Table of Contents
Introduction
Dreams of a digitally-enhanced environment have long been a fixation in modern society. Those dreams were further advanced by the futuristic vision of a holodeck in Star Trek: The Next Generation. As computational power, software engineering, and display capabilities have increased exponentially, we are getting closer and closer to the realization of this dream. Augmented and virtual reality are becoming viable. It is only a matter of time. In their incessant quest for the next big thing, venture capitalists have taken note and the money is pouring in. 2021 was the second-best year ever for VR/AR investment with almost $4 billion flowing into startups in the space—a figure that was just behind the $4.4 billion invested in 2018.
Factors Driving Investor Interest in AR/VR
An important question to consider is why there is such a gold rush to invest in AR/VR. What are the factors driving investor interest in this technology sector?
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Growing Market Potential: The global market for AR and VR is projected to reach approximately $300 billion by 2024, with AR technology deriving about a quarter of its revenue from industrial and manufacturing industries seeking to leverage its utility with regards to design. Enterprise adoption of AR is also projected to grow 66% CAGR through 2026.
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Use Cases in Various Industries: AR/VR technologies have a variety of use cases that can be harnessed and capitalized across multiple industries. These include education, product design and development, gaming, and retail. Each of these sectors presents opportunities for innovation and growth.
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Advancements in Technology: With the rapid advancements in computational power, software engineering, and display capabilities, AR/VR technologies are becoming more accessible and realistic. This makes them more appealing to both consumers and investors, as the potential for immersive experiences and improved productivity increases.
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Potential for Disruption: AR/VR has the potential to disrupt multiple industries by improving efficiency, enhancing user experiences, and creating new revenue streams. This disruptive potential is attractive to investors who are seeking high-growth opportunities in emerging technologies.
Augmented Reality vs Virtual Reality
What is augmented and virtual reality? And, how are they both different and distinct? Augmented reality is essentially a hybrid digital experience. It is a partially-immersive 3D interactive experience that incorporates both the real world and digital content. As such, it requires far less computational power and novel hardware and is therefore much more accessible.
On the other hand, virtual reality completely replaces the real world with a fully immersive, simulated one rendered by computer-generated graphics. How the user interacts within that virtual world is a function of the rules of the system, whereas in augmented reality, the user has control. This difference in user interaction and computational requirements makes virtual reality more challenging to create and adopt.
To summarize, the differences between AR and VR are as follows:
– AR uses a real-world setting while VR is completely virtual.
– AR users can control their presence in the real world; VR users are controlled by the system.
– VR requires a headset device, but AR can be accessed with just a smartphone.
– AR enhances both the virtual and real world while VR only enhances a fictional reality.
Use Cases
Both augmented reality and virtual reality have a wide range of use cases that can be harnessed across various industries. Some of the key use cases include:
Education
AR and VR can facilitate learning and skills assessment in a more immersive and engaging way. They are especially useful for reducing training risk in unusual or dangerous cases that are difficult to safely simulate in real life. Examples include fighter-jet and other warfare training, as well as remote collaboration or conferences/events, wherein AR/VR make it possible to dramatically expand the reach of the teacher/speaker and increase the quality of communication.
Product Design and Development
AR/VR is also a useful tool for product design and development. It allows designers to simulate and visualize physical products and spaces in a digital environment. This can help in evaluating design concepts, identifying potential issues, and improving overall product quality. Industries such as construction, real estate, and manufacturing can benefit from these technologies.
Gaming
Gaming and entertainment are natural fit for AR and VR technologies. VR offers total immersion and a more immersive gaming experience, while AR can enhance the real-world environment and bring virtual elements into the gaming experience. The gaming industry is always hungry for more immersive digital experiences, making it a promising market segment for AR/VR.
Retail
AR/VR technologies have the potential to revolutionize the retail industry. They can provide an enhanced shopping experience by overcoming challenges such as finding items in-store, assessing dimensions, and visualizing how products will look in real-world settings. 3D catalogs and interactive try-on visualization tools can improve the overall shopping experience and increase customer satisfaction.
Challenges
Despite the market opportunities, there are also challenges in the AR/VR industry that inhibit monetization. Some of the key challenges include:
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Hardware Limitations: The pace of hardware improvements in the VR space has not been sufficient to provide a seamless, well-integrated experience. Greater miniaturization, weight reduction, wireless capabilities, and more advanced sensors are required to improve the VR experience.
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Lack of Standardization: Unlike platforms like Android or Windows, there is no single dominant platform in the AR/VR space. This lack of standardization makes it challenging for innovators to build off a common platform and increases the fragmentation in the market.
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Security and Privacy Concerns: Immersive AR/VR experiences gather and leverage intimate information, making security and privacy crucial concerns. Ensuring the secure integration of body sensors, smartphones, and virtual environments is a complex task that requires careful attention.
Venture Capitalist Perspectives
Given the benefits, challenges, and market opportunities, venture capitalists have different perspectives on investing in AR/VR. Some key points to consider are:
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VR as a Long-Term Opportunity: Many venture capitalists believe that VR is the largest long-term opportunity in the AR/VR space. VR has the potential to create endless new worlds and offers total immersion. However, it is a riskier investment due to the technical challenges and higher computational requirements.
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Short-Term Opportunity in AR: Augmented reality complements the real world and offers a more accessible and less technically challenging experience. AR can be a safer short-term investment with a wide range of use cases and potential for growth.
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Focus on Customer Retention: Venture capitalists look for startups that have a plan for customer retention. While it is important to create fun and immersive experiences, habit-forming experiences are even more valuable. Startups should focus on creating experiences that keep users coming back for more.
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Beachhead Markets: Mobile and sports have been identified as potential beachhead markets for AR/VR. Startups that can create cool experiences with mobile as the entry point or enhance IRL sports experiences with VR have the potential for success.
AR/VR Investors
Several prominent venture capitalists and corporate venture capitalists have shown interest in investing in the AR/VR space. Some of the top AR/VR investors include:
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Bloomberg Beta: The venture capital arm of Bloomberg, Bloomberg Beta invests in powerful ideas that bring transparency to markets and achieve global scale. They are interested in investing in AR/VR to make work more productive, fulfilling, and available to as many people as possible.
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Intel Capital: Intel Capital is investing in AR/VR to benefit from the increased demand for semiconductor chips as the industry develops. They are willing to invest in hardware startups at various stages, including the pre-seed, seed, and Series A levels.
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Dune Ventures: Dune Ventures is an early-stage VC firm focused on gaming, esports, interactive content, and interactive technology. They have made investments in various AR/VR startups, including game development studios and NFT-based web 3.0 games.
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HCVC (Hardware Club Venture Capital): HCVC is the first community-based venture capital firm for hardtech startups. They provide financial support and assistance with business challenges to hardware startups. They have a global community of over 550 startups in 60 countries.
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BoostVC and Lux Capital: These traditional venture capital firms have a track record of investing in leading-edge technologies. They have made investments in AR/VR startups in various market segments, including gaming, image and video creation tools, and scientific visualization.
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Venture Reality Fund: The Venture Reality Fund focuses on driving innovation at the intersection of immersive, spatial, and intelligent computing. They make early-stage and Series B investments in AR/VR startups, including those working on AI-powered AR navigation and communication platforms.
In conclusion, investing in AR/VR offers significant opportunities for venture capitalists. The market potential, wide range of use cases, advancements in technology, and potential for disruption make AR/VR an attractive investment space. While there are challenges, such as hardware limitations and lack of standardization, the rewards can be immense for those willing to take the risks. With the right investments and innovations, AR/VR has the potential to transform industries and create new experiences for users.
