Will You Survive VR's Investment Decline?

Will You Survive VR's Investment Decline?
January 21, 2019

- Lacklustre consumer demand for VR headsets and a drought of capital has led to companies shutting down or laying off workers.

- Some VR companies have found a niche, such as in creating VR attractions in shopping malls.


A few years ago, virtual reality was all the rage in Hollywood, helping to fuel the rise of LA’s Silicon Beach tech hub with the promise of reinventing the entertainment business.


At its peak, investors pumped US$253 million into two dozen deals involving virtual reality and augmented reality (AR) start-ups in Los Angeles and Orange counties in 2016, hoping that pricey headsets projecting virtual worlds would become as popular as smartphones.


But investment in the technology has slowed dramatically in recent years, and what seemed like a promising boom has largely fizzled.


Several California companies that raised millions of dollars have shut down or laid off dozens of workers, as businesses scrambled to readjust their strategies in the face of lacklustre consumer demand for VR headsets and a drought of capital.


“It’s just been a drawn-out hype cycle that’s promised to be the next big thing for so long,” says Nicholas Pappageorge, a senior intelligence analyst at research firm CB Insights. “The investors’ patience for the industry has worn thin.”


The local decline in VR and AR investment is notable because it occurred at a time when overall venture capital funding in the two counties increased 36 per cent to nearly US$6.4 billion last year, according to the PwC/CB Insights MoneyTree Report. Investors parked their money in other areas such as cybersecurity and artificial intelligence.


Why the precipitous decline? Many investors have been skittish about pouring more money into an industry that hasn’t reached critical mass among consumers.

The interest surrounding virtual reality reached a peak in 2014, when Facebook announced it would acquire Oculus, a VR headset maker based in Irvine, Orange County, in a US$2 billion deal. That spurred investors to take the technology more seriously.


“That was the acquisition that spawned a thousand start-ups,” Pappageorge says.


But entrepreneurs and investors underestimated how long it would take for consumers to embrace wearing expensive VR headsets, with high-end versions costing hundreds and, in some cases, thousands of dollars. That put the technology out of reach for many consumers.


Cheaper headsets are now available, but sales still lag far behind voice-enabled smart speakers and other emerging devices.


“All these companies were building for a consumer that wasn’t quite there yet,” says Mark Linao, a principal at Akatsuki Entertainment Technology Fund.

Many VR headsets at the time were clunky, resembling boxes on people’s faces, and there wasn’t enough compelling content to persuade consumers to go through the experience, investors said.


“There have been some great advances in various pieces of the technology but as a whole it’s not grandma-proof,” says Venky Ganesan, a partner at Menlo Park-based venture capital firm Menlo Ventures.


Last year, seven million VR headsets shipped globally, according to an estimate by research firm IDC. That’s a fraction of the nearly 100 million smart speakers shipped in 2018, according to IDC’s forecast.


“The hardware needs to come to the point where people en masse will purchase it,” says Kobie Fuller, a partner at Upfront Ventures, a Santa Monica venture capital firm.


Even Facebook chief executive Mark Zuckerberg acknowledged in September that Oculus is still far from its goal of bringing virtual reality to one billion people.


“We have a saying in Facebook that the journey is 1 per cent finished and maybe in this case [it’s] not even quite [that],” Zuckerberg said during a keynote at an annual Oculus event in September last year. “But I’m confident that we’re going to get there.”


Some companies simply ran out of time. Vrideo aimed to be the YouTube of VR, a distribution platform for 360-degree videos that would allow users to change their viewpoint by moving their heads in a VR headset.


The Santa Monica-based business raised about US$2 million and employed about 15 people at its peak. But investors began to get skittish as manufacturers delayed the launch of new headsets, and bigger players such as YouTube and Facebook began investing in 360-degree video on their platforms, says Vrideo co-founder Alex Rosenfeld. After discussions to sell the company fell through, Vrideo shut down in 2016.


“We were on our last legs on the amount of cash we had left in the bank, and we had no choice but to shut down,” Rosenfeld says.

Meanwhile some players in the industry have been undergoing major restructuring to survive. LA-based company 8i, which creates technology that produces holograms in VR and AR, for instance, laid off workers in 2017 to focus on supporting content for mobile devices.


“If you’re producing content, you want to have an audience to sell that to,” chief executive Hayes Mackaman says. “When the install base didn’t grow, it reduced the market size.”


Even IMAX has pulled back. The Canadian entertainment technology company said last month it would end its pilot programme offering content like VR games based on movies in city centres including Los Angeles. The programme started in 2017 with half a dozen locations. Each centre was expected to cost US$250,000 to US$400,000 to create, not counting real estate expenses. Last year, chief executive Richard Gelfond said the audience was lacking in most of the locations.


“The consumer reaction was extremely positive, but the numbers just weren’t there,” Gelfond said in an earnings call in May.


Nonetheless, at the Consumer Electronics Show (CES) held in Las Vegas earlier this month, virtual and augmented reality companies remained bullish on the future. They cited potential bright spots, such as VR products and apps that can be used in business training, education and gaming. Games like Pokemon Go and Beat Saber that use augmented or virtual reality have been very popular.


To be sure, some VR companies in California have found a niche. Culver City-based Dreamscape Immersive, which has raised more than US$40 million in financing, creates VR attractions in malls where people pay US$20 to experience a virtual reality adventure.


Participants strap on a virtual reality headset, backpack and sensors, and then walk through a room where they experience a virtual world with their friends in a communal experience, where they might grab a real flashlight to ward off a virtual enemy. Dreamscape opened its first mall venue in December at Westfield Century City.


Company executives declined to disclose finances but said shows have been popular and that similar venues will open this year in Dallas, Columbus, Ohio and in the New York area.


Walter Parkes, co-chairman of Dreamscape Immersive, says one of the issues with some of the earlier content available on virtual reality headsets was that consumers were experiencing it alone.


“I was a disembodied observer of 360 video and I’m a human, and humans are social,” says Parkes, a film producer.

The roll-out of 5G may also help boost the industry’s reach. VR content looks best when it is seen with high enough resolution and on machines that can download the material quickly – something that many headsets and smartphones today don’t provide, says Lewis Smithingham, a partner with Los Angeles-based digital entertainment company 30 Ninjas, which produces VR content.


“We’ll be able to get content at quality, quicker [and] better, which is what the consumer wants with our attention spans being as short as they are,” Smithingham says.


Major Hollywood studios have also dabbled in VR, investing in start-ups and providing their own interactive experiences. For example, in 2016, 20th Century Fox released the Martian VR Experience, a roughly 25-minute film that allows users to see space through the perspective of fictional astronaut Mark Watney and drive a rover over craters.


Still, some investors say it may take several years before virtual reality becomes mainstream.


“When the internet first came along, people were disappointed also with its slow download speed and hard-to-use interfaces,” Ganesan at Menlo Ventures says. “These are really hard technologies, and the hype is always way ahead of the reality.”

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