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Business leaders gathered at this year’s Seattle based IMMERSE Summit (previously Sea VR) to explore how VR/ AR and Mixed Reality is transforming manufacturing, design, education, health and medicine and much more. Road to VR‘s Michael Glombicki caught up with two VR/AR investors to get their insight into the opportunities available in the immersive technology space and the strategies they’re employing to capitalise on them.

At this year’s IMMERSE Summit, Road to VR sat down with Matt McIlwain, managing director at Madrona Venture Group (investor in Envelop VR and Pixvana), and Patrick Eggen, managing director at Qualcomm Ventures (investor in Owlchemy Labs and Magic Leap), to discuss their investing strategies when it comes to virtual and augmented reality.

Road to VR: Matt has mentioned before that it is very hard to pick winners when it comes to VR content. Qualcomm Ventures is an investor in Owlchemy Labs, which is a content creator, so, Patrick, can you talk about Qualcomm’s strategy regarding investing in VR content?

Patrick Eggen: We have this thesis that there is a content creation bottleneck in VR. There is very limited quality content out there. We are looking for early stage companies which have limited dependencies in the VR ecosystem. The beauty of a company like Owlchemy is that they are producing high quality VR content but there’s a broader play there. Longer term, there is a potential platform play where they make the picks and shovels for the broader VR ecosystem. Think of them today as being in content creation but ultimately opening up to enable other VR developers to seamlessly create VR content. First and foremost, I think that’s the challenge.

It’s the same with Pixvana, granted they are all video, but the sophistication of creating content on VR is very, very challenging. Look at a company like Matterport: Matterport is not a pure-play VR company. One of the use cases they have is seamlessly converting their 3D models into VR content. All of a sudden you have 300,000 homes which, in the future, will be VR models and arguably the largest VR library in the world. Think of us not as investing in pure-play content, but think of it as a near-term hedge strategy where there’s always a broader play.

Matt McIlwain: I think that’s similar to our philosophy. Take a company like Pixvana, which we are investors in: it’s about real video and, beyond the point of capture, how do you stitch that video together? How do you process that video? How do you encode it so that it can be distributed to all different consumption devices? Well, they’re not a content company, but they might work closely with a couple of content creators to make some proof points and a demonstration of content that’s out and ready to be distributed broadly in the emerging VR world. I think that’s always been a balance between a company that wants to fundamentally have a broader technology platform but is trying to show existence proofs of what is possible now.

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I think companies here locally, like Pluto VR and Rec Room, that are trying to demonstrate shared presence are in a similar challenging time. You have to be able to show the actual application space. Rec Room’s got a great charades game and a really fun frisbee-golf game and my hunch is they have a broader platform play behind that, but they are using those applications to show what’s possible in terms of highly distributed shared presence.

Road to VR: Last year, this event was called SEA VR and it was focused mainly on virtual reality. With HoloLens and Magic Leap we’ve seen a broadening of the conference to include augmented reality as well. How do you see the comparison between the VR and AR opportunities for investment? Do you expect one to be bigger? Do you expect to see a convergence of the two?

Matt McIlwain: We think about a graph: there is VR and AR and then there’s tethered and mobile. Tethered and mobile will go across the time dimension and AR and VR will go across a sophistication dimension. Over time we think AR and VR converge into a world that the Microsoft folks call “mixed reality.” Over time, things will become increasingly untethered down to the point that they’re really kind of full 360 immersive experiences that I don’t need to have a separate computing device that I’m connected to through a wire. Is that a five-year journey? Is that an eight-year journey? Hard to tell specifically, but that’s the direction it’s going.

So, for me, there’s a set of technological things that feel further off in terms of what you might call “high-end AR” compared to what we are seeing in a “high-end VR” experience like an HTC Vive. I think Oculus is getting there, but I still think it’s behind, to be candid, even with the latest stuff that is coming out for Christmas. What Valve has with the Vive is the state of the art from a full, 360 immersive experience and I think that’s further along now. I think HoloLens has some interesting things that they’re putting out; we have a HoloLens in the office and we play with it in different use cases. Patrick knows more about Magic Leap so I’ll defer to him on that.

