. In 2020, VR did not get the shelter-in-place usage bump many had hoped for largely due to supply chain issues at Facebook, but VCs hope their new cheaper device will spell good things for the startup ecosystem.
To get a better sense of how VCs are looking at augmented reality and virtual reality in 2020, I reached out to a handful of investors who are keeping a close watch on the industry:
- Niko Bonatsos, General Catalyst
- Tipatat Chennavasin, The Venture Reality Fund
- Brianne Kimmel, Work Life Ventures
- Jacob Mullins, Shasta Ventures
- Gigi Levy-Weiss, NFX
- Brayton Williams, Boost VC
- Greg Castle, Anorak Ventures
Some investors who are bullish on AR have opted to focus on virtual reality for now, believing that there’s a good amount of crossover between AR and VR software, and that they can make safer bets on VR startups today that will be able to take advantage of AR hardware when it’s introduced.
“Besides Pokémon Go I don’t think we have seen the engagement numbers needed for AR,” Boost VC investor Brayton Williams tells TechCrunch. “We believe VR is still the largest long-term opportunity of the two. AR complements the real world, VR creates endless new worlds.”
Most of the investors I got in contact with were still fairly active in the AR/VR world, but many still disagreed whether the time was right for VR startups. For Jacob Mullins of Shasta Ventures, “It’s still early, but it’s no longer too early.” While Gigi Levy-Weiss of NFX says that the market is “sadly not happening yet,” Facebook’s Quest headsets have shown promise.
On the hardware side, the ghost of Magic Leap’s formerly hyped glory still looms large. Few investors are interested in making a hardware play in the AR/VR world, noting that startups don’t have the resources to compete with Facebook or Microsoft on a large-scale rollout. “Hardware is so capital intensive and this entire industry is dependent on the big players continuing to invest in hardware innovation,” General Catalyst’s Niko Bonatsos tells us.
Even those that are still bullish on startups making hardware plays for more niche audiences acknowledge that life had gotten harder for ambitious founders in these spaces, “the spectacular flare-outs do make it harder for companies to raise large amounts with long product release horizons,” investor Tipatat Chennavasin notes.
Responses have been edited for length and clarity.
Niko Bonatsos, General Catalyst
What are your general impressions on the health of the AR/VR market today?
We’re seeing some progress in VR and some of that is happening because of the Oculus ecosystem. They continue to improve the hardware and have a growing catalog of content. I think their onboarding and consumption experience is very consumer-friendly and that’s going to continue to help with adoption. On the consumer side, we’re seeing some companies across gaming, fitness and productivity that are earning and retaining their audiences at a respectable rate. That wasn’t happening even a year ago so it may be partially a COVID lift but habits are forming.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
Companies to watch are the ones that are creating cool experiences with mobile as the first entry point. Wave VR, Rec Room, VRChat are making it really easy for consumers to get a taste of VR with devices they already own. They’re not treating VR as just another gaming peripheral but as a way to create very cool, often celebrity-driven, content. These are the kinds of innovations that makes me optimistic about the VR category in general.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
In both AR/VR, a founder needs to be both super ambitious but patient. They’ll need to be flexible in thinking and open to pivoting a few times along the way. Product-market fit is always important but I want to see that they have a plan for customer retention. Fun to try is great, habit-forming is much better. Gaming continues to do pretty well as a category for VC dollars but it’d be interesting to see more founders look at making IRL sports experiences more immersive or figuring out how to enhance remote meeting experiences with VR to fix Zoom fatigue.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
Hardware is so capital intensive and this entire industry is dependent on the big players continuing to invest in hardware innovation. Facebook and Microsoft seem to be the main companies willing to spend here while others have backed away. If we expand our thinking for a minute, maybe the first real mainstream breakthrough AR/VR consumer experience isn’t visual. For VR, it might be the mobile experiences. For AR maybe AirPods or AirPod-like devices are the right entry point for consumers. They’re in millions of people’s ears already and who doesn’t want their own special-agent-like earpiece? That’s where founders might find some opportunity.
Tipatat Chennavasin, The Venture Reality Fund
What are your general impressions on the health of the AR/VR market today?
It’s still early but we are seeing strong signs of a healthy emerging ecosystem. VR adoption is relatively small and already we see companies making tens of millions in revenue both in the consumer and enterprise. Facebooks’ Oculus Quest has really had a tremendous impact over the last year, helping to grow consumer software spending by 3x over the previous year and Facebook launching an improved Quest 2 at the even lower price point of $299 will definitely have an even greater impact.
The COVID pandemic has accelerated a lot of the trends like work from home that makes VR and AR turn from a nice to have to a need to have and an essential part of the new normal. When looking at what other potential devices have a growing ecosystem of developers making millions in revenue, AR/VR is further ahead than smart watches, smart speakers and other devices with much bigger install bases, which points to AR/VR being not just a product but a true platform.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
Some of the speculative bets that relied on widespread adoption haven’t panned out, but companies that are focused on providing real value for their customers have seen success and growth. Companies like Stivr and Talespin are now training millions in VR for the top Fortune 500. Many of the early bets were made before consumer VR had even launched but now we are able to see actual customer traction so for enterprise, we look for companies that are getting beyond pilot stage into full deployments with customers. For games when VR first launched making $1 million in revenue in a year was notable, now a successful VR game can make $1 million in a week.
