Next UP: “Alternate Realities”

How investors are currently thinking about virtual reality, augmented reality, and mixed reality

Scott Lenet
Risky Business


On May 1st, I moderated an investor panel for the Digital Entertainment Group in Los Angeles (I also moderated the DEG’s Spring Emerging Technology Forum last year, exploring three technologies disrupting home entertainment). We discussed current investor perspectives on virtual reality, augmented reality, and mixed reality.

Here are quick definitions of these technologies:

  1. Virtual reality — an immersive experience where the viewer interacts with a fully simulated environment
  2. Augmented reality — a live, direct view of a physical, real-world environment with an overlay of computer generated video, graphics, audio, or GPS data
  3. Mixed reality — a live, direct view of a physical environment with an overlay of computer generated video, graphics, audio, or GPS data that are anchored to points in the real world

Combined, these technologies are often described collectively as “XR” deals. If augmented reality and mixed reality sound similar, it’s because they are. From an investor perspective, these two are often viewed as indistinguishable, except to industry insiders who can be insistent about the subtleties.

Investor Perspective

The story of VC investor interest in the virtual reality market is pretty straightforward. While the underlying technology has been around for quite some time, in 2014 Facebook bought Oculus for $2 billion, and suddenly VCs and entrepreneurs began paying serious attention. While many investors professed that augmented reality might hold the potential for greater adoption, the first wave of investment in this market went predominantly into hardware, content, and enabling technologies for virtual reality.

The exit market for “alternate reality” companies has been limited since the Oculus sale, however, with typical trade sales below $100 million from 2015–2017, and no IPOs. Investor interest is driven by exit potential, and the market has cooled off substantially since that first, defining acquisition.

Notable M&A outcomes: while the 2014 Oculus sale to Facebook set the table for massive investor interest in virtual reality, there haven’t been any exits at that level since

If you ask a venture capitalist about virtual reality today, you will likely get a lukewarm response with a recognition that there simply are not enough devices in the hands of consumers to enable a mass market. The total consumer headset market in mid-2018, which includes products at multiple price-points and various levels of quality, is estimated by The Verge to be less than 10 million units. This is not sufficient “critical mass” to enable meaningfully sized video game or media content businesses.

According to estimates by The Verge, market penetration hasn’t reached consumer scale yet

Despite this, funding to the category has continued to rise. From 2013 to 2017, the number of startups funded and the total dollar value of these transactions has grown tenfold. Along the way, investment has begun to shift from virtual reality to augmented reality (and mixed reality), which now receives about one-third of nearly $3 billion in annual funding in this market. Mobile augmented reality, in particular, addresses some of the market size problems of virtual reality, because there are billions of mobile phones in use.

VC funding to “alternate reality” startups has continued to rise in volume and deal value

Digging deeper into the numbers from Pitchbook, it becomes clearer that the “alternate realities” venture capital market is dominated by a few big companies. In 2017, four companies raised over half the capital in this category — talk about the power of the top 1%! Stripping out deals funded with more than $100 million (the so-called “mega deals”), the total dollar value of investments in alternate reality startups actually shrank from $1.5 billion in 2016 to $1.3 billion in 2017. These numbers are still quite healthy.

Four companies raised more than half the capital to “XR” startups in 2017

And of course, the concentration of capital in the winners represents a long-developing trend in venture capital that derives from the “power law” in which the biggest companies capture the lion’s share of market value, and thus investment capital, in each segment.

The four “XR unicorns” that raised mega rounds of greater than $100M in 2017, according to TechCrunch

The companies receiving the most funding demonstrate investors’ shifting preferences from virtual reality to augmented reality. Magic Leap is a well-publicized startup that has raised billions to develop hardware and software for augmented reality experiences. Unity is a 15-year old company that has built a strong position as a developer of software engines for video games and other digital media, and has equal applications for VR and AR. Improbable is a game development operating system designed for use with game engines like Unity and its rival Unreal. Niantic Labs is a Google spin-off that launched the highly successful Pokémon Go and has generated over $1 billion in revenue from mobile augmented reality.

