Joe Kraus is a general partner at Google Ventures, and he was on a panel at the Virtual Reality Intelligence conference in San Francisco talking about VC investment trends in virtual reality. Joe predicts that 2016 will be a “perceptual year of despair” for virtual reality where the market won’t really start to take off in a big way until 2017. He says that for VR start-ups, the key will be to conserve cash and survive 2016 until 2017 when the VR market will start to really take off. Joe talks about some of the VR investments that Google Ventures has made, and some of his predictions for the future of VR and AR.
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Each year, Google Ventures has a total of about $300 million to invest into early-stage companies, and Joe Kraus has been looking into virtual reality for the past 14 months. Google Ventures has already made investments into Jaunt VR for cinematic capture and distribution of VR experiences, the social VR companies of High Fidelity and AltSpaceVR, the casual gaming company of Resolution Games started by Candy Crush designer Tommy Palm, as well as Emergent VR life capture and sharing with friends. Google’s investment into Magic Leap came from the corporate headquarters rather than Google Ventures.
Joe says that even though the desktop market is going to be the first out of the gate with gamers, he sees that the long-term mobile market is going to be more lucrative than desktop VR because the total cost of ownership is going to be a lot more manageable.
This stage of VR reminds Joe of the early days of the world wide web back in 1993 where the market was willed into existence, and there was a lot of collaboration in order to initiate the virtual reality market. Joe mentions the quote from Michael Abrash saying that this time in VR is going to be seen as the “good old days,” and that the technology and experiences are going to continue to improve.
Looking back to the lessons of the mobile app ecosystem, Joe suggests that perhaps the best investment strategy for the iOS app ecosystem was to go to sleep for three years and then start investing. Even though some of the early companies has good exits, the big winners didn’t emerge until after the initial wave of companies and applications. That said, Joe still believes that it’s really important to be investing into VR now because there is a learning curve for what works and doesn’t work in VR as it evolves and it’s really important to be involved now.
Joe sees that some of the key drivers for VR adoption include gaming for desktop VR, adult entertainment for mobile VR, and 360 videos and photos which will drive user-generated content as that medium finally can be fully appreciated with these fully-immersive VR HMDs.
Joe says that just as the user-generated content has been a horizontal feature within the web experience, social will also be a key part of most of the VR experiences. Google Ventures has made investments into two different social VR companies, and he sees High Fidelity as being more about building experiences in VR while AltSpace VR is more about engagement and doing things within a virtual environment.
When deciding what to invest in, Joe says that venture capitalists look for a magical combination of the team, market, and product and ultimately a viable business plan. The problem with VR right now is that there is no market yet, and so it’s a promise of big market. So they’re looking for a breakthrough product with an audience to get sustained audience and sustained behavior that has the possibility of having a defensible business model with a team who can actually do it. It’s a risky time to be investing in VR, and so Google Ventures mitigates their risk by syndicating their deals with other VCs and they also tend to write smaller checks.
Joe sees that Google Cardboard has a really important contribution to the VR ecosystem because you need a range of solutions ranging from expensive and high performant solutions to more affordable and accessible solutions like Cardboard. VR is an experiential platform, and you have to give people a taste of VR in order for people to really understand it.
One of the biggest mistakes that Joe sees VR entrepreneurs make is that they mistake novelty for value. The medium of VR is so new that people are likely to get a lot of strong reactions to the shock and novelty of VR, and it’s easy to mistake that for something that’s going to create something of sustained value.
In the future, Joe sees that virtual reality is taking us down a path towards augmented reality, and that they both have a role. Ultimately, Joe wants a contact lens that’s possible to do full transparency and selective occlusion to do remote telepresence with AR, and he also wants lights-out VR to be able to completely transport himself into a virtual environment. He recognizes that the laws of physics may prevent this vision of coming true, but that we’ll be able to get pretty close with glasses or something akin to wearable ski goggles.
Joe predicts that we’ll be able to experience the full spectrum of VR to reality to AR within the next 10-15 years, and he’s confident that this will happen because of the consumer demand for storytelling to experience wonder and escapism. He imagines a time where you’ll be able to transport yourself to anywhere on the planet to see what’s happening in real-time. It would be hard for people in 1993 to imagine all of world’s knowledge being accessible from your pocket, and we were able to achieve that within just 15 years. So Joe is confident that within the next 15 years we’ll be able to be transported to anywhere on the planet with AR or VR.
