VR Gets Reality Check with Significant Decline in Investment

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A few years ago, virtual reality was all the rage in
Hollywood, helping to fuel the rise of Silicon Beach with the promise of
reinventing the entertainment business.

At its peak, investors pumped $253 million into two
dozen deals involving virtual and augmented reality start-ups in L.A.
and Orange counties in 2016, hoping that pricey headsets projecting
virtual worlds would become as popular as smartphones. But investment in
the technology has slowed dramatically in recent years, and what seemed
like a promising boom has largely fizzled.

Several California companies that raised millions of
dollars have shut down or have laid off dozens of workers, as businesses
scrambled to readjust their strategies in the face of lackluster
consumer demand for VR headsets and a drought of capital.

“It’s just been a drawn-out hype cycle that’s
promised to be the next big thing for so long,” said Nicholas
Pappageorge, a senior intelligence analyst at CB Insights. “The
investor’s patience for the industry has worn thin.”

Investment in seven augmented and virtual reality
start-ups in L.A. and Orange counties plummeted 81 percent last year to
$24.7 million compared to 2017. That’s just 10 percent of what venture
capitalists poured into the local sector in 2016, according to the
PwC/CB Insights MoneyTree Report, which tracks investment in virtual and
augmented reality. Nationally, funding for augmented and virtual
start-ups fell 46 percent to $809.9 million last year compared to 2017,
according to the report.

The local decline in VR and AR investment is notable
because it occurred at a time when overall venture capital funding in
the two counties increased 36 percent to nearly $6.4 billion last year,
the report said. Investors parked their money in other areas such as
cybersecurity and artificial intelligence.

Why the precipitous decline? Many investors have been
skittish about pouring more money into an industry that hasn’t reached
critical mass among consumers.

The interest surrounding virtual reality reached a
peak in 2014, when Facebook announced it would acquire Oculus, an
Irvine-based virtual reality headset maker, in a $2-billion deal. That
spurred investors to take the technology more seriously.

“That was the acquisition that spawned a thousand start-ups,” Pappageorge said.

But entrepreneurs and investors underestimated how
long it would take for consumers to embrace wearing expensive, virtual
reality goggles, with high-end versions costing hundreds and, in some
cases, thousands of dollars. That put the technology out of reach for
many consumers. Cheaper headsets are now available, but sales still lag
far behind voice-enabled smart speakers and other emerging devices.

“All these companies were building for a consumer
that wasn’t quite there yet,” said Mark Linao, a principal at Akatsuki
Entertainment Technology Fund.

Many VR goggles were clunky, resembling boxes on
people’s faces, and there wasn’t enough compelling content to persuade
consumers to go through the experience, investors said.

“There have been some great advances in various
pieces of the technology but as a whole it’s not grandma-proof,” said
Venky Ganesan, a partner with Menlo Ventures, the venture capital firm
based in Menlo Park.

Last year, 7 million virtual reality headsets shipped
globally, according to an estimate by research firm IDC. That’s a
fraction of the nearly 100 million smart speakers shipped in 2018,
according to IDC’s forecast.

“The hardware needs to come to the point where people
en masse will purchase it,” said Kobie Fuller, a partner with Upfront
Ventures, a Santa Monica venture capital firm.

He expects funding for virtual and augmented reality
start-ups will remain flat in L.A. and Orange counties in 2019. “We have
this dilemma that we’re trapped in right now, and I have faith that in
time the market will materialize,” Fuller added.

Even Facebook CEO Mark Zuckerberg acknowledged in
September that Oculus is still far from its goal of bringing virtual
reality to 1 billion people.

“We have a saying in Facebook that the journey is 1
percent finished and maybe in this case not even quite,” Zuckerberg said
during a keynote at an annual Oculus event. “But I’m confident that
we’re going to get there.”

The market’s growth didn’t come in time for some local companies.

Future Lighthouse, a VR studio with offices in Los
Angeles and Madrid, closed last year after it ran out of money. The
company said it had more than $1 million in invested capital and
produced 18 virtual productions, but was hurt by the slowdown in the
market.

“VR investors have been overly conservative and we
didn’t catch the first wave of investment in 2016, making our more than
necessary second funding round in 2017 unsuccessful,” the company stated
last year.

Another casualty was Vrideo, a Santa Monica-based
business. It aimed to be the YouTube of VR, a distribution platform for
360-degree videos that would allow users to change their viewpoint by
moving their heads in a VR headset.

