Veteran investor Tipatat Chennavasin reveals his strategies for monitoring the virtual reality business.
When virtual reality (VR) metaverse company Rec Room reportedly received $100 million at a $1.25 billion valuation last week, Tipatat Chennavasin wasn’t shocked. Rec Room was an early investment for Chennavasin as general partner of Venture Reality Fund because he believed the company’s tiny but nimble team had hit upon a winning formula for social VR. Beat Games, creators of Beat Saber, and Owlchemy Labs, creators of the Vacation Simulator, were both backed by VR Fund before being acquired by Facebook and Google, respectively. Recently, the company has been working to establish a new $50 million fund, and Orange, a major telecommunications provider in France, has joined in.
App analytics firms like App Annie and Sensor Tower in the mobile market adopt an approach similar to what Chennavasin does when evaluating companies: they crunch public data and correlate it with information they receive from their portfolio companies. Protocol spoke with Chennavasin, who revealed some of the inner workings of his data analysis, discussed his thoughts on Apple’s rumoured headset, and forecasted an increase in unicorn values and mergers and acquisitions. The interview has been condensed and simplified for readability.
How did you feel when you heard about the Rec Room?
It doesn’t surprise me that they’ve achieved unicorn status so quickly and are the first virtual reality software company to accomplish it. Given how popular virtual reality is right now, their one million MAUs is a remarkable achievement. Rec Room was first released for virtual reality headsets but has since expanded to consoles and mobile devices. Their total user base is 15 million, with 2 million of them being content producers. That’s a major consideration. Most creator platforms have a negligible number of creators compared to users or players. Rec Room features a far higher concentration of original content producers. The sheer enjoyment of making things and thinking up new ideas in virtual reality is probably a big part of the reason behind this. Virtual reality makes it easier for more people to make their own 3D content.
Is it likely that we will encounter further VR “unicorns”?
Well, I think so. Unicorn firms are extremely unusual, but many consumer and business VR startups have already reached the revenue thresholds required to be valued at that level. As Beat Games was purchased by Facebook, they are no longer a standalone enterprise and hence do not qualify as a “unicorn.” It has been stated, however, that over the past three years they have made $180 million, with half of that coming in just last year. You’re getting close to the point where, if it were a separate business, it would be called a unicorn. Unlike certain game studios, most enterprise businesses don’t brag about their earnings. Nevertheless, on the business side, we see a lot of companies producing a lot of ARR; dozens of them are doing a million dollars, and some are even getting to $5 [million] to $10 [million] or more. That’s a big step towards legitimising them as a unicorn.
Let us know how you keep tabs on virtual reality businesses.
I work in mobile gaming, where we try to estimate revenue from factors like rating and review volume. And luckily I have a lot of different data points and can come up with some kind of grasp of the market thanks to my portfolio and also my cordial contacts with many of different game studios out there. Once Oculus released their figures, I was able to double-check to make sure I wasn’t misreading anything. And to my pleasant surprise, I turned out to be reasonably accurate.
Have you recently learned something useful through this method?
The Quest’s market revenue increased by more than fivefold between its first and second years on the market. Sixty games have grossed over $1 million, while Oculus has said that six have made over $10 million. When we apply the same methodology to Steam, we find that at least 40 titles have earned over $1 million, and that four titles have earned over $10 million. Despite popular belief, PC VR is actually on the fall while the Quest continues to gain popularity. Nonetheless, PC VR saw a revenue increase of almost 4x year over year as a result of Half-Life: Alyx and its subsequent halo effect.
Really intriguing. Can we expect these markets to maintain their current rates of growth?
The expansion of The Search will quicken and broaden. The success of games like Half-Life: Alyx pushed PC VR forward, and there aren’t any similarly successful games planned for the foreseeable future. While VR on PCs had success this year, I don’t expect that success to multiply by four in 2019.
What difference will Apple’s much-talked-about headphone set make?
According to rumours, Apple’s initial headgear will be a pass-through augmented reality (AR) headset designed specifically for professionals. It’s not a typical headset for the general public. They aren’t making an effort to compete with the Quest or the Valve Index, in my opinion. To get people thinking about the kinds of applications and use cases that are going to make sense for a spatial environment, I believe they are actually constructing a developer station that will allow individuals to design AR apps for their next headset. Similar to how you need a MacBook to develop iPhone apps. You can’t develop apps for the iPhone on the iPhone. But, Zuckerberg has claimed that the ecosystem will be considered legitimate until it reaches 10 million members. The environment will be so healthy that it can maintain itself. I think we’ll get there sooner rather than later, and that will cause other businesses to enter and say, “We see the success, and we want to be a part of this.” This will be yet another turning point for the industry.
What other developments have you noticed recently?
More businesses will begin to generate substantial income in this sector, I believe. Further financial announcements are on the way, as is some fascinating merger and acquisition [activity]. In 2018, there were 21 deals for VR, AR, and associated AI, with Apple, Facebook, and Snap being the most active acquirers. If we examine their purchases across all industries, we find that the majority of them were made in the virtual reality and augmented reality (VR/AR) sector, with 40% of Apple’s purchases, 66% of Facebook’s purchases, and 75% of Snap’s purchases being XR. That’s instructive and fascinating all at the same time. And take a look at the kinds of businesses that are being bought up. Application firms, content studios, and game developers are replacing purely technological firms as the target of acquisitions for foundational technologies like computer vision. One indicator of the ecosystem’s growth is the fact that 30% of the companies involved were content studios.
Since you first started investing in VR, what other changes have you noticed?
When we first established this fund five years ago, we wondered, “What happens after the iPhone?” And at the time, a lot of folks speculated that it was due to XR technology. That might be electronic timepieces. Perhaps high-tech audio speakers.
Five years later, and hundreds of millions of units have been sold. Apple, Amazon, and Google have had a lot of success with their products, but they haven’t been able to establish a developer environment in which third-party software designers can profit from the hundreds of millions of customers and devices.
The number of people using VR systems is unquestionably far lower. There are probably around 10 million devices capable of high-quality virtual reality with six degrees of freedom. Nonetheless, hundreds of businesses, both consumer-facing and enterprise-focused, are generating over $1,000,000 annually in sales. There is little doubt that we are seeing the birth of a brand new ecosystem and platform.
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