A high level guide for investors and entrepreneurs looking to invest their money or start a company in the virtual reality and augmented reality space.

1. Where to invest
money (and time) in VR/AR? October 2016
image © Maurizio Pesce

2. Investors Entrepreneurs
Form your own
investment thesis
rather than follow the
herd!
Decide where you
want to invest the next
10 years of your life!
Why is this important?
Caveat: don’t always
listen to these guys
image © Adrian Brooks, Imagewise Limited image © svetlinnikolaev

3. “VR is the next
social platform”
Zuckerberg
“Augmented/Virtual Reality
to hit $150 billion by 2020,
disrupting mobile”
Digi-Capital
+
“VR and AR is the next
computing platform”
Goldman Sachs
image © Mike Licht image © Digi-Capital
Many are claiming that this is the next big disruptive platform
… so what can we learn from the platform that preceded it?
images © Facebook, Mike Licht and Digi-Capital

4. So what can we learn from the mobile wave that preceded it?

5. 2. Speed?
1. Enormity?
3. Composition?
I want to look briefly at three components of value creation
how big
will it
actually be?
how fast will it grow?
what are the
themes, business models,
verticals?

6. 1. Enormity -
Mobile was big because it didn’t directly compete with other
platforms
ate “low utility free time”
enabled “completely new use cases”
= no readily available substitutes
= muted competition
= virgin “grow the pie” revenues
Mobile

7. 1. Enormity -
VR and AR arguably impact a much wider set of industries and
platforms but has large substitutes and hence competitors
eats “hardcore gaming”
and enables “new use cases”
= direct substitute for console/PC gaming
VR
AR
potentially eats “mobile”
potentially eats “computers”
potentially eats “televisions”
and enables “new use cases”
= direct substitute for several industries

8. images © MIT media lab, Magic Leap
If it could replace ….
the phone the computer the TV
$350B
industry
$375B
industry
$115B
industry
+ +
= $840B of addressable hardware to disrupt
1. Enormity -
This large potential comfortably supports the large valuation
of companies like magic Leap
so a 3% of capturing 30% market share of that is already worth $10b!

9. 2. Timing -
Mobile actually took a lot longer to grow than we remember
0
350
700
1050
1400
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Million
devices
NTT DoCoMo
⛔ poor data speeds
⛔ poor interface
⛔ not rich
⛔ very closed platform
Crackberry
✅ better interface
⛔ poor data speeds
⛔ not rich
⛔ very closed platform
iPhone
✅ better interface
✅ good data speeds
✅ rich, touch-based
⛔ closed platform
(until 2008)
Android
✅ better interface
✅ good data speeds
✅ rich, touch-based
✅ open platform
BOOM!!!!

10. 2. Timing -
VR and AR feels like mobile 2004, not yet 2008
Million
devices
0
350
700
1050
1400
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Oculus DK
⛔ poor experience
⛔ poor portability
⛔ expensive
⛔ lack of content
Magic Leap
✅ good experience
✅ better portability
⛔ expensive
⛔ lack of content
Vive/Oculus
✅ better experience
⛔ poor portability
⛔ expensive
⛔ lack of content
iPhonesque
✅ great interface
✅ portable
✅ cheap
⛔ closed
Androidesque
✅ great interface
✅ portable
✅ cheap
✅ open
BOOM!!!!
? ?

11. … other than they both involve
putting cool stuff on your head
images © Jason Farrell & Gamer Story
3. Composition -
Caveat - VR and AR are not all that similar!

12. images © Jason Farrell & Gamer Story
VR is about being somewhere
else and wanting to transport
yourself to content
AR is about making me more
productive or bringing utility
by bringing content to where I
am
3. Composition -
One creates presence while the other one takes it away
➡ What places do I currently have to
be that I really don’t want to or
cannot physical be?
➡ What content could I bring to where
I am physically to enhance my
experience?

