Venture capitalists contemplate how much exuberance is good for VR investing

Above: Oculus Rift is just the start of the VR marketplace.

Image Credit: Oculus VR

Question: You brought up the need to develop content based on the mobile platforms, based on where the market is now. It sounds like there’s a bit of a disconnect between wanting to invest right now, but also looking forward and investing in high-quality content. Are you keeping in mind that there might a merger coming, that mobile might become a high-quality experience going forward? And from a content perspective, how do you talk to your partners about creating that high-quality content, even though creators are kind of limited right now?

Zhang: Talking about the different platforms, there’s definitely a spectrum of devices available for creators producing mobile VR content. For content creators, it’s good to have a strategy that fits all of them. Say you have an IP that’s interactive, that requires a lot of computing power. That’s interesting for a higher-end experience. But you might be able to come up with something that’s complementary to that on less powerful platforms.

Mobile computing power is going to continue to improve. We’re going to see experiences on mobile that are very compelling and very interactive. A lot of the platform players are looking at adding peripheral devices. The mobile experience is going to become richer and that’s going to be an opportunity for content creators. When you think about your content play, right now it may not fit in both mobile and the higher-end experiences. But pretty soon the experiences are going to be closer on both platforms.

Yang: If you’re a content creator you have to have a true north. What is it you want to create? What do you stand for? You can’t stand for all things to all people. If you truly want to be premium, optimize for premium. There are certain platforms that’s particularly good for. Then be honest with yourself. You’re going to have downscale the experience for some of the other platforms that can’t take advantage of the full immersive experience you’re trying to create. If you want to go at it in a big market at the lower end, just do that. But you have to have a point of view. Different pieces of IP and content you build have to be targeted.

DeMiroz: With our content investment strategy, we have to see the manifestation of your vision. A lot of designers have ideas, but when that idea turns into a game it doesn’t necessarily translate that well.

The other part is — again, we talked about multiplatform. You don’t have to be on everything at once. Some genres lend themselves to a high-end experience. Mobile translation may take a while to get there. Our portfolio company, Owlchemy Labs, with Job Simulator, it’s super popular. They’re going to be on every platform eventually but they have a platform deployment strategy. Another portfolio company, Against Gravity, has a game called Rec Room. It’s a social VR game. That will again be on all platforms, but it’ll also take some time to get there. You have to have an amazing user experience, no matter what platform you’re on. You need to deliver that as part of a multiplatform strategy.

One thing we advocate is, don’t get into long-term, expensive, epic title development. We see titles with proposals coming to us that say, “I need $3 million to develop a vertical slice.” Does that mean you need $15 million for the whole game? More? There’s no market for that, which means there’s no investor appetite for it.

GamesBeat: Is that where the platform holders are putting some of their own investment?

DeMiroz: Not for a $3 million vertical slice. That’s really expensive. Again, if you have a console background that makes sense. You’re used to a 36-month development cycle and a massive team. VR is more like mobile. Get out there early. Be very nimble and flexible. Learn a lot, iterate, and improve. Money is coming from Oculus, Google, and others, but not at the scale some people expect to get.

GamesBeat: I’m curious about something like Baobab as well. They raised $25 million. To me, that seems like an investment in one particular person, the guy who made Madagascar. Now he’s doing VR and he’s come up with a couple of funny VR shorts, interactive 360 videos. You expect the guy who made Madagascar to be able to do something good. That, to me, seems to be why they got that much money. What would be your view on that?

DeMiroz: I’m the only non-investor up here. [laughs] I’m envious, because their team has phenomenal talent. They’re building great talent. When they raised the A round I didn’t have the fund in place, and the B round was out of our range.

Yang: All of these businesses, especially the content studios — it’s too simple to just limit it to there being one great creative person involved. There are three legs to the stool. You have to have great creative, obviously, but you also need a great technologist and a great business person. If you look at the three cofounders of Baobab — Maureen Fan, Eric Darnell, and Larry Cutler — they represent those three pillars. Some of our other companies fit that model exactly, with a business person, a tech person, and a creative person. You can’t have two out of three, because then you’re unbalanced. If you only have one out of the three, you probably shouldn’t have taken the meeting in the first place.

There’s a lot of tech being built here because it’s all breaking new ground. We think of these as full stack studios. It’s at a point where some of the tech being built is so novel and unique that it could be its own third-party business if we wanted it to be, but we’re keeping it proprietary because that affords an advantage relative to the rest of the industry. That might change down the road, but that’s a business discussion to have.

