Early stage funding is a good leading indicator of industry health. And in XR, it’s one of the few signals we have to predict market growth, as we examined in our 2017 Lessons, 2018 Predictions, as well as recent discussions with investors.

With that backdrop, and amidst lots of industry concern and curiosity, Digi-Capital announced that 2017 VC funding in the XR sector totaled $3 billion. And it’s good news and bad: That total is up from 2017, indicating that XR’s softness didn’t impact funding levels. But deal flow was down.

Specifically, most funding went to a few deals, including Magic Leap ($502 million),
Improbable ($502 million), Unity ($400 million) and Niantic ($200 million). The concentration means many XR companies won’t secure follow-on rounds, thus the shakeout we’ve speculated.

And as indicated in our “Tech Giants Tackle AR” report, much of the innovation will come from deep-pocketed giants like Facebook, Google, Apple and Amazon, as opposed to venture-backed startups. But the latter will indeed be important for “building block” technologies.

The next few quarters will provide key signals for XR’s health, including the trending of funding levels like this, as well as another key leading indicator: hardware sales. Mobile AR is fairly robust on that measure, given the smartphone installed base, but VR headsets will be the wild card.

We expect movement in standalone VR, starting with Oculus Go’s U.S. launch next quarter. That could give consumer VR the jolt it needs, starting with a greater installed base, which compels more content and apps (developer incentive), which attracts more users. A virtuous cycle.

Stay tuned for lots more commentary and analysis as these variables play out in the coming weeks and months. It will be an important time for XR and the (late to arrive, but still promising) fourth transformation.

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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.