13. images © Jason Farrell & Gamer Story
➡ What places do I currently have to
be that I really don’t want to or
cannot physical be?
➡ What content could I bring to where
I am physically to enhance my
experience?
3. Composition -
Each leads to very different use cases
- At work? … tele-working
- At school? … education
- In hazardous environments? … training
- At experiences? … sport, concerts, travel
- At work? … notifications, process-oriented
efficiency improvements, device
replacements, training
- At home? … device replacements, interior
decoration

14. Applications
Hardware Platform
HMDs
Inputs
Haptics
Distribution
Engines
Capture
Advertising
Analytics
Test
Games
Travel
Sports/Live
Entertainment
Healthcare
Education
Entertainment
360 Video
Enterprise Social
Virtual Spaces
Telecommuting
Training
…
Dating
… …
…
Real Estate
See @tipatap for a great overview of companies in each vertical
3. Composition -
I look at VR and AR opportunities as largely falling into three
categories

15. Hardware Platform Entertainment Enterprise Social
Investment
required
Very high
(manufacturing)
Medium/high
(must grow with
platform)
Low
(dev cost only)
Low/medium
(often funded
by enterprises)
Very high
(rarely directly
monetized)
Time to
market
Slow
(R&D)
Fast
(Low initial
expectations)
Fast
(low initial
expectations)
Medium
(often captive
to clients)
Slow
(complicated,
network effects)
Revenue
model
Unit sales
(+ distribution)
Free
(later SAAS)
Paid
(later freemium)
Paid
(later SAAS)
Free
(later indirect)
Barriers to
entry
High
(expensive to start &
differentiate)
Medium
(customer
lockin)
Low
(constant churn
of interests)
Medium
(customer lockin)
High
(network effects)
# Winners Very few Few per
category
Many
(though few
for long)
Few per
category
Few
Degree of
competition
Low Medium High Medium Low
Breakeven
customers
High
(low margin,
amortized R&D)
Medium/high
( depends on
competition)
Medium, later
high
(competition erodes)
Few, later
high (productization
drives subscription)
All (scale
unlocks
other options)
3. Composition -
These categories each have quite different business models

16. 3. Composition -
Hardware - really a bet to be the next Apple, Samsung, Sony
Investment
required
Time to
market
Revenue
model
Barriers to
entry
# Winners
Degree of
competition
Very high
(manufacturing)
Slow
(R&D)
Unit sales
(+ distribution)
High
(expensive to start &
differentiate)
Very few
Low
Breakeven
customers
High
(low margin,
amortized R&D)
$350B
$150B
$80B
$34B
Mobile wave success cases:
What you have to believe:
• That VR and AR hardware evolves to be fully integrated
platforms not just peripherals
• That the underlying technology is novel enough and can be
effectively protected by patents, creating barriers to entry
• That open source efforts (eg Tango) don’t destroy too much
value
• That you can credibly raise A LOT of money to get off the
ground or you can alternately focus on smaller hardware
components that larger players might want
$390M
$121M
$278M
$356M
Integrated Component

17. 3. Composition -
Platform - lots of medium size company, pragmatic approach
Investment
required
Time to
market
Revenue
model
Barriers to
entry
# Winners
Degree of
competition
Medium/high
(must grow with
platform)
Fast
(Low initial
expectations)
Free
(later SAAS)
Medium
(customer
lockin)
Few per
category
Medium
Breakeven
customers
Medium/high
( depends on
competition)
Mobile wave success cases:
$750M
$275M
$200M
$350M
$104M
$250M
$100M
What you have to believe:
• The VR & AR will require similar platform development as
mobile did (likely)
• Incumbents on other platforms are slow to take up AR & VR
(likely)
• Likely candidates include VR/AR versions of existing platform
plays - ad systems, analytics, development tool chains,
performance monitoring, testing, security - as well as platform
elements unique to VR/AR - avatar systems, broadcast
platforms, face tracking, emotion, etc