Patrick Eggen: First and foremost, I concur. I think AR and VR are going to converge. In a simplistic way: VR takes you where you want to go and AR brings anything into your analog world and you can calibrate that dial. If you think of 100% of VR as completely immersive and digital and you dial back a bit you can see elements of both. I think the key is that they are all sort of distinct platforms today. Whether it’s mobile VR, or tethered VR, or VR with a console, or mixed reality, or AR, they’re all very distinct, so you currently have significant fragmentation.

We were early investors in the AR landscape. First, we invested in a company called Blippar about five years ago. Blippar was immediate go-to-market. They used the cameras on existing smartphones to amplify the analog world. They were working with 200 tier 1 brands and they were actually able to monetize. Three or four years before Magic Leap and this whole renaissance, AR was just a sea of dead companies. We were very adamant in investing in one company per sub-sector and we picked Blippar. Out of the gate they scaled to where it made AR mainstream. Basically, they made any object a media format. For four or five years we saw companies that had only one of the two aspects we were looking for: 1) technical acumen using computer vision and 2) marketing chops. Blippar was the one that had both of those attributes. Fast forward and you’ll see they ended up buying Layar.

It wasn’t until Magic Leap came along where we saw a new paradigm: a full-stack platform. I can’t really reveal anything about magic leap but it is fundamentally a new paradigm. If you look at what Rony [CEO of Magic Leap] said at the Fortune conference, he spoke about it as a full-stack compute platform. We think the AR/VR convergence will become the next platform beyond the smartphone and that’s where we’re investing.

In terms of AR, we’ve had a barbell strategy: Blippar was immediate go-to-market and Magic Leap is more of the moonshot going for a new compute experience and we are trying to search for a similar analog in the VR world.

Matt McIlwain: The other thing I’d say is that we’re already seeing, in VR, elements of the virtual reality environment being augmented by my physical world. For example, we’re investors in Envelop VR and they, ironically, help bring the things you did on the screen into VR. But then, when I’m in VR, a lot of people still like using their keyboard and their mouse, so through cameras, they can project your hands and your keyboard and mouse into your virtual reality environment. They’re augmenting your VR world with your physical world and so that is an example of the blending together of VR and AR.

Road to VR: One of the things that is challenging from a media stand-point is covering China. Is that also true when it comes to investing?

Matt McIlwain: It’s not really our strategy because our strategy is to be early stage and mostly focused on companies based in the Pacific Northwest. We look around the world to see what the trends are and what’s real and what’s hype. That’s why having friends like Qualcomm Ventures is great for us because, through them, we can see some great things that we may not be seeing ourselves as easily. We do our own homework as well, but I really defer to Patrick and their team on what they’re seeing on the ground in China.

Patrick Eggen: You really need investment folks on the ground. It’s similar to the strategy that Madrona has in Seattle because they are the beacon for anything in the Pacific Northwest. Not only do they have dedicated investment partners here, but they have the very profound network of eyes and ears. Similar for my colleagues in China, it’s very competitive there and it’s important to have that access on the ground where you can get in early on these deals. I would say China is a hyper-competitive market. Valuations are not cheap. In fact, there could even be a premium there at times. China has really crossed this chasm from being a follower and copy-cat to truly innovating.

On the mobile VR side, we have a portfolio company called Ximmerse in China that a lot of people haven’t heard of. The big issue with mobile VR today is that it doesn’t have six degrees of freedom, so it’s very limited in positional tracking. With the right mobile VR input controllers, that resolves that gap and that’s what Ximmerse is doing. What we saw with Oculus at Connect is they sort of hinted at this holy grail prototype of untethered, optimized computer power, low latency, real time, 6 degree of freedom tracking.