More broadly, do you think virtual reality offers any meaningful opportunities in gaming or is it really just another type of display and input?
VR is a huge opportunity in gaming for small independent teams. Even with an install base in the tens of millions of units, we are seeing over 100 titles making over $1 million in revenue and top titles making over $60 million in sales and counting. I expect the first $100 million title by the end of the year and it could be more than just one. For indie game developers, VR provides one of the greatest opportunities and led to some of the biggest success stories in all of gaming for small indie teams in the past few years.
Beat Saber was a self-financed, self-published indie hit made on a budget that wouldn’t cover the marketing cost of a mobile game launch and has gone on to make over $60 million in two years before being acquired by Facebook. The developers behind PC indie hit Superhot VR said they made more money in VR than on PC and that was with a well-received PC indie hit. Big games like Half-Life: Alyx of course show that AAA can also be successful, but it’s great to see that the majority of hits in VR are made by small dev teams. And this is all with a relatively small install base that is rapidly growing. So like the other platform shifts in gaming we saw with social and then mobile, VR is the newest opportunity that small teams have to make big successes and become the next big game companies.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
Maturity of the platform, specifically with wearable AR HMD or glasses, which really means combining the right features at the right price that pushes much broader adoption in enterprise and consumer. Microsoft Hololens 2 was a huge step up from the previous generation of Hololens 1 and Magic Leap 1 and if we see as big a leap for the next generation then we can expect much wider adoption in the enterprise. For a platform with widespread adoption like AR on mobile phones, we would like to see success from small startups and not just the larger incumbents like Snap and Niantic.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
Because the hardware isn’t where we know it needs to be, especially for AR, there is a lot of startup opportunity. There are still plenty of challenges with optics and inputs like BCI that will be solved by startups. Companies like Varjo and Nreal, who just closed rounds earlier this year, show that if you can really innovate that there will be investors. But definitely the spectacular flare-outs do make it harder for companies to raise large amounts with long product release horizons, yet we are still early in VR and AR and there is still plenty of innovation needed so the opportunity is still up for grabs, which is why companies like Facebook are doubling down now.
Brianne Kimmel, Work Life Ventures
What are your general impressions on the health of the AR/VR market today?
I’ll just take a step back and say that in gaming as an ecosystem, there are a lot of investor dollars being put toward game development including game studios and sort of where I spend my time more on the picks and shovels, of how do we make it faster, easier, more collaborative for anyone to build their own video game.
It’s just getting easier to build and so from an AR/VR standpoint, I also look at to what extent are there new applications that are also using AR/VR for health care or manufacturing or for use cases that potentially can increase safety and security during an extended period of social distancing, and so I’ve seen a lot happening there.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
Historically, I look for relevant experience and I feel like the most competitive rounds I’ve seen when it comes to gaming or AR/VR have come from founders that have previously built games, or have spent close to a decade in the ecosystem.
What I believe has changed and what communities like Discord have really democratized in terms of both creating a community for individuals that want to break into the industry and for individuals that want to build a bottoms-up community for early distribution, what used to take five to 10 years of relevant experience at another gaming company. First-time founders can actually use a community that they build on another platform to essentially validate the idea and give investors a peace of mind about what they’re building.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
I think it all comes down to a unique insight and a competitive advantage when it comes to distribution. And so, I’ll use these new [Zoom] apps as an example, I think that they’re a great example where there are certain aspects of roles and certain highly specialized skills where teaching educating and doing your daily job on Zoom won’t actually cut it. I do foresee AR applications becoming an integral part of certain types of work. I also think that now that as a lot of the larger platforms such as Zoom are more open, people will start building on the platforms and there will be AR-specific use cases that can help industries where, you know, a traditional video conferencing experience doesn’t quite cut it.
Jacob Mullins, Shasta Ventures
What are your general impressions on the health of the AR/VR market today?
It feels like there is a fresh wind coming into AR/VR driven by the stark shift in work and life due to the effects of the COVID-19 pandemic, and the near-term accessibility of devices, namely Quest 2.
Ubiquitous remote work is creating demand for new experiences for virtual collaboration, especially in industries that work with physical products or remote training for physical jobs. More broadly, in-person experiences like conferences and networking events are looking to virtual platforms to enable virtual mingling to simulate social serendipity. At home, going to the shopping mall has become obsolete. The demand to view products in your own space has greatly increased. Fashion and beauty companies are turning to “virtual try-on” solutions in AR.
