The Case for Investing in Spatial
In 2017, we put together an internal market report on AR/VR that captured both our enthusiasm as well as reservation for the space. Numerous hurdles were still ahead of the space then (e.g. lukewarm consumer adoption, hollow content, and high price of hardware), but in the two years since our original report, the industry has evolved significantly and is now approaching an important inflection point. The case is especially strong for enterprise AR where we see the promise of wider scale adoption and sustainable growth.
At White Star Capital, we believe that successful AR software startups will offer 1.) technically superior AR products that are ready to use out of the box, 2.) clear value propositions that demonstrates return on investment for enterprise customers, and 3.) scalable solutions that will evolve with mainstream adoption.
After exploring and researching the crowded landscape, we decided to invest in Spatial, a startup developing collaborative AR software that turns physical space around us into a shared augmented one. In a world of increasingly distributed organizations, Spatial’s collective computing platform empowers people to be more connected, creative, and productive.
We’re tremendously excited to back this company because it not only satisfies our three criteria for success above, but also uniquely expands the capabilities of today’s enterprise workforce through augmented reality.
To illustrate our thought journey leading to the Spatial investment, we’ll first break down the core drivers of mainstream AR adoption in three parts.
- Imminent 5G Network
- Increasing AR Hardware Maturity and Penetration
- Specialization of AR Software
And as a summary, we highlight a few factors that made Spatial truly stand out from the AR landscape.
5G Network Is Finally Here
The amount of data generated and transferred for immersive AR applications dwarf the data needs of popular mobile apps and web-enabled content. While the latest 4G LTE network allows us to instantly stream movies on Netflix and host group video calls in Google Hangouts, it still lacks bandwidth and transfer speeds to support the full extent of AR.
Ideally, data latency must be below 6 milliseconds for AR. Currently, 4G networks can reduce latency only to 10 milliseconds. 5G, in comparison, enables the extremely low rate of 1 millisecond — well below the threshold needed to support AR. This network breakthrough is now well underway with major 5G networks expected to be deployed by 2020.
Since the launch of the original 1G mobile network in 1979, subsequent next-generation networks have been rolled out roughly every decade. Each new generation of mobile networks brought forward exponentially better network capacity, which enabled much faster data transfer. And this cycle had profound effects on communication technology, consumer products, and the internet.
Our main take away from this brief history of cellular networks is two-fold.
First, category-defining products are introduced before the full-scale implementation of contingent networks. For example, Motorola developed its first mobile phone, DynaTAC, before 1G was fully rolled out in the early 1980s. Likewise, Apple introduced its first iPhone 3 at the tail-end of 3G networks in 2007, ahead of the imminent 4G network rollout. Microsoft, Facebook-Oculus, Google Android, and Samsung all have been iterating on AR/VR hardware for years, anticipating another paradigm shift in 5G.
Second, each subsequent generation of mobile networks create a logarithmic increase in economic value. With better network capabilities and more powerful consumer products comes a significantly more complex technical stack. This complexity leads to specialization in the value chain. From 1G to 3G, incumbent hardware manufacturers reaped the benefits of new technology adoption. However, software companies (both web and mobile) are now equally dominant in 4G, where consumer hardware is merely a platform. This specialization enables young software companies to co-exist and thrive alongside much more mature tech behemoths as they tackle capital-intensive hardware innovation.
It will still likely take years for 5G to be fully deployed across the developed world. In fact, the majority of AR use cases remain tethered to indoor wifi networks rather than outdoor cellular networks. But the continued focus and investment into incumbent hardware development is undoubtedly driven by the anticipation that 5G networks will soon universally power AR/VR devices whether they are used indoors or outdoors, by consumers or enterprise.
AR Hardware Ready for Prime Time
Major AR hardware players have been developing head-mounted displays (“HMDs”) for almost a decade now. Companies such as Daqri and Magic Leap were founded in 2010, while Microsoft’s HoloLens program traces it lineage back to the same year when Xbox Kinect was launched. With the exception of Magic Leap, most hardware manufacturers are now on (or beyond) their 2nd generation product. Product maturity is becoming more evident not only as 1st generation shortcomings are addressed, but also as features are continuously built out more advanced than the last.
