Investors show appetite for VR

The global VR sector is starting to prove its business case to investors. TMT Finance reporter Gabriel Prieto explores some of the underlying themes and recent M&A and investment in the space. 

A total of 218 Virtual Reality initiatives  received a total of US$2.3bn worldwide as of February 2017, according to a VR market research report by entrepreneur Michael Hoydich in partnership with Samsung NEXT, the research arm of the South Korean tech giant.

VR refers mainly to three different segments: Virtual Reality, 360 videos, and Augmented Reality. These three concepts have been the centre of attention for many investors since the technology took off worldwide in March 2014.

Investor appetite has been driven by expectations that the VR industry will yield high returns in the near future. VR is expected to produce around US$65bn in revenues by 2021, according to data provided by the research firm IDC.

Funding rounds range from seed capital in cases like Pandora Reality, which received a US$0.10m investment, to series C investments in cases like Unity, which received a US$181m investment from eight investors: DFJ Growth, China Investment Corporation, Frees Fund, iGlobe Partners, Sequoia Capital, Thrive Capital, and WestSummit Capital. The latter also received funding from private investor and tech entrepreneur Max Levchin.

But Magic Leap, a Florida-based startup, dwarfed these investments when it received US$793m in a series C fundraising in February 2016. The company has been working with what is known as mixed reality - a type of augmented reality that goes beyond what other companies have ever achieved - and it attracted the attention of giants like Alibaba, Google, JP Morgan, Morgan Stanley, and Qualcomm Ventures, which invested both debt and equity.

Google is a recurrent name when it comes to VR and 360 video. The company is also funding the German startup Fragment, and other tech giants are equally keen to provide funding for such companies.

With APIs like WebVR, all website managers have the possibility to enable VR content on their webpages. It is because of this that “investors see that there is a market,” said Thomas Seymat, VR coordinator at Euronews.

Other investors and VR executives, present at the TMT M&A Forum in March 2017 in London, agree with him.

The executives, who preferred not to be named, said that as of right now, hardware development is the only profitable VR market. The CEO of an Israeli startup that built its own camera system for 360 video on 3D explained that although high returns are expected, the profitability of the sector is still unclear. “There are some limitations, driven by the high investments that are needed in this unexplored territory,” he explained at the event.

The CEO of the startup currently developing a consumer-targeted app explained that the main challenge for the content creation industry is “the lack of high resolution, driven by the technological limitations that content developers are currently facing.”

Even if VR hardware is improving quickly, with better cameras and devices continuously under development, limited network connectivity could curb the chances of VR becoming mainstream any time soon. Telecommunication networks might not be ready for the use of mainstream VR just yet. “Network operators have to start thinking about the demand of bandwidth Virtual Reality and 360 videos are going to require once the quality improves and they are accepted by the general public,” said an analyst at the TMT M&A Forum.

But operators are working on the issue. AT&T announced that it is in the process of acquiring US-based communications operator Straight Path for US$1.6bn. The move will add a portfolio of millimetre wave (mmWave) spectrum, including 39 GHz and 28 GHz licenses to AT&T. The acquisition of these waves will allow AT&T to support its efforts in 5G development, necessary to accelerate the delivery of experiences such as Virtual and Augmented Reality. Straight Path shareholders will receive US$1.25bn, which will be paid using AT&T stock. The transaction, which was advised by Evercore, is expected to be completed within 12 months, subject to FCC authorization. Weil, Gotshal & Manges LLP provided legal counsel.

Investors believe that the VR industry’s revenues are going to be driven by the applicability of the technology to other markets, such as health and education. They also believe that entertainment and media companies will seek to use VR technology, but they will likely not be the industries spearheading the development of VR, as they do not expect similarly high profits coming from these investments in media.

Matterport is an example of this trend. The company has created a 360-camera device with a marketing strategy focused on other businesses. In addition to the camera, the company offers 3D mapping of interior spaces and cloud services, which would allow potential clients to virtually explore real spaces. The company specifically targets residential property, commercial real estate, retail and restaurants, hospitality and events, construction and architecture, arts and culture, and news and entertainment.

The lack of interactivity-measuring tools in current VR apps is another limitation identified by experts.

There are companies that have set sail towards the creation of B2C content. These companies are planning on using three business models: subscription, advertisements, and partnerships with big distributors.

One of the companies that has attracted lots of attention from investors in the B2C is NextVR. The firm offers NBA basketball games content in 360 video, and is leading the investments in the entertainment sector - it attracted US$80m in a series B fundraise in August 2016 from CITIC Group Corporation, Comcast Ventures, Dick Clark Productions, Formation 8, RSE Ventures, The Madison Square Garden Company, and Time Warner Investments.

The California-based startup sealed a five-year partnership deal back in February 2017 with Fox Sports to stream - via Oculus Rift and Daydream - Virtual Reality sport experiences where Fox Sports holds the broadcast rights.

Jaunt, another leading Californian startup, is currently developing both content and gear. The company attracted US$65m in a series C fundraise in September 2015 from China Media Capital, Evolution Media Partners, GV, Highland Capital Partners, InnoSpring Seed Fund, Redpoint, Sky, The Madison Square Garden Company, Axel Spring, Disney, Participant Media, and ProSiebenSat.1 Media.

However, it is clear that these companies, even with such bulky budgets, are still far from making profits. “The industry is just starting, and all the efforts are centred on attracting the masses’ attention,” says a consultant during the VR session at the TMT M&A Forum 2017. People are expected to spend less than £250 on VR equipment, analysts say. But they are positive that the VR gear will be a “gift wrapper” for the upcoming Christmas holidays, which would boost the reach of VR content.

Analysts and startup executives at the TMT M&A Forum 2017 agreed that there are two ways of making content with VR. One is to make low-value content that is delivered periodically. The other one is to create high-value pieces, which implies more costs in terms of time and budget.

In the content realm, Baobab studios has been labelled as the Pixar of VR. The company has focused on developing high-value content, and has created pieces like ‘Invasion’ and ‘Rainbow Crow’. The studio has received a total of US$25m from a series B fundraise. Amongst its investors were Twentieth Century Fox, Horizons Ventures, Evolution Media Partners, LDV Partners, Shanghai Media Group, and Youku Global Media Fund.

Another company that has attracted the attention of media investors is Within. With a series A fundraise of US$12.6m in June 2016, the company gathered enough funding to work on their storytelling ideas with VR. Some of the investors were Andreessen Horowitz, Marker, 21st Century Fox, Annapurna Picture, Freelands Ventures, Legendary Entertainment, Live Nation Entertainment; Vice Media, WME Entertainment, and Tribeca Enterprises.

The startup Dreamscape Immersive has also attracted the attention of big names in the content creation industry. The startup plans to launch a VR Multiplex in Los Angeles later this year. With US$11.36m of funding coming from 21st Century Fox, Bold Capital Partners, IMAX, MGM, Warner Bros, Westfield Corporation, and Steven Spielberg, the company expects to actively transport the audience into alternative realities.

All this suggests that making VR profitable business will be the main challenge for the industry. Its economic success will likely decide whether VR will be another short-lived hype or a sustainable digital industry. However, the advances of companies in the VR industry give reason for optimism.