Actual reasons to get excited about virtual reality

Few technologies have promised so much and delivered so little than virtual reality. But some VCs are betting that this is the year that VR finally lives up to the hype.

“The notion of VR has been with us for a long time. I mean, just look at old sci-fi movies from the ‘60s,” said Renata Quintini, a general partner at Felicis Ventures. “But all those early efforts fell short. The VR experience never felt realistic. There was too much lag time and it made people physically ill. VR also required too much processing power and was too expensive to execute.”

But now, she believes, the technology has caught up with the vision. That’s why she recently led her firm’s investment in Survios, a stealth startup that raised $4 million last year to develop a VR gaming platform.

“It’s a perfect storm for VR,” Quintini said. “The processing power, the display quality, and the motion sensing are now where they need to be. Everything has come together. VR not only works really well, it is also cost effective. And thus accessible to consumers.”

Her sentiments are echoed by the folks at Rothenberg Ventures, which late last year launched a VR accelerator called River. The inaugural class of 13 startups includes the likes of DeepStream VR, a maker of VR games for pain relief and rehabilitation; SDK Lab, focused on industrial training and travel in VR; and Fove, which has developed headset that uses eye tracking to create an immersive experience.

Rothenberg did not respond to requests for comment.

Each company in River will receive a $100,000 investment, three months of office space in San Francisco, and mentorship from industry veterans.

“We believe 2015 will be the year of VR,” the firm announced in a blog post. Rothenberg is basing much of its optimism on Facebook’s $2 billion purchase of virtual reality headset maker Oculus VR, which raised more than $90 million in venture funding Andreessen Horowitz, Formation 8, The Founders Fund, Matrix Partners and Spark Capital. In addition, the industry has seen the release of other VR platforms, including Samsung’s Gear VR and Google’s Cardboard.

Investors like Quintini agree that Facebook’s blockbuster acquisition was a watershed moment for the sector.

“It validated the idea that there is a new important platform being created,” she said. “Facebook wants to be where users are, and it believes VR will be that place.”

The Oculus acquisition also served as a signal to VCs that they can score a billion-dollar exit with their VR investments. Quintini was sold on the category the first time she played Zombies on the Holodeck, a virtual reality game created by Survios.

“I only got so far in the game and I freaked out,” she said. “I could feel the zombies crawling all over me. It felt real. When I experienced that demo, it was transformative for me. I was convinced.”

Despite the breathless anticipation, VR remains relatively underfunded by VCs, especially compared to other consumer tech categories. The typical knock against the technology is that it is not a proven money maker, and worse, that even if it does catch on, it will be a short-term fad, like 3D TV sets.

“At this point, there has not been a ton of VC interest in virtual reality,” said Jai Choi, managing director of Tekton Ventures and an investor in the space. “But at the core, this technology is extremely disruptive. It will ultimately shift many of our consumer behaviors and actions.”

Exact funding numbers for VR are hard to pin down. A recent CNBC report said only 11 VR companies received venture funding in 2014 totaling just $54 million. However, those numbers don’t include Google’s massive $542 million investment in Magic Leap, a four-year-old company that is creating what it calls “cinematic reality” by blending computer generated images with the physical world.

Other recent fundings include:

  • Jaunt, a startup that’s building a full-stack hardware and software solution for cinematic VR, raised $27.8 million in Series B funding led by Highland Capital Partners with participation by Google Ventures. The company has raised about $35 million in total funding.
  • AltspaceVR raised $5.2 million from Dolby Family Ventures, Formation 8 (an investor in Oculus), Google Ventures, and others to transform 2D Web experiences, including watching Netflix, YouTube, and other content, into 3D virtual experiences shared on massive screens.
  • Virtuix landed $3 million in seed money from Tekton Ventures and Maveron for its VR treadmill that enables users to walk, run, and jump within a 360-degree virtual environment, creating a sense of immersion and presence within virtual worlds.
  • Augmented Pixels, a developer of augmented and virtual reality technology focused on the retail and real estate markets, raised $1 million in seed funding from The Hive.

VCs who believe in VR, believe big.

“In my view, VR is a revolutionary category along the lines of the personal computer, the internet, and mobile,” Quintini said. “VR is really the next great frontier. The technology will unlock new use cases and new markets, just like those other categories did. When you have computing capability that can enable things that were never possible before, that is a very powerful development.”

The first applications for VR are centered on immersive gaming. But that’s just the beginning. Choi said that VR applications stretch far beyond gaming, into military and corporate training, medical treatment, and fitness, among many others.

“The possibilities are limitless,” he said. “This is a platform category that will create brand new industries. Right now, the focus is on immersive gaming because that is a very attainable application, but VR is much broader than that. It could encompass meet-ups and multi-person adventures, anything that is travel oriented or even something simple like real estate tours.”

T.M. Ravi, managing director and co-founder of The Hive, echoes these sentiments. He said he invested in Augmented Pixels because it was targeting such industries as real estate and retail, and not gaming.

“The company is not selling a wow factor,” he said. “It is trying to solve real customer problems. That is how you build a business.”

Augmented Pixels said it has licensed its technology to several undisclosed real estate firms and furniture companies. Furniture shoppers, for instance, can use the technology to capture a 3D model of a sofa and place it virtually in their living room to see how they like it. Meanwhile, real estate investors in China can buy a house in California without leaving their own home.

“We are transforming the purchasing experience and helping users save time and money,” said company founder and CEO Vitaliy Goncharuk.

A primary challenge for VR going forward is scoring that first big hit. Despite the fanfare over Oculus and other VR gaming platforms, it is unclear whether consumers will flock to these technologies. But 2015 will be a very telling year, especially as Oculus is expected to release the first commercial version of its VR headset for an estimated retail price of $200.

“The real challenge in this market is the timing around consumer adoption,” Choi said. “But really, that’s the same for any new disruptive technology.”

Another challenge is the uncertainty of when the developer community will jump aboard en masse.

Quintini said she worries about whether adoption of VR technology will really be there in scale.

“For instance, if you want to do something collaborative in a VR world, but you only are the only one with the hardware, then that’s going to be a really sucky experience,” she said. “So you need for that ecosystem to develop and for everything to be there at the right time.”

There’s no magic answer to these questions. But, given the many promising developments, VR is finally feeling, well, less virtual. And it’s more real than ever before.

Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at tom.stein@yahoo.com.