A common theme across both AR and VR is the capital-intensive nature of the hardware space. This is not a field for young companies to enter anymore. As an illustrative example, Meta launched in 2013 with an ambitious vision to compete in AR hardware. Not only was Meta few years behind Magic Leap, it also had far less funding- Meta raised a total of $73m compared to Magic Leap’s whopping $2.3b. Even after two product iterations, Meta ultimately failed to secure further financing and declared bankruptcy in January of this year. Daqri met the same fate in September, even after raising $275m in VC funding since 2010.
Meta’s demise points further to maturity in the AR hardware space. Five years ago, it was still unclear which major AR hardware platforms were here to stay. Now in 2019, a clearer picture starts to emerge. Magic Leap is driving consolidation, with four acquisitions so far (and Daqri also made four acquisitions before shutting down). Microsoft continues to finetune the core strategy behind its HoloLens program with a strong focus on enterprise AR.
As the AR hardware industry continues to develop, we expect to see more explicit product and price positioning among various competitors. In today’s hardware landscape, lower-price headsets are marketed to the consumer, and higher-priced headsets are marketed to the enterprise. Headsets on the lower end (e.g. Snap’s Spectacles, Vuzix’s Blade) are largely restricted to simple consumer use-cases such as navigation, posting to social media, photography, and video recording. More expensive headsets (e.g., Microsoft HoloLens 2 and Daqri’s Smart Glasses) have more sophisticated use-cases, enabling users to interact with robust 3D content that maps onto the real world.
Two main factors drive this product positioning today. In a still-budding phase of AR adoption, enterprises have higher capacity than consumers to purchase HMDs in bulk to integrate AR technology across organizations. Furthermore, production costs of AR hardware components are still high, which makes comprehensive AR features inaccessible at a consumer price point. As a result, AR hardware companies are increasingly focusing on enterprise.
Product iterations of Google Glass and Microsoft HoloLens illustrate this trend. Google originally released Glass Explorer Edition to the consumer public in 2014 for $1,500, but in 2017 revised Glass under a new name (“Enterprise Edition”) and repositioned for enterprise use-cases at the same price. Microsoft similarly released the first generation of HoloLens (“Development Edition”) to AR content creators in 2016 for $3,000, initially pitching it as a way to get work done and play games. HoloLens 2 started shipping in November of this year with a definitive focus on enterprise and a slightly higher price of $3,500.
Contrary to projections on AR/VR hardware penetration from 2016 by Analysis Group and Kzero, actual shipment worldwide has decreased year over year from 2016 to 2018. A key factor driving 2016 unit shipment well above the projection’s ‘high-adoption’ scenario was the full suite of products concurrently released that year — Rift, Hololens, Spectacles, Daydream, Meta, Vive, and Playstation VR were all introduced to market in 2016. Six of all seven products released in 2016 were consumer-oriented (i.e. Meta was the sole product explicitly positioned for enterprise). We believe the subsequent compression in global shipment is the result of higher-volume consumer hardware being replaced by lower-volume enterprise products.
AR hardware’s product maturity, price positioning, and penetration together sets the stage for category winners addressing specific verticals to emerge in the software space.
Looking for Emerging Categories in AR Software
Across the 37 AR software companies we have been tracking to date, total funding has been similarly distributed between consumer and enterprise. Consumer software is comprised of AR gaming, mobile AR, and content & media. Combined, the three consumer categories have raised a total of $1.27B in VC funding. Enterprise software is much more segmented with companies emerging in specific verticals such as industrial, healthcare, and commerce. Enterprise-focused AR software companies raised a total of $1.35B so far, slightly above the consumer total.
The sheer funding in AR gaming is hard to ignore. It accounts for more than 40% of total funding across both consumer and enterprise. Improbable is a UK-based games technology company that offers SDK/GDK that integrates with Unity and Unreal, two leading gaming engines that are widely used for AR/VR development. Improbable alone raised $604m from investors such as Softbank’s Vision Fund and Andreessen Horowitz. Niantic, the creator of Pokemon Go, also raised $470m from Google, Spark Capital, Founders Fund, and others. These were relatively early bets in AR. Neither Improbable nor Niantic rely on dedicated AR hardware and were founded in 2013 and 2010, respectively.