Zhang: I’d agree that having the three-legged approach is very important. Particularly the creative side, because that’s more rare. You want to see those folks who’ve made blockbuster films and the like coming out of their comfort zone and saying, “This is a new area, but it’s where I want to put the next 10 years of my career.” We’re actively working with founders who’ve come out of other industries and are looking to impact VR.

This is happening more in the U.S. at the moment. We’re seeing directors, creatives coming out of Hollywood and looking at AR and VR as an industry where they want to try themselves. In China we’re a little earlier in the process. We haven’t had too much success. But we’re still looking for creatives who are ready to found their own teams, find the tech people and the business people, and move into the VR space.

Above: The Oculus Rift.

Image Credit: Oculus

Question: How are you thinking about the adoption curves for VR versus AR and MR over the next five years or more? To what extent are there places where you can hedge your bets on one platform or another?

DeMiroz: The bigger picture is that there are fundamental differences between the sectors. It’s the dev kits. If you look at the dev kits for VR, more than 300,000 are out here. AR is in the low thousands. There’s an enormous capacity coming from the VR developer community not only for gaming and entertainment, but also for health care, manufacturing, education, travel, real estate. A lot of experimentation and innovation is happening with VR dev kits. AR is only getting started.

Our long-term vision is that eventually we’ll have mixed reality devices that can do multiple modes, so you can do immersive VR and AR. Whatever happens transitionally in the next few years, the market will eventually coalesce into a single device model. That could be our primary communication and commerce environment. But currently VR and AR dynamics are really driven by the dev kits. The numbers are significantly different between the two communities.

In AR, we have an investment in a computer vision company, as I said before. We’re looking at a lot of AR opportunities. If you look at Pokemon Go, that’s what some people call “weak AR.” It’s not necessarily related to the physical environment, but it’s laid over the physical environment. Beyond gaming, all across industry sectors, AR’s potential is enormous. It’s just that the developer community is way behind.

GamesBeat: What’s missing from VR platforms now? When you think these missing elements are going to arrive? We’ve gotten the sense that Facebook and Oculus are working on a wireless headset. Microsoft and Facebook have talked about inside out tracking. What else seems to be missing? Google recently bought Eyefluence for its eye tracking. Are there other things that will come in with the next rev of hardware, or might be even further out?

Zhang: One aspect of technology I’m actively researching and looking into is something called volumetric capture, volumetric streaming. It’s a technology that’s not just for VR, but for AR and other applications down the road. The holy grail is to be able to feel like you’re on the court, playing alongside an athlete, live streaming that experience while it’s played. That’s the high end of the technology. It’s something I’m very passionate about. We’re actively looking at doing a deal in the space.

DeMiroz: Volumetric capture and light field technologies, going forward — you’re going to want to have true presence. The beauty of VR is that you really want to feel like you’re part of the video or the interactive content. Volumetric asset capture and display, light field effects, all that is very important. Ultimately the price point has to be affordable. You have to have incredible content. You have to have a great publishing platform so content providers can monetize. But we’re looking at emerging opportunities.

Question: You talked about the importance of smartphone-based VR. Best Buy has said that they’re expecting to sell $500 million worth of VR hardware this season, but with an average price point below $50, while means it’ll almost all be smartphone-based. I feel like there’s a disconnect between that and where the venture community is placing its dollars. They’re more focused on the home-based systems. Can you point to investments that you’ve made that are focused on that smartphone opportunity?

DeMiroz: For us, we really invest in enabling technologies, foundational technologies for mobile, like Eonite doing inside out tracking and so forth. And also we’re investing on the content side. If you look at the content companies, game companies we’ve invested in, they’re all targeting both the high end and the low end, the latter being mobile.

The Daydream will start a real growth in volume on the mobile front. Unfortunately, what happened with the Galaxy 7 didn’t help the sector. But with Daydream and Samsung and other devices coming next year, we should see significant mobile installed base growth. From our perspective, we’ll continue to invest in fundamental technologies that will empower mobile, as well as content for mobile platforms.

Zhang: Mobile isn’t just a display. It’s also a capture device. One of the companies we’re working with enables this capture ability to live stream both 2D and 3D with the same camera sensor. It’s very exciting stuff. In the U.S. and Asia, live streaming is already a huge business, and we want to provide streamers with better technology in the AR and VR space. We want to make it possible to live stream in an AR setting, or stream yourself through your mobile phone.

Yang: We’re all bullish on mobile. We don’t usually get the question about trying to prop up mobile. Usually we’re trying to defend premium stuff. Location-based VR, I think we’re all very big fans of that. There’s an opportunity there, especially globally.