Quest 2 is a high-quality VR device finally at a price point and form factor that has a chance for mass market adoption. And Apple keeps teasing its AR Glasses coming next year, while social platforms have fully enabled AR experiences in their cameras (Snap, Instagram, Facebook, etc.). Five years ago, AR/VR hardware devices were just too expensive and clunky to scale. Today there is a chance.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
The difference between then and now, is that with Quest 2 there is a chance to scale a customer base. It’s a nuance, but companies won’t find success because they are “VR,” the companies that find success will have done so because they built the best product, and VR is how it’s delivered. It’s still early, but it’s no longer too early. I’ve been seeing companies in physical product development/collaboration and AEC (architecture, engineering, construction) who are starting to gain real customer traction. Repeatable customer demand and growing revenue would get me over the hump.
More broadly, do you think virtual reality offers any meaningful opportunities in gaming or is it really just another type of display and input?
VR has a MASSIVE opportunity in gaming — gaming is the first scale use of VR — new billion dollar game IP/franchises will be built here. It won’t be a copy/paste of prior platforms; VR offers a fundamentally new canvas for amazing gaming creativity.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
I want to see real, repeatable customer purchase of AR software products. I want to see more than “pilots,” and purchasing coming from core lines of business, not the “innovation budget.” Customers vote with their wallet; if AR is truly a useful product solution for them they will be willing to pay for it. I counsel AR entrepreneurs to not give anything away for free, make people pay, only then you will find PMF.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
I am not investing in AR/VR hardware; it’s so complex and cost intensive. It’s best to let the major tech companies build these platforms.
Gigi Levy-Weiss, NFX
What are your general impressions on the health of the AR/VR market today?
Market is sadly not happening yet … AR is simply not anywhere hardware-wise (until Apple comes out with their device probably) and mobile device AR is very limited and still a small niche. In VR the Quest is finally a good device, but content is still lacking … I fear these markets are still realistically a few years away from fulfilling their promise.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
Not just a good idea but some indication that the experience is amazing on today’s devices and has amazing customer acceptance. Haven’t seen anything like this recently.
More broadly, do you think virtual reality offers any meaningful opportunities in gaming or is it really just another type of display and input?
I think that when VR really happens — it will change gaming forever. Truly immersive games are the future — it’s just a question of when it will happen.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
I will need to see consumer devices … Before there are really amazing devices that every user can enjoy, investors are unlikely to invest in most AR gaming startups.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
Currently it feels that the big guys will dominate both AR and VR hardware. They are aware that whoever will dominate the hardware platforms could risk their core businesses and are therefore committed to owning these platforms. This is not likely to change — hence less opportunities in the hardware field IMHO.
Brayton Williams, Boost VC
What are your general impressions on the health of the AR/VR market today?
All our VR companies are growing month over month in both the consumer and enterprise markets at speeds never seen in the previous years. COVID-19 has played a significantly positive role in the adoption of VR and both total user count and time spent in headset continues to show improvement across the board.
We need to continue to see improvements in hardware and ideally more players enter that space.
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
Because absolute headset numbers are still low but continuing to grow, we look more for time spent in headset or retention rather than total user count. We want to see founders create that sticky product that delivers the best 15-30 minutes of someone’s day. VR is magical and we want to continue to see products that wow users. Also because timing the market remains difficult, our mantra at Boost VC is to be the cockroach. Don’t die!
More broadly, do you think virtual reality offers any meaningful opportunities in gaming or is it really just another type of display and input?
VR offers a ton of meaningful opportunities. For anyone who has used the products, they don’t see it just as another type of display and input. It is much more than that.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
Besides Pokémon Go I don’t think we have seen the engagement numbers needed for AR. We believe VR is still the largest long-term opportunity of the two. AR complements the real world, VR creates endless new worlds.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
This is a very difficult space to be building in. Facebook is most likely selling the Quest below cost with minimal revenue still coming in from the software compared to FB. I do think there is an opportunity to develop a better consumer headset, with some mistakes Facebook is doing at the moment. Will take an investment and time but there is a big opportunity at the end of this.
Greg Castle, Anorak Ventures
What are your general impressions on the health of the AR/VR market today?
The VR bets of several years ago have largely struggled to pan out, if you were to make a startup investment in this space today what would you need to see?
More broadly, do you think virtual reality offers any meaningful opportunities in gaming or is it really just another type of display and input?
100%. The unique super power of VR is the ability to transport you into new immersive environments that make you feel a real sense of presence. Gaming in VR is truly a magical experience.
Most investors I chat with seem to be long-term bullish on AR, but are reticent to invest in an explicitly AR-focused startup today. What do you want to see before you make a play here?
AR is still years out. I want to know how a company creating AR technology is going to survive until AR reaches mass market.
There have been a few spectacular flare-outs when it comes to AR/VR hardware investments, is there still a startup opportunity in AR/VR hardware?
How many startups do you know of that make flat-screen TVs? Consumer hardware, especially in the display space, is incredibly expensive and takes years to bring to market at scale. It can be daunting to invest in this space. That said, if you see something interesting, let me know ;)
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