Pokémon Go from Niantic Labs

Venture Capital Investor Panel

I asked our panelists whether they really care about the nuances distinguishing VR, AR, and mixed reality. Teymour Boutros-Ghali, managing partner of Bold Capital was quick to say, “No. I don’t care,” focusing instead on what conditions could drive revenue for his investments in the category. Teymour noted that location-based entertainment (“LBE”) like theme parks and arcades provide a logical thesis for XR investing, since these don’t rely on massive consumer adoption. He mentioned high profile LBE entrants like The Void, Two Bit Circus, and his own fund’s investment in Dreamscape.

Our panelists represented a diverse approach to investing, ranging from a new fund dedicated to gender balance, a traditional institutional venture fund, a private equity fund, and one of the largest corporate VCs

Abby Albright represented the WXR Venture Fund, a new firm dedicated to gender balance in virtual and augmented reality startups. She noted that the current climate corresponds to the “trough of disillusionment” typical of markets that have not yet reached their full potential.

Our panel of investor experts in “alternate realities”

The panelists agreed that industrial applications beyond consumer entertainment could very well propel the category. Stephen Saltzman of Intel Capital, the fifth most active venture capital firm in XR investments, indicated that there are numerous attractive deals beyond entertainment, because business-to-business applications don’t rely on broad consumer adoption and can generate revenue almost immediately. The investors seemed particularly positive about the possible healthcare applications of virtual reality.

Enterprise virtual reality and augmented reality solutions in these industries may be adopted widely before consumer VR becomes mainstream

Greg Berkin of Concours noted that some experiences in virtual reality are truly compelling, and mentioned an Oscar winning production that would convince even the most stubborn skeptic. At that point, I challenged the creative executives in the audience to compose haiku lamenting the gap between winning awards and generating revenue. By the end of the panel, John Penney of 20th Century Fox had scripted this gem:

Seeking awards now,

The money well will run dry —

Jobs may vaporize.

If anyone has additional ideas for haiku on this topic, please post them below in the comments! I will tweet out the best entries.

Overall, the panelists expressed optimism about the potential for this technology to be transformative and lucrative, but caution about funding businesses too far ahead of scale markets and real revenue. Ultimately, the investors agreed that success would require the right combination of technology, marketing, timing, and of course, luck.

“Bey’s Law” and What I learned in Other Sessions

Mike Dunn, the president of product strategy and consumer business at 20th Century Fox, and the chair of DEG, opened the forum by encouraging the members of the group to work together with the startup community to continue to develop innovations that benefit the entire industry, even through uncertainty and disruption.

The afternoon’s other sessions included a keynote by author and futurist Charlie Fink, and presentations and panels focused on content monetization, hardware and devices, and the role of high-bandwidth connectivity in distribution. Notable quotes from these sessions included:

  • “Is it really the price-point, or just the lack of a true killer app?” — Ben Havey, Walt Disney Studios
  • “Head-mounted displays are still a few years away” — Charlie Fink, author of “Metaverse, An AR Enabled Guide to VR & AR”
  • “The challenge is not the tech; it’s the application” —Mike Dunn, 20th Century Fox
  • “If Beyonce would release her next single in VR, the hardware adoption problem would be over” — Christina Heller, VR Playhouse
Charlie Fink wrote an augmented reality enabled “pop up” book to explain XR technologies, but I still think the next edition would be more immersive if he were to add “scratch and sniff” technology, too

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For more information about the Digital Entertainment Group, please contact Executive Director John Powers (

Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs. Touchdown’s Los Angeles-based Senior Associate Selina Troesch contributed to this article.

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Scott Lenet
Risky Business

Founder of Touchdown Ventures & DFJ Frontier, USC & UCLA adjunct professor, father of twins, Philly sports Phan, Forbes & TechCrunch contributor