Vrideo raised about $2 million and employed about 15
people at its peak, but investors began to get skittish as manufacturers
delayed the launch of new headsets and bigger players such as YouTube
and Facebook began investing in 360-degree video on their platforms,
said co-founder Alex Rosenfeld. After discussions to sell the company
fell through, Vrideo shut down in 2016.

“We were on our last legs on the amount of cash we had left in the bank, and we had no choice but to shut down,” Rosenfeld said.

Other players in the industry have restructured.

Jaunt, based in San Mateo, started out selling
virtual reality cameras, encouraging media companies to build cinematic
360-degree videos. Jaunt has raised more than $100 million from firms
including the Walt Disney Co. In 2015, it partnered with USC to create
the Jaunt Cinematic Virtual Reality Lab. Part of its three-year gift
included loaning Jaunt cameras, so students could test and build virtual
reality content. But the partnership ended last year after Jaunt said
it was refocusing its business on augmented reality.

Jaunt laid off an undisclosed number of workers and
last month sold off gear such as virtual reality headsets and gaming
computers through an online auction.

“VR didn’t take off in people’s homes the way people
expected it to in 2016. That may have been the thing that changed the
Jaunt company,” said Candace Reckinger, director of USC’s Immersive
Media Lab.

Jaunt declined to comment.

Another L.A.-based company, 8i, which creates
technology that produces holograms in VR and AR, also had to pivot. The
company laid off workers in 2017 and has focused on supporting content
for mobile devices.

“If you’re producing content, you want to have an
audience to sell that to,” CEO Hayes Mackaman said. “When the install
base didn’t grow, it reduced the market size.”

Even IMAX Corp. has pulled back. The Canadian entertainment technology company said last month it would end its pilot program offering content like virtual reality games based on movies in centers in cities including Los Angeles. The program started in 2017 with a half-dozen locations. Each center was expected to cost $250,000 to $400,000 to create, not counting real estate expenses. Last year, CEO Richard Gelfond said the audience was lacking in most of the locations.

“The consumer reaction was extremely positive, but the numbers just weren’t there,” Gelfond said in an earnings call in May.

Nonetheless, at the Consumer Electronics Show in Las Vegas last week, virtual and augmented reality companies remained bullish on the future. They cited potential bright spots, such as VR products and apps that can be used in business training, education and gaming. Games like Pokemon Go and Beat Saber that use augmented or virtual reality have been very popular.

To be sure, some local VR companies have found a
niche. Culver City-based Dreamscape Immersive, which has raised more
than $40 million in financing, creates VR attractions in malls where
people pay $20 to experience a virtual reality adventure. Participants
strap on virtual reality goggles, a backpack and sensors, and then walk
through a room where they experience a virtual world with their friends
in a communal experience, where they might grab a real flashlight to
ward off a virtual enemy. Dreamscape opened its first mall venue Dec. 14
at Westfield Century City.

Company executives declined to disclose finances but
said shows have been popular and that similar venues will open this year
in Dallas, Columbus, Ohio and in the New York area.

Walter Parkes, co-chairman of Dreamscape Immersive,
said one of the issues with some of the earlier content available on
virtual reality headsets was that consumers were experiencing it alone.

“I was a disembodied observer of 360 video and I’m a human, and humans are social,” said Parkes, a film producer.

The rollout of 5G may also help boost the industry’s
reach. Virtual reality content looks best when it is seen with high
enough resolution and on machines that can download the material
quickly, something that many headsets and smartphones today don’t
provide, said Lewis Smithingham, a partner with Los Angeles-based
digital entertainment company 30 Ninjas, which produces VR content.

“We’ll be able to get content at quality, quicker
(and) better, which is what the consumer wants with our attention spans
being as short as they are,” said Smithingham.

Major Hollywood studios have also dabbled in VR,
investing in start-ups and providing their own interactive experiences.
For example, in 2016, 20th Century Fox released the “Martian VR
Experience,” a roughly 25-minute film that allows users to see space
through the perspective of fictional astronaut Mark Watney and drive a
rover over craters.

Still, several investors say it may take several years before virtual reality becomes mainstream.

“When the internet first came along, people were disappointed also with its slow download speed and hard-to-use interfaces,” Ganesan said. “These are really hard technologies, and the hype is always way ahead of the reality.”

(Article written by Wendy Lee)

(SOURCE: TNS)

Source: https://tnj.com/vr-gets-reality-check-with-significant-decline-in-investment/

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