Apple's VR debut to fire up stagnant sector, investors say

When Osso VR CEO and co-founder Justin Barad raised his seed round, the investor had one question: "How much money do you need?" They promptly wrote a check for $100,000 and told Barad to call them in a year for an update on their investment in the company, which offers a virtual reality training platform for surgeons.

"It was the peak of the VR hype: 2016. If you had 'VR' in your name, you would get funding," Barad said. "I thought, 'This is going to be easy.'"

Months later, when attempting to raise a Series A, Osso VR and Barad faced an opposite reception: Having "VR" in a startup's name resulted in rejections and refusals to meet. It was one of the first big downturns in VR investing, following several hardware failures and a lack of consumer interest in 360-degree video content.

"People really lost faith in VR and really overinvested in it in the beginning," said Barad, whose company went on to successfully raise funding, most recently a $66 million Series C led by Oak HC/FT in March 2022. "All the fluctuations—it's been difficult to weather."

Investors and startups are now bullish on the vertical, despite its history of ups and downs, for one big reason: Apple.

The tech giant is set to enter the mixed-reality space by revealing a headset at its annual developer conference in early June. While many details about the forthcoming device remain under wraps, investors and startup founders say Apple's entry into mixed reality will stabilize and energize the vertical, bringing an overdue challenge to Meta's dominance.

"It's about f------ time," said Adam Draper, founder and managing director at Boost VC, a pre-seed investment firm that has bet big on AI and VR over the last few years. "This market is about to pop off."

Apple's foray into mixed reality is significant for several reasons. It's the first time the company has launched a new flagship product since the Apple Watch was introduced in September 2014. It's also the biggest development in virtual and augmented reality since Meta bought VR hardware startup Oculus in 2014 for $2 billion. Grim reality Companies have explored the use of AR and VR headset technology for over 25 years. As far back as 1996, gaming behemoth Nintendo experimented with a tabletop-mounted headset known as the Virtual Boy that was promptly canceled after criticism and lackluster commercial sales.

More-recent efforts have also been stymied. Alphabet's Google Glass eyewear and follow-up Daydream VR headset were discontinued after failing to generate consumer enthusiasm. VC-backed Magic Leap pivoted to making enterprise AR headsets after failing to gain traction in the consumer market.
   
Amid a broader slowdown in big tech, Microsoft has reportedly pulled back from the Hololens, an AR glasses project, while Meta, whose Meta Quest headset is the market leader, has made mass layoffs and pivoted from its heavy focus on the metaverse toward AI. Gaming companies such as Sony and Valve have headsets, but they require integration with other devices like computers and gaming consoles.

VC investment in AR and VR peaked in 2019 during a wave that helped to propel Magic Leap to a $6.7 billion valuation, according to PitchBook data, in a $280 million Series D led by Japanese mobile phone operator NTT DoCoMo. Mass adoption of the technology never arrived, and investment dipped—before rebounding in late 2021 and early 2022, driven in part by metaverse mania. The Apple of investors' eyes Apple is different, investors say. The company has a track record of releasing polished, easy-to-use and refined products, and its focus on integrating hardware and software could be a differentiator for its forthcoming device. Many investors pointed to Apple's iPhone and iPad—products in verticals that existed long before Apple's entry—as a model for what the company could do for AR and VR.

"Apple is incredible at turning incredibly geeky things into the coolest mainstream item," said Draper. "What Apple does really well is normalize technology to the rest of the world."

Investors pointed to Apple's creation of its app store, following the release of the iPhone, as a key reason VR and AR are poised for major growth. It led to a proliferation of startups seeking to cash in on a newly created marketplace.

Marco DeMiroz, general partner and co-founder of The Venture Reality Fund and a former executive at mobile gaming company Playfirst, cites a similarity to the investing environment of 2011. Several app startups exploded in popularity and growth after the number of smartphones in the US grew to 100 million. DeMiroz cited Rec Room, a Venture Reality Fund portfolio company, as an example of VR success. The startup, which offers a gaming and social platform with VR capabilities, has achieved unicorn status, attracting capital and attention from investors and consumers alike.

DeMiroz pointed out that while their investments don't count on any one big tech player, like Apple, the interest from big tech companies is a great sign for investors.

"It's an incredible validation," he said.

Draper, the Boost VC partner, thinks Apple's entry will encourage more founders to launch startups in the segment, a boon for investors. "We're going to see the next billion-dollar, two-billion-dollar business being founded right now."

According to the investors and startups interviewed, Apple's entry marks the first major challenge to Meta—a challenge that many welcome, since competition could move the technology forward.

Chris Pickett, the CEO of DigiLens, a company that makes components for holographic displays and includes Samsung, Sony and Corning among its investors, has seen increased demand for materials from manufacturers. He said a transition is underway and that the status quo—the current standard led by Meta—is set to be disrupted.

"Nobody wants the standard to be owned by the people that own it now," Pickett said. "Everyone is getting ready for a transition."

He said that the biggest benefit of Apple's entry will be the stabilizing effect it will have.

"The perception of risk will decrease. With Apple entering the space, it will finally put an anchor in the ground."

Featured image by Jenna O’Malley/PitchBook News

This article originally appeared on PitchBook News