Before my career as an investor, I worked at Warner Bros. and at a venture-backed startup that spun off from New Line Cinema. And as an early-stage VC with Signia Venture Partners, I’ve been actively hunting for virtual-reality opportunities in the media and entertainment industry — I couldn’t be more bullish on VR and AR as a fanboy, consumer and investor.

Most venture-backed startups around entertainment VR/AR have fallen into four buckets: Cinematic VR, sports/live events, content-creation tools/infrastructure and gaming.

Moviemakers are exploring opportunities for director-uncontrolled viewer perspective in VR movies. Visual effects engineers improve motion-capture techniques for inserting real-life human holograms into virtual worlds. Movie studios look to additive VR/AR “bonus content” to help market their tentpole $100 million theatrical releases. Game developers look to create ethereal escapes and immersive horror and shooter games. And concert and sporting event producers look to engage (and monetize) fans on a new and exciting event viewing medium.

As an investor, I’m looking at all of these closely, alongside a few enterprise applications of VR/AR (particularly within training and education), but for the purposes of this article, let’s stick to the entertainment biz.

Cinematic VR

Cinematic VR refers to storytelling and short films — content whose success is dependent on creativity more than on unique, defensible technology. We have seen a host of venture-backed startups emerge in this category: Baobab, Penrose, Within (formerly VRSE), Felix & Paul and, at one time, even Oculus’s internal Story Studio. For the most part, these companies have either been started by recently minted Harvard Business School MBAs or by folks with significant past creative/technical show business experience. Investor-wise, strategics such as Comcast Ventures have been particularly active in cinematic VR; however, it was Andreessen Horowitz that wrote the biggest check to date for an early-stage cinematic VR startup (for Within).

While I’m a huge fan of the content I’ve seen (Within’s “Clouds Over Sidra,” a mini-documentary that follows a 12-year-old Syrian refugee, is particularly impactful), our approach has largely been one of “wait and see” until VR headset distribution creates a significantly larger audience. This is because of the monetization challenge : Who is going to pay for this content in the long term?

Most of the premium cinematic VR experiences I’ve seen to date have been brand-sponsored. Brands have sponsored this content for exploratory or “edginess” value more than purposes of mass brand exposure, due to the limited VR audience at present. As a result, ad-supported business models will not work in these nascent days, either.

I don’t think VC dollars should be funding movie production, and that’s what cinematic VR companies look like to me right now.

My friend and past co-investor, Joe Kraus of Google Ventures, said not too long ago that 2017 is “the year of survival for VR companies.” I think this particularly holds true for cinematic VR companies, which will eventually need to rely on larger audiences for direct monetization. I don’t think VC dollars should be funding movie production, and that’s what cinematic VR companies look like to me right now. A sustainable production funding and monetization cycle for cinematic VR content will only emerge with a much larger audience.

Having been an early investor in the YouTube MCN ecosystem, I’m definitely open to making these kinds of “content” platform investments, but not yet. YouTube’s audience was already quite large: Big-balance-sheet-Google already owned it, an ad-supported monetization infrastructure was already in place, and folks had the requisite hardware and networking capabilities (en masse) to make venture-backed YouTube content bets work.

While cinematic VR production companies aren’t the same as YouTube MCNs, both require an audience of sufficient size for venture investments to work. And even then, it’s the platforms for talent management, cross-promotion, product placement, etc., that are preferable to straight-up content investments themselves. In either case, it’s the limited audience for cinematic VR that prohibits near-term investment from our fund.

Sports and live events

Sports and live events in VR have Next VR and Jaunt flying their heavily VC-backed flag. Active stakeholders include Peter Guber (head of Mandalay Entertainment, now part of NextVR) and David Anderman (former COO at LucasFilm, now Chief Biz Officer at JauntVR). Both have deep media backgrounds and the domain expertise necessary to build media businesses in emerging distribution channels.

Past experience in building media businesses from the ground up is most important for new CEOs in media VR companies, and I don’t expect it will be long before we see VR/AR plays from media moguls.

