Try as he might, Madrona managing partner Tim Porter could not get Sachin Deshpande to share much of anything about Magic Leap.
The two were on stage last week at a virtual reality conference in Seattle. Deshpande is senior director of product management at Qualcomm Ventures, an early investor in the Florida augmented reality company, which Tuesday announced a $793.5 million funding round. Alibaba Group, a new investor, led the round, which also included new backers Warner Bros., Fidelity, JPMorgan Chase, and Morgan Stanley. Prior backers including Google and Qualcomm also participated.
Deshpande, Porter, YB Choi from Vulcan Capital, and Seattle-based angel investor Charles Fitzgerald share enthusiasm for virtual and augmented reality with a growing group of investors—more than 200 were actively placing bets in the sector last year by one count—but they also expressed some skepticism and uncertainty about what will actually catalyze a new industry to substantiate the hype.
And let’s be clear at the outset. From a funding perspective, there’s Magic Leap—doing something that looks incredibly cool with holograms projected on the real world—and there’s everyone else in VR. Magic Leap has captured 72 percent of the roughly $1.9 billion invested in virtual reality in the last 25 months.
Fitzgerald, who previously worked on platform strategy at Microsoft, says the excitement around VR is warranted, though, as with every big advance in technology, the timing is less certain. “I do see VR as a fundamental platform leap, which means that we get to re-do a lot of things,” he says. “There’s a whole ecosystem that has to get built out.” But the question is, he says, “How does that platform come to fruition?”
“We’re looking for anything that can unleash VR. We don’t know what that is,” Deshpande says. “This is a brand new world, as mobile was over a decade ago.”
With high-end VR headsets set to reach consumers this year, will 2016 be the year that a virtual reality platform is capable of supporting a broader ecosystem of software, content, services, and industry-specific applications? “We actually forecast that next year is the year the platform might emerge,” Deshpande says.
Investors are wondering: how many VR units will be in the market in a year, or two? Do you count low-end devices such as Google Cardboard—essentially a pair of lenses to enable viewing of VR content on a smartphone—in the same category as the forthcoming Oculus Rift and HTC Vive? (Google announced last week that more than 5 million Google Cardboard viewers had shipped since it was introduced a year and a half ago. The company made the design available to anyone, and a number of manufacturers, including View-Master—yes, that View-Master—are making them.)
Choi says Vulcan performed “a pretty advanced, complex modeling exercise” to forecast the magic number. “Our range is somewhere between 25,000 and 300 million,” he deadpanned. “We’re pretty confident about that.”
But seriously, folks. There was consensus among these investors, who spoke as part of a day-long conference produced by the Technology Alliance, that gaming is the obvious first market for high-end VR devices. Gamers, Choi says, “are ready to get one of these things tomorrow and start using it.”
When a new platform emerges, the first wave of applications tend to be merely old apps on a new platform: “Clearly, tons of gaming stuff is going to move to VR,” Fitzgerald says. “But what’s really interesting is the second phase, when you start to figure out the new capabilities of the new platform, and start to do things we haven’t seen before.”
He’s bullish on potential commercial applications in areas such as data visualization and collaboration. One such example is a partnership between Redfin, the Seattle-based online real estate brokerage, and Matterport, allowing an immersive 3D walk-through of homes listed for sale. Sib Mahapatra, manager of strategy and new ventures at Redfin, says some 90 percent of the homes listed for sale by Redfin brokers last year were scanned with Matterport cameras. “Real estate is one of the most intuitive applications for something where the biggest value is presence,” he says.
Fortune 500 companies will have an easy time writing big checks for VR technology, Fitzgerald says. But it’s a different story for a consumer to spend thousands of dollars on first-version hardware and software. “What that consumer adoption curve is going to look like is really hard to say,” he notes.
Despite the uncertainty, investors are flocking to startups working across the spectrum of virtual and augmented reality technologies, and 2016 is already a record year, thanks to Magic Leap’s massive Series C funding round. That round by itself is more than double the $349.9 million raised across 73 investments in North American virtual reality companies in 2015, according to data from Seattle-based PitchBook. In 2014, $720.6 million was raised across 47 deals, though the lion’s share of that went to Magic Leap’s $542 million Series B round.
Deshpande says Qualcomm’s $25 million stake in Magic Leap (prior to the Series C, though Qualcomm participated in the latest round, too) was the largest single investment the corporate venture arm has made.
And more investors are chasing the opportunity. PitchBook counts 204 active VR investors in 2015 (including venture firms, angel investors, corporate VCs, and others), a 56 percent increase over 2014.
Fitzgerald says it’s still early days, and that questions about how many units will be in the market in the next couple of years miss the bigger transformation occurring. “I think people are being very short-term. The question is, What’s your timeframe? Almost any startup you look at in this, it’s a five- to 10-year investment cycle,” he says. “If you have that sort of a timeframe, I actually think it’s a great time to invest.”
