Venture capitalists contemplate how much exuberance is good for VR investing

Question: What do you guys think the impact of web VR will be?

DeMiroz: We’re big believers, and in fact we’re about to close a deal in the next couple of days. As you know, web VR has been sort of stalling. We didn’t know which direction it was going to go as far as how much support it was going to receive from the platforms. But recently both Google and Oculus have gotten behind it, and as a result we’re seeing accelerated adoption of web VR. It’s nice to have content delivery in a browser. You can have multi-mode consumption patterns. You should expect to see web VR coming up shortly.

Zhang: It’s a space we’re actively looking at as well. Given how much penetration there is as far as the delivery medium, it’s an area we’re paying attention to.

Above: Samsung’s Gear 360 and Gear VR headset.

Image Credit: Ken Yeung/VentureBeat

Question: From a prioritization standpoint as far as investments, are you looking for the next Magic Leap, or are you looking at content platforms, content creation, codecs?

Zhang: For us, we look for certain areas, starting with enabling technologies, solving the most basic problems in VR. What’s the best way to stream data? What’s the best way to compress a large amount of data to reach a device? How do you stream assets to multiple platforms? We’re also looking at things like content production, content tools. Enabling technologies that help content creators figure out how they can get to market, that’s something we pay a lot of attention to.

At the other end of the spectrum is content IP. We look at content creators as they come up with really interesting IP. Are they well-placed to leverage that in different markets? Can they distribute their content globally? Can they develop other content based on these initial explorations? That’s what we’re also looking at.

DeMiroz: I can tell you, from our portfolio, out of the 14, five are in content and games. We’re creating a sub-portfolio of content and game companies. These tend to be smaller investments at earlier stages.

Coming from a gaming background, I’ll note that a lot of PC and console developers couldn’t translate their IP to small rectangular screens. It was very different for them — asset management, user experience, funnels, the freemium model was very different. We’re seeing similar hesitation that great designers coming from mobile, PC, and console may not translate to the VR experience. VR gives you an incredible platform to tell great stories, but something like first-person shooting doesn’t do a lot for me in VR. It works on that rectangular screen.

As we expand this portfolio of companies, we’ll probably invest in a dozen or so — early stage, different genres, multiple platforms. But our main portfolio of nine companies, as Michael said, will be at the bottom of the stack or the top of the stack, foundational technologies. We’re investors in Eonite, computer vision technology. We’re investors in Sliver, which is doing esports in VR. We’re investors in Visionary, which is a content creation platform. Michael and I invested in Spaces, which is another platform for content creation and deployment in theme parks. It’s almost a theme park OS.

Those are fundamental technology providers that have immediate ability to monetize in the market. You don’t have to have hundreds of millions of devices out there.

Yang: We look for founders who’ve been practicing the art of VR for at least a couple of years. We’re wary of Johnny-come-latelys who are just jumping in because it’s the cool new thing to do. You have to train. Like Marco just said, a lot of skills don’t carry over. We want to see that you’ve cleared those hurdles on your own time and on your own nickel because you come to us and ask for expensive capital.

The other thing we’re looking for is a story you can tell that allows you to get the rounds of financing after the one we all come into. The first check is the easiest check. The second check is harder. There’s going to be a shakeout. We all know it’s coming. Whether or not your first round of investors will be there to support you — it’s going to be interesting to see what happens in that marketplace. We’ve been accelerating the financing process for most of our portfolio, encouraging them to go out rather quickly — far more quickly than in other sectors — to get it while you can get it.

Above: VR Funhouse is a series of mini games for the HTC Vive virtual reality headset.

Image Credit: Nvidia

GamesBeat: I’m curious what advice you guys would give entrepreneurs as far as how they should think about valuation.

DeMiroz: I’d suggest a balanced perspective. If you look at venture dynamics, a lot of times angel goes in one direction where VCs have significant leverage. In an emerging sector entrepreneurs have leverage because there’s a scarcity of talent. Nosebleeding at the either end of the spectrum doesn’t help. Like Michael said, if you get a great high-priced valuation, what do you do for your next round?

You have to think about venture funding as a journey. You’re going through some of the alphabet. You get that A round and it gives you a platform to achieve your milestones. Then you have the B round. You have to deliver milestones and create successive validations of the growth model. If A is too aggressive — you see companies raising $2 million at $18 million pre. You have to execute flawlessly and build way beyond expectations to get a markup from there. It just doesn’t make sense.

My recommendation is to come up with a model where both investors and founders get a decent ownership after the financing. You have partners who can stay with you for the rest of your journey.

Zhang: In any early technology trends, there are those cases of runaway valuations. We’ve seen what the data says about valuation of companies like that. Survival rates are very tough. We’re wary of that, but at the same time, we encourage our founders to think about growth for the long term. Not just optimizing for right now, but optimizing for five years and further on.

As far as valuations we’re observing currently, things are coming down a little bit. If you were to draw a map of valuations, the east coast of China has the highest valuations, then Silicon Valley, and then New York. In general, though, even the Chinese valuations are starting to come down. To us that’s an encouraging trend. We’ll see more companies survive in the long term.

Question: For content that’s entertainment-focused, what are some of the monetization models that may work? A lot of money is going to content studios, but what are the exit strategies? Also, have you seen compelling vertically integrated content solutions? Targeting a specific niche market, for example, by addressing specific problems.

Zhang: One thing we see is that Silicon Valley, and the west coast of the U.S. in general, is a huge exporter of content globally. Feature films go to China, they go to India, they go everywhere. Different spin-offs of that content are produced elsewhere as well. This is content that’s not cheap. It’s very expensive. If you take the Chinese market, for example, if you look at the cost of acquisition of content for a company like Tencent, these costs have close to doubled in the last couple of years. And as the IP gets better, there are more ways to monetize it.

For any content, you want to get wide penetration. You want people to look at what you’re creating and follow it. But you have to find ways to monetize it, package it, and find distributors that are willing to work with you to get it to market. There are some things we can do to help in those areas. We can work with our studios in a model where they have great content and they want to get it on a global stage — find the right partners, help distribute, help find markets where that content can survive and grow.

Yang: One area we think content works really well is in the health care vertical. I do a lot of health care investing outside of the VR context. There’s a lot of stuff in fitness, nutrition, diabetes management, and so on in a traditional context. Bringing health care into a more immersive environment and affecting behavioral change, we think, is very interesting.

We’re seeing the beginnings of companies that want to go through health care providers to offer a VR-based solution to patients along various therapeutic regimens and protocols. We think that’s particularly interesting.