For example, securing IP rights with top-tier sports teams and entertainers is no small feat. If it was something that simply required a Rolodex, Hollywood talent agencies, CAA or WME would have already locked down this category of future VR revenue stream. Past experience in building media businesses from the ground up is far more important for new CEOs in media VR companies, and I don’t expect it will be long before we see VR/AR plays from media moguls like Barry Diller, Peter Chernin and Jeffrey Katzenberg (who recently said he’s forming a fund to invest in VR). Strategic media investors such as Advancit Capital (run by Viacom’s Shari Redstone), Comcast Ventures, Time Warner Investments and even Disney have all been active in VR investing, as they see a new immersive distribution medium through which to leverage existing IP libraries and in which to develop medium-specific original IP.

Nobody plays the IP game better than big media behemoths, and none of them are asleep at the wheel as VR emerges on the fringes of their traditional theatrical, television and digital businesses. For potential venture investment, we would definitely look for startup CEOs who had deep entertainment industry experience in developing content for new platforms and who built successful businesses on those platforms.

Gaming

Today, the popularity of VR among game developers is visceral: Lines going out the door at the Game Developers Conference for VR sessions, new investor decks from game developers now building for VR, a heavy initial focus on gaming from the major VR headsets (Oculus, Vive, PSVR), not to mention that gamers are usually among the earliest adopters of any new tech platform. All of this makes for a fertile crescent of VR innovation.

My goal as a gamer investor: Finding the Venn diagram overlap of game developers with category-defining game design experience and the technical chops to push the boundaries of immersive hardcore gaming.

VR games will soon present an interesting investment opportunity. Gamers are early adopters and most have a high willingness to pay for premium content. Already, Survios’ Raw Data, a VR game for the Oculus and Vive, is doing more than $1 million per month in paid downloads. CCP, the Icelandic game developers behind Eve: Valkyrie, another VR title, will soon be “break-even” after its giant $30 million VR development investment. The Wave VR is an impressive Rock Band-style multiplayer game, developed by senior devs on the original franchise and recently backed by Kleiner Perkins, RRE, the VR Fund and Presence Capital. The Wave VR incorporates “social” into VR casual gaming, and if it maintains its trajectory, I wouldn’t be surprised if somebody like sleepy Zynga awoke from corp-dev slumber to make an acquisition as an entry point into VR.

The opportunity for VCs to invest in console game developers has typically been challenging, due to the way game developer/publisher economics traditionally worked. There was already too big a cut coming off the top from the big-box publisher, making VC returns hard to come by. It remains to be seen how the potential co-investment ecosystem plays out for Sony PSVR.

Moreover, if I had to guess, next year’s Microsoft Xbox: Scorpio console will likely be compatible with the Oculus Rift, due to hardware upgrades on the console’s side and to software improvements at Oculus that allow the Rift to play on dumber hardware. In either instance, I haven’t really seen console-specific developer pitches come through my office. That may very well change as VR game devs build for several platforms to maximize audience draw in these early days of eyeballs, thereby making non-console platforms an exciting co-investment opportunity. Or, Sony and Microsoft will become more like Oculus and Valve in how their developer grants, VC co-investment plans and platform fees work.

There will be some “VRcade” investment opportunities that arise. The Void raised $50 million from the Chinese company Shanda. Zero Latency VR will be an attractive target in the same space. Other “experiential rides” such as Sleep No More and Escape the Room could move into mixed-reality-compatible experiences. As my recent trip to Japan indicated, I think VRcades are going to be pretty big. That said, the real estate leases and expensive up-front capex of these companies can make them challenging investments for early-stage VCs. Still, I continue to watch the space closely.

We’re looking at a few higher-end gaming opportunities right now, and have been really intrigued by what we’ve seen. Finding the Venn diagram overlap of game developers with category-defining game design experience and technical chops to push the boundaries of immersive hardcore gaming — that’s my raison d’etre as a gamer/investor at present.

Augmented reality

Augmented reality is a harder egg to crack for media investors. The only meaningful (publicly known) media investor involvement to date has been Thomas Tull’s Legendary Entertainment, which invested in the Florida-based darling, Magic Leap. However, talk recently circulated that as part of his company’s acquisition by Dalian Wanda, Tull was selling some of his position in a secondary share sale. Disney has a close relationship here, too. The LucasFilm San Francisco compound’s ILM division hosts an offshoot of Magic Leap’s team as part of ILMxLabs, possibly Disney’s brightest minds in VR and AR. I’d be surprised if Warner Bros.’ upcoming Spielberg-directed “Ready Player One” doesn’t have a real-life VR and AR experience to accompany it.