18. 3. Composition -
Entertainment - likely too early to support meaningful exits
Investment
required
Time to
market
Revenue
model
Barriers to
entry
# Winners
Degree of
competition
Breakeven
customers
$7B
$3B
$5B
$2B
Mobile wave success cases:
What you have to believe:
• That VR and AR gaming/entertainment will be more like
console and high MSRPs and several unicorns
• That the market exists to support the budgets required to
make compelling games (presently this is not the case)
• That building games this early in the platform growth cycle will
create platform possibilities
• That there is defensible platform know-how that is difficult to
emulate
Low
(dev cost only)
Fast
(low initial
expectations)
Paid
(later freemium)
Low
(constant churn
of interests)
Many
(though few
for long)
High
Medium, later
high
(competition erodes)
$1B
$1B

19. Investment
required
Time to
market
Revenue
model
Barriers to
entry
# Winners
Degree of
competition
Breakeven
customers
$4B
What you have to believe:
• That an enterprise play is a smart way to fund fund your R&D
that that can be later be productized (less need for VC/Angel
investment)
• That enterprise customers are more willing to experiment with
VR and AR and hence can be early adopters
• That you can build meaningful revenues form a smaller
number of customers (you don't necessarily need mass
adoption to build something valuable)
Low/medium
(often funded
by enterprises)
Medium
(often captive
to clients)
Paid
(later SAAS)
Medium
(customer lock-in)
Few per
category
Medium
Few, later
high (productization
drives subscription)
NB: Most enterprise
mobile application tend to
be multi-platform and part
of larger companies
Mobile wave success cases:
3. Composition -
Enterprise - a smart model for European VR & AR companies

20. Investment
required
Time to
market
Revenue
model
Barriers to
entry
# Winners
Degree of
competition
Breakeven
customers
$25B
$18B
$1B
Mobile wave success cases:
What you have to believe:
• That VR & AR will grow faster than expected, as social
networks because exponentially more valuable the more users
you have
• That Facebook, WeChat and WhatsApp will not successful
transition to this new platform
• That you can hunker down for many years without any
significant revenue streams
Very high
(rarely directly
monetized)
Slow
(complicated,
network effects)
Free
(later indirect)
High
(network effects)
Few
Low
All (scale
unlocks
other options)
3. Composition -
Social - potentially big, but very early today as requires scale
$85B

21. Applications
Hardware Platform Entertainment Enterprise Social
AR Hardware
0.8B
VR Hardware
0.15B
Video
0.2B
Solutions
0.2B
Games
0.2B
Advertising
0.1B
Distribution
0.1B
Peripherals
0.03B
Social
0.05B
58% 12% 24% 12% 3%
Probably
Under-invested
Way too
early
Pre-requisite
Over-invested
at this stage
Under-invested
3. Composition -
Where investment money as of Q2 2016 has gone

22. Some critical investing questions I ask
High uncertainty
especially as to
speed and how any
one vertical my
evolve?
Situation In addition to the standard questions I might ask
a startup, I focus on two critical ones:
1. How fundamentally strong is the product use case?
(ie. real value or gimmick)
2. What degree of pivotability does the
startups/founders offer?

23. Will 360 video really be the next
broadway or will it always be a
novelty niche?
Will immersive biology replace
textbooks, or just satisfy our inner
voyeur?
Will VR sports really substitute for
actually being there?
Will with VR social experience be
better or worse than real life?
1. How fundamentally strong is the product use case?
What of what we are seeing will be tomorrow’s fad?

24. 2008 Now
1. How fundamentally strong is the product use case?
Much of what was successful in early mobile never stood the
test of time

25. 2. What degree of pivotability does the startup offer?
Many mobile winners underwent significant pivots
TapDefense Tapjoy
tower defense game global incentivized install network
AuroraFeint
weird tetris-like game
OpenFeint
social mobile gaming network

26. andrewl@gmail.com
andrewllacy
andrewlacy
Andrew Lacy
Advisor | Investor | Entrepreneur
San Francisco | London
THANKS