The DeanBeat: In the VR industry, a thousand startups will bloom. Most won’t make it

We’re all trying to get a handle on virtual reality, and its cousin, augmented reality. Will it be a bust? Or will the two industries become a $150 billion market by 2020, as tech advisor Digi-Capital predicts? Will the game segment of these industries look more like mobile or consoles?

I’ve moderated three sessions on it in the last few weeks, conducted more interviews, watched a lot of talks, and attended two VR conferences (including one in Seattle and another in San Francisco). That in itself tells you about one of the hottest sectors in gaming now. VR and AR are the frenzy of the moment, as evidenced by the packed room at the stately Intel Capital Global Summit in San Diego, where I moderated a panel of VR and AR veterans. The VRX conference in San Francisco was also packed this week. And in a demo, I nearly toppled as I (virtually) walked across a wobbly ladder that was strewn between two icy cliffs on the trek up Everest. Now I’m struggling with the question, “Have the early pioneers done too good a job of evangelizing and inspiring entrepreneurs?”

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Our own VB Profiles estimates there are 234 startups that have raised $3.8 billion to date — all of them created in a very short time. They’ve created a collective enterprise value of around $13 billion, and they employ around 40,000 people. Independently, Nvidia chief executive Jen-Hsun Huang said his graphics chip company is in touch with around 250 VR companies. That’s all for an industry who principal products haven’t launched yet, and I’m aware of at least two seed funds forming to invest in VR games and other VR apps.

I believe that giants like Facebook, Google, Amazon, and Microsoft will drive VR and AR forward as part of their giant chess game to outwit each other. At this rate of startup creation, with more funds to add fuel, I would not be surprised if there were a thousand VR and AR companies a couple of years from now. Most startups will fail. A few will create something fantastic. We’ll have simple VR apps that become blockbusters. And we’ll have complex, intricate virtual worlds that will make us feel like we’re in the Star Trek Holodeck. Startups are going to need a lot more time and money than they think to get their shot. CCP Games just raised $30 million to make VR games like Eve Valkyrie. I’m guessing they’re going to need $100 million before they’re through. They should move at fast, but not insane, speeds to the VR Gold Rush. And then they should expect AR to take over.

I did a sanity check on the number of VR companies in an interview with Huang of Nvidia, which was the sole survivor of the cycle that saw the creation of more than 70 3D graphics chip companies in the 1990s.

“Not all of them are going to make it. We’re working with some that are head-mount displays, some that are virtual reality cameras, some that are software stacks or engines, some that are applications, some that are making amusements or location-based entertainment, some that are in design, some that are in medical, some that are in communications. It’s craziness,” he said in an interview. “VR is a computing platform approach. It’s not a market. This new capability is enabling a lot of markets.”

Asked if the number of companies was right, he said, “It’s almost appropriate because there are so many industries. People in the automotive industry are working on VR. People in design, architecture, location-based entertainment. All of these industries are completely unrelated. The one thing that is related is that they all need a platform to do their work….You have to multiply by the number of geographies. There are some in China, some in the U.S., some in Europe, some in Latin America. It’s all over the place. It’s good. I would agree that if there were 17 head-mount display companies all trying to go after gaming, that would be a waste. But there aren’t.”

The first major product is the Samsung Gear VR, a mobile headset which works with four Samsung smartphones. It launches on November 20, and it works reasonably well. At the high end, we’ll see the Oculus Rift from Facebook’s Oculus VR and the HTC Vive (built with Valve’s Steam VR) early next year. Sony plans to bring VR to the PlayStation 4 game console in the first half with a product called PlayStation VR.

Everybody realizes that VR is a new vector for games, and creating successful titles that don’t make people throw up from nausea will be hard to create. So the learning has to begin now, and the investments have to happen now. When the new systems launch, a ton of companies will try to get there first. Most will fail. The installed base of systems won’t hit a critical mass for a while. Startups are going to need deep pockets so they can learn, fail, and learn again before the Gold Rush arrives, according to Jason Rubin, head of worldwide studios at Oculus.

VR has led an accelerated life since Palmer Luckey created his first prototype for the Oculus Rift in 2012. Upload VR, one of ten VR meetup that formed in Silicon Valley, got its start in May of 2014, right around when Facebook bought Oculus for $2 billion. Upload VR started with 60 people in Silicon Valley. It drew 500 people in October, and it attracted 1,400 in January. Then it became a whole conference unto itself this fall. Developers are going to these things and consuming every piece of information they can get about VR. That could lead us to think that we’re only going to see everything get better from now on.

