VR falls back in 2017, but investors look ahead

North American investments in virtual reality took a step back last year as consumers have been slower than expected to adopt VR technology.

But investors in the sector remain bullish.

A total of 65 companies in Canada and the United States last year raised a little less than $1 billion in venture funding, according to preliminary data from Thomson Reuters. Augmented-reality developer Magic Leap led the way with a $502 million Series D round led by Singapore’s Temasek Holdings, boosting the Florida company’s valuation to a reported $6 billion.

But the next largest VR deal in 2017 was Lytro, which raised a $60 million round to develop its light field imaging for VR applications.

In 2016, 65 companies, the same number as last year, raised more than $1.4 billion in financing. Again, Magic Leap had the largest round, an $800 million funding. Thalmic Labs raised the second-largest funding that year, a $120 million round. The company develops technology that transmits electrical impulses from a user into a computing platform.

However, despite VR funding dropping about 32 percent over the year, Marco DeMiroz, general partner of Virtual Reality Fund, is bullish that the AR/VR sector will grow over time and funding will increase.

DeMiroz, former president and CEO of mobile-gaming company PlayFirst, and General Partner Tipatat Chennavasin, former CEO of mobile-game startup Big Head Mode, are raising a targeted $50 million for VR Fund.

The Palo Alto, California, early-stage firm has built a portfolio of 20 companies in three years. VR Fund has raised commitments from various strategics in gaming and entertainment, including Japanese gaming company Gumi, which is the anchor investor. Another LP is HP Tech Ventures, the corporate venture arm of HP, which invested an undisclosed amount.

The VR Fund has one exit to date, VR gaming studio Owlchemy Labs, which Google acquired last year for an undisclosed price after it raised $5 million from investors. DeMiroz expects the firm to wrap up the fund close early this year.

DeMiroz says much of the funding in the VR/AR sectors in 2016 was in gaming. But 2017 also saw more enterprise-related uses of AR and VR grow.

“Gamers were the first adopters,” he said. “But as the technology has continued to develop, we’re seeing uses in healthcare, education and in the enterprise. And a broader array of investors are looking at VR today.”

VR got a lot of attention in 2014 when Facebook said it would acquire the VR headset-maker Oculus VR for $2 billion.

Joanne Chen, a partner at Foundation Capital, is similarly bullish about the space though she says the VR/AR sector is small and young. “Virtual reality got a big boost thanks to gaming, but the hype has died down,” said Chen.

Last year, the firm invested in Immersv, developer of a platform that connects consumers to advertisers in interactive mobile and VR. The Emeryville, California, company raised $10.5 million in a Series A round from Foundation, VR Fund, Rogers Venture Partners in Canada and others.

Chen says she sees a lot of VR companies, but her focus is on business applications in VR. She also sees many use cases for VR technology in other industries, such as construction, architecture, real estate and office space planning.

Though she looks at the business uses of VR, Chen is a consumer of the tech, too. When she married Data Collective Partner James Hardiman on Aug. 6, 2016, in Carmel, California, the VC couple had their wedding and reception filmed in 3D virtual reality as well as traditional photography and video.

She says the size of the VR version is large and hard to share, but she’s watched it and relived the moment.

“We’ve seen a lot of exciting consumer uses of VR in gaming and entertainment that have created a lot of hype,” Chen said. “The hype is dying down, but we’re just getting started with the enterprise and other use cases.”

Download Data: Top VC-backed VR deals in North America (2017)

People in Samsung Gear VR devices at the Mobile World Congress in Barcelona on Feb. 21, 2016. Photo courtesy of Reuters/Albert Gea