Mature, well-funded players exist in both mobile AR and content & media as well. For example, Jaunt, a multi-faceted enabler of cinematic AR/VR content, has raised $100m in funding from the likes of GV and Walt Disney. Within, a company aiming to become the Netflix of AR/VR content, is another content player that raised more than $50m from investors such as Andreessen Horowitz and Temasek Holdings.
With category winners already starting to emerge in the consumer software space, enterprise AR presents a more appealing opportunity to discover early-stage companies that can grow into market-leading positions within the next few years. On the other hand, non-exhaustive, verticals in enterprise AR can be broken down into six categories listed below:
Enablement & SDK: Companies creating AR enablement software and Software Developer Kits (SDK) such as tracking or simulation/dev engines that enable more capabilities and easier development for AR hardware and software
Industrial: Companies producing AR solutions specifically tailored for field service, enabling front-line workers to connect with support experts in real-time
Education & Training: Companies offering AR-based tools for education and learning, with content to engage children and immersive simulations to train employees
Healthcare & Medical: Companies producing AR solutions specifically for medical purposes, such as surgery assistance or remote patient-doctor interaction
General Enterprise: Companies offering AR applications for distinctly enterprise use-cases, such as virtual workspaces or 3D data visualization
Commerce: Companies producing AR content for sale and advertising purposes, enabling customers to engage with products in a novel way (e.g. visualizing an item in one’s own home)
AR enablement companies such as Unity Technologies and Matterport represent a mature category similar to consumer AR. Unity Technologies, a game developer, offers a 3D development engine that has become an industry standard for AR/VR. Matterport captures the built world in 3D, automatically transforming them into interactive 3D models. These two companies together have raised more than $700m from investors such as Sequoia Capital, Lux Capital, and Thrive Capital.
Industrial, while not as mature a category as consumer or AR enablement, is moving quickly to get there. Many investors saw high applicability of AR in this space where ROI for front-line workers was especially strong. NEA, General Catalyst, and GGV Capital are among the VCs who have invested in software companies that compete under this category. Daqri offers integrated AR software alongside its Smart Glasses hardware and Upskill provides wearable technology for factory and warehouse workers.
The remaining enterprise categories in education, medical, commerce, and general enterprise (e.g. workspace collaboration, data visualization) are still in their formative years. And with major hardware incumbents such as Microsoft and Google repositioning AR products towards enterprise, many more verticals will likely emerge.
Spatial Leading the Future of Enterprise Collaboration
In the last decade, category-defining enterprise collaboration products emerged in Voice-over-IP (Skype), video calling (Zoom), and integrative messaging (Slack). While these companies incrementally strengthened the means of communication across organizations, all product offerings were, and still are, constrained to the traditional two-dimensional interface of computers and mobile phones. We believe Spatial is creating a new means for three dimensional collaboration through AR, seamlessly blurring the digital boundaries between personal and shared workspace, while unleashing new levels of productivity and engagement for the modern workforce.
Our conviction in Spatial can be highlighted through two key points.
- World-class Founding Team and Management: Spatial was founded and is managed by industry-leading experts who are widely respected by the AR community. Named as one of “Top Entrepreneurs in Technology” by Businessweek, Anand (CEO) previously founded BumpTop, a 3D desktop user interface, which was acquired by Google in 2010. Jinha (CPO) was named “35 Innovators under 35” by MIT Technology Review, and developed pioneering 3D user interfaces at MIT Media Lab. Other key members of management also bring relevant experience from leading technology companies such as Google, Uber, and Samsung.
- Phenomenal Partnership with Leading Brands in AR: Spatial was the only company to present on stage with Satya Nadella, CEO of Microsoft, during the Hololens 2 reveal at Mobile Web Congress in February 2019. Based on the high-caliber management team and strong brand recognition of the company, Spatial built a strong partnership pipeline of pioneering Fortune 1000 companies that are driving the enterprise adoption of augmented reality.
In summary, we are tremendously excited about AR’s transformative implications for the workplace, and are proud to be partnering with Spatial as it propels enterprise adoption of AR into the mainstream.
About White Star Capital
White Star Capital is a global multi-stage technology investment platform that invests in exceptional entrepreneurs building ambitious, international businesses. Operating out of New York, London, Paris, Montreal, Tokyo, and Hong Kong, our presence, perspective, and people enable us to partner closely with our Founders to help them scale internationally from Series A onwards.