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But what would happen if a thousand companies show up, maybe 20 of them turn into viable businesses, and those businesses take a lot longer than the startups expect to bloom? We can expect this will happen because it has happened before. Business author Geoffrey Moore wrote a best-selling business book about this pattern in Crossing the Chasm, where he noted how it’s very hard to bridge the period between the creation of a new market and the arrival of the masses. Andy Grove, former CEO of Intel, referred to this chasm as the “Valley of Death” for startups during the era of the dotcom boom and bust.

John Riccitiello, chief executive of Unity Technologies, said in our fireside chat at VRX that he is very bullish on the long-term prospects for VR gaming. Unity is getting ready for an era where tools will make it easy to produce the content.

“I’m nervous that conferences like this exist at all. It seems like we all expect to see a brand new head-mounted display under every Christmas tree. There’s this notion that it’s all here now. My honest expectation is that there won’t be a consumer market for AR and VR for two years, probably, if not four,” he said. “We haven’t gotten the kit together where it’s a powerful enough compute box. AR and VR require enormous compute power. The creative challenges around what a game is, what a movie is, what some of the other applications are — even just basic chatting — aren’t figured out. Content creation in this space is not figured out.”

He added, “Within 10 years, or probably six or seven, a billion people will be wearing a head-mounted display, and it’ll be the most incredible thing you’ve ever seen. It’s going to be big, and I’ve been through many platform transitions and platform creations. I see the earmarks here. I’m quite certain of it. What I’m also quite certain of is that the party might feel like it’s over before it’s started. A number of folks in the industry want to say it’s not a big deal, and in 2016 they’ll probably be right. We’ll go through a gigantic wave of hype, and then it’ll break when people aren’t that excited about what they can get.”

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VR is getting “shot out of a cannon in a ready-fire-aim sort of way,” Riccitiello warned.

Tim Sweeney, CEO of Epic games, said in our fireside chat that everybody wants to create the Metaverse, this science-fiction idea of a virtual world (from Snow Crash by Neal Stephenson, who is working at AR company Magic Leap, by the way).

“We have to be careful,” he said. “We’ve learned a lot about the workings of the Internet from social networks and massively multiplayer games. These are real world incarnations of something like the Metaverse. But they’re going to have some fairly significant differences. Like most real-world things, they’re not going to be quite so utopian. They’re going to be shaped by market forces and social forces. We’ve seen all these attempts eventually degenerate into chat-oriented universes rather than game-oriented universes. Having rule systems and game systems in place to guide players is a big part of it.”

It’s also different from the evolution of games in one important respect. Mobile is coming first, ahead of the PC and the consoles. In the past, the high-end systems evolved first. Now we’re going to get both a low-end and a high-end experiences at the same time. Sweeney is one of those worried about an “indiepocalypse,” as a million indie game developers discover that only 500 companies or less will make money in mobile gaming’s future.

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“Here in the Silicon Valley area, I think a lot of people are approaching this from the point of view of the mobile gaming revolution and trying to extrapolate that to VR,” Sweeney said. “But VR is very different. The mobile gaming experience is fundamentally limited by this very small screen in front of you that occupies maybe 15 degrees of your field of view. The PC and console experience you have a 45-degree field of view. VR is 120 degrees, your entire view space. The expectations of users on the platform will rise to levels we’ve never seen before. The console and high-end PC businesses have a lot more to teach us about development in this business than the mobile business. We’re going to see large teams producing some very novel, high-end experiences. They’re going to redefine the state of the art in photorealism.”

I would bet that Epic Games, which has produced cool VR demos such as Bullet Train, will be one of the companies that eventually gets VR gaming right. They’re certainly enthusiastic about it.

“Anybody who’s ever experienced a compelling VR experience can tell you. ‘Why is this happening? Because it’s amazing.’ This is going to redefine how we interact with technology and computers over the next decade and beyond,” said Ray Davis, head of the Seattle studio at Epic Games, in a panel I moderated at the Intel Capital Global Summit. “Over the next year, especially, this is going to be a critical year for VR. Oculus, HTC Valve, lots of these manufacturers will be bringing headsets out there. We’re going from a small tool that 100 or 200 developers can access to potentially thousands or tens of thousands. Then you’ll see a massive wave of creativity and expansion of what’s possible on the platform.”

Davis added, “I see a lot of similarities to what happened with mobile phones. When Apple introduced us to the iPhone and the App Store — “Hey, look at this touch thing” — it started with fart apps. But eventually it led to some really compelling experiences that didn’t make sense on a PC or laptop or any other form of computing. Where we’re going with VR and AR is just a natural evolution.”

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Success will come down to who carves out the right niche and creates the product that everybody has to have. All of the speakers are raising the right questions about VR and AR. I guess we’ll find out soon enough who’s right, as the VR era starts next Thursday with the launch of the Samsung Gear VR. Cross your fingers, pull out your wallet, but keep a bucket nearby.