We see wonderful ecosystems like Seattle and LA where you could have break away companies. We’re not biased towards San Francisco and we’re one of the rare firms that invest in fly-over states. We are in seven different countries around the world and the talent here in Seattle that Madrona is investing in is very special. But, I think when you look at Asia, you see some amazing innovation from companies. This is not just a copycat sort of phenomenon. We have folks on the ground in Beijing in Shanghai to invest there. Given the somewhat tepid demand, from an investor’s standpoint, to invest in a series A or series B, we see a lot of companies from Asia, and particularly China, participating and that’s not dumb money. There’s actually understanding there.

Road to VR: Are there still hardware investment opportunities out there?

Matt McIlwain: I think the question there is if there are a lot of venture-backable opportunities versus bigger company opportunities. I think there’s only going to be a few Magic Leap-style bets out there. Ximmerse is an interesting example because they’re picking a broadly defined problem. What are the input devices that provide the ability to create without a big headset and PC sitting by me? They offer a possible solution from an input device perspective.

There’s probably some specific components within the hardware that I could imagine. For example, if there was a fabless chipset design that is going to go into a particular kind of device, I could see that as being an opportunity. But even still, I would bet on Qualcomm or somebody else more than I would bet on Joe with his startup team. If you talk to the folks at Microsoft, they’ll tell you they’ve been putting a lot of money into the hardware that powers HoloLens and I bet Magic Leap will say the same.

Patrick Eggen: To Matt’s point, from a venture-backed lens, it’s challenging unless you calibrate your returns and are looking for a company to be bought. There will be a lot of these companies being very acquisitive by addressing product gaps. You may also see acqui-hires as we’re seeing in the AI space because I think a lot of this talent will be at a premium. But overall, I think early stage we’re investing more on the software side where there’s lower dependencies. Later stage or mid-stage, we’ll look if there’s a higher dependency like visual tracking or eye tracking or something really non-trivial that’s interesting to us but we will calibrate our expectations with respect to returns.

You have to remember that it’s still very early days. I hate to be jaded but the adoption is very limited today. We are in the midst of these platform wars. We don’t have enough content creation out there and it’s still a little unclear. We’re still treading very carefully. As we saw with the AR data points, it took a long time before we got through the woods to this renaissance. We are bullish mid to long-term but we are very cautious for the next 6 to 9 months. We have three investments in this area and we’re hoping to have more but we are very cautious in how we approach it as well.

Road to VR: Do you have a killer app that you are really looking out for?

Matt McIlwain: For me the, the most amazing experiences are the ones where I can be in a shared presence environment in VR or presumably AR. I’ve really only experienced these in a VR environment. That means that myself and somebody else are physically separated and are experiencing something together. Those same things could be as simple as you and I having a conversation in some shared space. It could be on the beach or it could just be in a room. But we could also work on a whiteboard together and when we’re done working on the whiteboard together, we have an electronic record because it was all done digitally.

I think this is a little bit futuristic, but we know they are working on it from the videos we’ve seen at Facebook’s F8 and Oculus Connect. Those are worth watching. In the F8 one, they took a selfie on the London Bridge and then posted it to the real world of Facebook versus the virtual world that they were playing in. That’s actually pretty close to what I want. We’ve seen those kind of experiences, in some cases further along, and I want to see those get commercialized. Those shared presence, rich, immersive experiences that are not just about you and I being in a room but the things that we can do.

So why would you invest in something like that? I want to see that, but you could imagine there being somebody that says: “it’s great that Facebook does what it does, but how about all these other apps? What’s going to be the set of tools that are going to power that kind of shared presence experience?” I don’t think Facebook is going to open-source what they’re building. They’re trying to build a social network, so the strategic play there is somebody who’s going to license or sell that capability to all the other apps and all the other app builders that want to have the cool use-case and application that’s now a shared presence application instead of a single participant application.

Patrick Eggen: I think that’s a really good, quintessential example and shows the power of Facebook. We looked at a company called AltspaceVR in San Francisco and their vision was that Matt and I could go into our own immerse environment, go on the whiteboard, and talk about deals. Then, we could go into the lounge and go watch the Sounders game in a way that amplifies the experience. It will take time and Facebook as the catalyst can just muscle and flex that much faster.