Investors are excited about AR and VR, just like most of the tech world is. But they see things through a different lens. Given risk profiles and often-higher stakes than other entities in the AR and VR landscape, they have additional layers of insight and consideration.
They also have perspective that’s advantaged by depth and breadth. The former comes from the diligence they apply to investment opportunities with individual companies. The latter comes from looking at several companies and sectors. This positions them to see things that others don’t.
So ARtillry ventured (excuse the pun) to capture that perspective in a new report. We’ve spent much of the last year talking to investors, and attending industry events where top investors speak. The result is a collection of insights, which we’ve synthesized into a categorized narrative.
Where do AR and VR investors see the biggest opportunities? What are their investment theses? What factors signal strong financial upside? What do they look for in a pitch? Finally, what can the rest of us take away from those insights in order to choose the right paths in AR and VR sectors?
These questions are tackled throughout the report, and the key takeaways can be seen below. Topics include enterprise versus consumer approaches; high-end AR and VR versus more rudimentary (but scalable) mobile formats; and strategies around content.
Investors we’ve spoken to have lots to say on these topics that will steer the course of AR and VR. Their credibility is stronger than many other industry voices, given not only unique vantage points mentioned above but another key factor: They’re putting money where their mouths are.
Smart Money: Insights From AR & VR Investors
AR & VR have elicited considerable investor excitement and projections of smartphone-sized transformation.
— We’ve witnessed a rise in AR and VR-focused investment firms (Presence Capital, The Venture Reality Fund, Super Ventures), and corporate VC firms (Comcast Ventures, Qualcomm Ventures, Intel Capital, Lenovo Capital).
More than $4 billion in venture funding has been invested in AR & VR companies since 2012.
— Magic Leap alone has received $2 billion, which should signal caution, but we believe funding dispersion will even out.
— AR companies have received the most funding, followed by consumer VR, enterprise VR, and VR games.
Underlying tech has received the most funding recently, followed by video content, games and peripherals.
— In this relatively early phase, building blocks hold a large opportunity, including haptics, processing and inputs.
— All parts of AR & VR’s collective spec sheet are underdeveloped, creating opportunities across the board.
Addressable market is a big investment criteria, and is currently diminished by consumer VR’s small base.
— Consumer hardware ubiquity is marked by 100 million units. VR headset penetration is currently 17 million units.
— Until consumer VR reaches ubiquity, enterprise and mobile AR hold nearer-term opportunities for scale.
Mobile AR’s benefits include volume penetration, portability, all-day access and frequency of use.
— ARkit and ARCore create 505 million AR-compatible smartphones today, increasing to 4.3 billion by 2020.
— ARCore is advantaged by a lower-friction web AR approach. ARkit is advantaged by more structured revenue models.
Enterprise AR & VR have more receptive buyers than consumer markets, due to a strong ROI case.
— Enterprise AR & VR can benefit from the unit economics of SaaS pricing/packaging.
— Successful enterprise execution is often found in entrepreneurs with vertical or industrial knowledge.
— Knowledge of enterprise software dynamics and business processes (in addition to VR/AR) is a winning formula.
— Warning signs of enterprise approaches include lack of customer diversification or recurring revenue potential.
AR & VR content companies can be risk prone, and don’t often see venture-sized returns or exits.
— There can be longer-term value and recurring revenue outside of content itself, such as merchandising.
— Broadcast-focused AR & VR companies can tap into the sector’s scale and receptiveness to innovation.
Social is thought by many to be AR & VR’s eventual killer app, especially VR.
— Social functions can make games and apps more multidimensional, with greater appeal for repeat usage.
— Social can also amplify growth potential through viral marketing dynamics and network effect.
After product, market and other aspects of business models are optimized, pitch tactics must equally be refined.
— The art of pitching investors includes proper selection, “networking in,” and streamlined talking points.
— Key tactics are specificity, quantitative-focus (unit economics, market size, etc.) brevity, and humility.
The consumer VR sector is experiencing a shakeout, meaning deceleration of new investments and a funding crunch.
— This will impact existing players who will compete for a finite supply of follow-up investment rounds.
— New entrants should model out spending levels, cash and the macro environment.
— All players should build conservative to aggressive forecasting ranges and operate lean.
Disclosure: ARtillry has no financial stake in the companies mentioned in this post, nor received payment for its production. Disclosure and ethics policy can be seen here.