This post is an excerpt from the ARtillry Intelligence Briefing, Smart Money: Insights from AR & VR Investors. It pulls from the section of the report that introduces the investment climate and segments its areas of opportunity, including AR & VR “building blocks.” Preview the report here and subscribe to access the entire thing. 


The VR/AR Climate

Along with mobile technologies and SaaS-based enterprise software, few areas in the past decade have gotten investors as excited as AR and VR. Also known as immersive computing, many investors predict that it will be the next transformational computing shift, on the order of smartphones or PCs.

“Looking for the next major computing platform, people often posit that it could be autonomous driving, robotics, or drones,” Comcast Ventures’ Michael Yang told ARtillry. “As a diversified technology fund, we’re always chasing big markets in computing. We think VR/AR is one of them.”

Confidence signals include the fact that some forms of AR and VR build from the foundation already set by the smartphone ecosystem, including hardware and distribution (app stores). It’s also both consumer and enterprise-relevant, global and validated through investments from tech giants.

“When was the last time you saw a technology where you have Google, Facebook, Apple, Microsoft, Samsung, Sony and HTC beating each others’ brains out,” said Yang. “If they’re focused on this, it’s going to go somewhere.”

Proof Points

To back up investors’ excitement levels, it’s best to look at where they’ve placed their chips. Turning to figures from SuperData, there’s been roughly $4.1 billion spent on AR and VR companies since 2012. And the 2017 annual total is on pace to hit roughly $1.6 billion.

There’s also been an increase in AR and VR-focused investment firms such as Presence Capital, The Venture Reality Fund and Super Ventures. Venture capital arms of tech giants have also shifted focus to AR and VR, including Comcast Ventures, Qualcomm Ventures and Intel Capital.

“A surge in the number of VR/AR focused funds indicates high interest and enthusiasm in the market,” said Orange Silicon Valley (OSV) business strategist Kristie Cu. OSV is a strategic investing subsidiary of French telecom carrier Orange, and has made VR investments such as Wevr.

AR and VR investments have also interestingly happened outside of the usual suspects of tech-focused venture capital firms on Sand Hill Road. Though many of them are warming up to immersive technologies, investing has mostly come from the above companies and some overseas capital.

“I was looking at VR and AR investment over the past couple years, and I don’t think I saw a single traditional Silicon Valley venture firm,” said Ben Narasin, general partner at Canvas Ventures at the AWE conference. “It’s a lot of strategic [investors], and money out of China.”

Segmenting AR & VR

Though funding totals so far indicate a strong level of confidence for AR and VR, it’s important to note that most of it went to a few companies including Unity, Improbable and Magic Leap. In fact, this month, Magic Leap closed a $505 million series D, which brings total funding to $2 billion.

This isn’t entirely surprising, as funding in emerging sectors will sometimes cluster in this way. But when looking at funding levels as a leading indicator of industry health, it should be noted that a few large outliers like Magic Leap have boosted total spending figures. We believe this will even out.

As for technologies being funded, AR companies have received the most money, according to Superdata, followed by consumer VR, enterprise VR, VR games and VR hardware. For the latter, tech giants like Google and Facebook do most of the building, rather than venture-backed startups.

DigiCapital has gotten even more granular in categorizing funding by sub-sector. Of the $800 million it tracked in AR and VR funding in the second quarter of 2017, underlying technology received more funding than any other category. That was followed by video content, games and peripherals.

This dispersion of sub-sectors brings up another important point: The AR and VR ecosystems are segmented and nuanced. Though interlinked, each has its own dynamics and technological underpinnings. They should likewise be viewed with different metrics and expectations.

“We have learned because it’s a fast moving industry, that certain segments within VR have taken off and they have little curves and trajectories in and of themselves, said Comcast Ventures’ Yang. “So you can’t describe [AR/VR] as a whole monolithic investment climate.”

Collective R&D

The focus on underlying technology in DigiCapital’s findings is reflective of AR and VR’s early stages, during which enabling technology is vital. This is a concept that was validated by many of the investors we’ve talked to, and is reflective of some of the opportunities they’re tracking.

In this relatively early phase, there’s funding emphasis – and thus startup opportunity – on building blocks. Technologies like haptics, processing and inputs are attractive venture funding targets. Input controls are especially important, and a key focal point for Super Ventures’ partner Matt Miesnieks.

“Most of the input systems we use are a single mode. It might be voice or gestures or touch,” he said at June’s AWE conference. “I’m interested in solutions that are multimodal, that combine gesture with voice and computer vision, and intelligently tie them together to get a more natural means of input.”

Examples of this principle include eye-tracking startup Eyefluence, which Google acquired last year for an undisclosed sum. And Ultrahaptics received $23 million in series B funding in May to advance its ultrasonic haptics technology for AR and VR – another key building block.

“We provide haptic feedback using ultrasound so you can get a sense of touch, just putting your hand in the air,” Ultrahaptics VP of strategic partnerships Robin Alter told ARtillry. “We vibrate the nerves on your hand so that when you reach out, there’s an object or texture right there in space.”

AR/VR investor and Across Realities CEO Steve Lukas adds that AR and VR’s fully-realized vision won’t materialize until we refine these building blocks. That includes technical specs required for immersive computing to be viable for mass-market. It’s all about a collective R&D process.

“Every company working on AR and VR is doing R&D for our AR/VR future,” he said at the AWE conference. “What do we need to achieve the next level of VR so we can get to the medium term? If all we’re thinking is long term, we’re drilling too deep into a market we haven’t saturated.”


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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.