Much of AR’s potential depends on Magic Leap coming to market in a soon-enough time horizon, with a big-enough splash.

Other AR platforms, such as Microsoft HoloLens and Meta, certainly have entertainment and media applications, but the former is initially being marketed as an enterprise device, and the latter is still too early to prove its mettle. Much of AR’s potential depends on Magic Leap coming to market in a soon-enough time horizon, with a big-enough splash. Investors have stacked their Jenga-tower expectations (and preferences), and the longer Magic Leap remains in stealth, the shakier consumer AR’s forecast becomes.

That said, Tim Cook recently said that AR was a key focus for Apple. In recent memory, Apple has joined a product category after it has already been defined, usually with vast improvements and beautified design. It has certainly been acquisitive in the “infrastructure” of AR over the past couple of years, snapping up Metaio, FaceShift, Emotient and Flyby Media. Apple entering the AR headset market would be the kind of platform VCs would bet on, and bet big.

The nearer-term market (and investment) opportunity in augmented reality exists within lighter use cases than those of Magic Leap or HoloLens. Snapchat face filters (using Looksery’s technology) count as AR, so I’m excited by what Snap Inc Spectacles hold in store — more for purposes of socializing the idea of wearing tech on your face than for immediately available, advanced AR applications. I’m also curious to see what the RealSense and Movidius divisions of Intel push to the smartphone ecosystem for AR. Depth-sensing mobile phone cameras open up a whole host of SLAM-enabled environmental mapping for intelligent digital overlays. We’ve already seen a bunch of startups toying around with SLAM-sensitive smart-device cameras for interior decorating, apparel sales, and toys-to-life (e.g. Lego) entertainment. I’m on the lookout for innovative, mobile-first startups that take advantage of depth-sensing computer vision.

Infrastructure

Infrastructure startups are emerging around head/positional tracking (Eonite Perception), haptic feedback (Axon VR), and offloading of device compute to the cloud, enabling more impressive overall VR experiences (Cloudgine, Improbable Labs). There is opportunity here, as we’re still on version 1.0 VR headsets — headsets that are expensive, require expensive PCs or add-on hardware to work, and/or require a 16x16-foot unencumbered space to feel truly immersive.

Another area of particular interest right now is the intersection of VR/AR and artificial intelligence.

Typically with most infrastructure businesses, startups can run the risk of being made obsolete if, for example, headset manufacturers have been secretly working on a better, faster version of their product, already well-funded and packaged up for the next hardware release. Even if that’s not the case, infrastructure tech gets copied by competitors (usually in China these days), and becomes industry best practice before long. Other times, best-in-class infrastructure companies are swallowed up by headset manufacturers themselves as “acqhires.” These rarely offer home-run investor returns.

However, sometimes it’s possible to become an embedded, defensible part of the software stack, and that’s where we’ve been investing over the past two years. This is where an infrastructure player thrives over time like Dolby, or infers higher-quality experiences with “Intel Inside” branding. Enduring businesses and platforms can be built here if they do the (initially) small thing they do, really well, better than others, and maintain their competitive superiority over time. In these instances, there’s no point in platforms reinventing the wheel and competing with the startup, instead preferring a vendor relationship with them as ongoing service providers.

Both of our announced VR/AR investments to date have been within this category and we continue to look for strong technically driven teams in this space, particularly around interesting applications of computer vision.

Another area of particular interest right now is the intersection of VR/AR and artificial intelligence. Once we’ve captured a real-life human performance or likeness in 3-D, why not use the same deep neural networks and machine learning that are applied to autonomous vehicles, or chatbots on various messengers, to give VR/AR holograms a mind of their own? Yes, I’m thinking Jarvis from “Iron Man,” Bishop’s sister Shard from the ’90s “X-Men” cartoons, or Russell Crowe’s Jor-El in the recent Superman movie — giving bodies to bots.

Sunny Dhillon is a founding partner at Signia Venture Partners, an early-stage fund in Menlo Park and San Francisco. He invests in virtual and augmented reality, consumer mobile and media startups. He represents Signia on the boards of gaming company, Super Evil Megacorp, virtual-reality company, 8i, and consumer mobile GIF company, Tenor. Reach him on Snapchat (@sunnydhillon25), or Twitter and Medium @SunDhillon.