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Rough Transcript
[00:00:05.452] Kent Bye: The Voices of VR Podcast. My name's Joe Kraus. I'm a general partner at Google Ventures. Last 14 months or so, I've been spending most of my time looking at VR companies and made now probably six, seven investments. Great.
[00:00:23.656] Joe Kraus: So what are some of the companies that you've invested in so far?
[00:00:26.545] Kent Bye: We have investments in a variety of companies, so let's maybe start from largest to smallest. We have investments in jaunt on the cinematic distribution and capture side. We've got two investments in the social space, alt space and high fidelity. We have an investment in gaming, but not hardcore gaming. We wanted a counterplay where we were focused mostly on casual. So a company called Resolution Games, by a guy named Tommy Palm, who's heavily involved in Candy Crush and based out of Stockholm. We have an investment in emergent VR, which is about how do you capture your life and broadcast it to your friends. So the notion of making deeper connections with other people through VR. I have a couple of personal investments in VR as well, so a content studio called Beobob, and a few others. And is the Google Ventures also invested in Magic Leap, or is that a different part of Google? Magic Leap was done out of Google Corporate, so that was a very large check written by Google. We invest $300 million a year, and if memory serves, the single check that Google put in was larger than that into Magic Leap.
[00:01:36.546] Joe Kraus: Great. So we're here at the Virtual Reality World Expo, and you're just on a panel.
[00:01:41.331] Kent Bye: So what were some of the main points that you were trying to communicate to this audience here? Yeah. Let's see. The first was, boy, there was a ton covered in the panel. So let me see if I can talk about a few different areas. The first was, what do I think is going to happen in 2016, 2017? My general view is that I'm a huge VR enthusiast, and I think though that 2016 is going to be kind of a perceptual year of despair in the VR category, primarily because the expectations of headset sales have gotten way ahead of what I think reality will be. And that means there's going to be a press cycle which is about disappointment. I think the true believers are really going to say this is a matter of when, not if, But I think it will shake out some of the what I would call investor weak longs. People that are interested in VR because other people are saying it's interesting as opposed to having real conviction. What I think that means is in 2016 if you're a startup in VR, the key is conserve cash and surviving is your strategy. Like make it to 2017 where I think the market really starts to go. We talked about, at least for me, I'm a much bigger believer long-term in mobile VR. Well, even mid to long-term. Even though I think in the short-term, all the pent-up demand for VR is really in the gaming segment, which does perform better in the desktop environment. And I think Sony will do also very well with their offering. So, I think in the short-term you're going to see an out-the-gates movement in the desktop space, but I think mid to long-term mobile VR has to win, primarily because of total cost of ownership and larger market size. You know, when total cost of ownership is measured at a Gear VR at $100 on top of your already subsidized, you know, Samsung Galaxy S6, that's a very different proposition than spending $1,000, $1,200 if you've got to buy a rig from the ground up. One of the things I talked about is why I love the VR space, which is, you know, I think it reminds me the internet a lot in 1993-94 with this passionate group of people willing a space into existence. There's a lot of sharing that goes on between companies, not super competitive. People are sharing best practices, how to make good experiences. People are making up the rules that we will take for granted. granted in five, ten years. And as Abrash said at his talk at Oculus Connect, for all the stress people might feel, these are the good old days that we're experiencing right now, which is also great. I talked about, from an investor point of view, how maybe it's a little bit dangerous to be investing in the VR category right now, if you look at cell phones as an analogy. in that maybe the most successful strategy of investing in the app ecosystem around let's say iOS after the iPhone came out was to go to sleep for three years and then wake up and start investing because many of the early companies didn't actually turn out to be the companies of consequence. Many of them had fine exits, but they weren't the Instagrams, the WhatsApps, the Snapchats. These all tended to evolve after the first wave, but I think it's important to be investing now personally. So the reason I continue to invest personally is because I think the learning curve in understanding what's going on in VR as it evolves is incredibly important. We talked about a bunch of different application areas and what might be drivers of VR. Obviously gaming in the short term, gamers have been waiting for 20 years to be more immersed in the games that they want to play. We talked about, I think adult is going to be a big driver of mobile VR in particular. categories of user-generated content I think are really interesting. Again, 360 video, 360 photos, finally having a market primarily because, you know, historically they haven't done well because the experience of consuming them has been terrible relative to the experience of what you're trying to capture. And now with HMDs, you actually can experience what was intended to be captured in the first place. And I think people sharing those kind of intimate moments of their life with each other makes a difference. And again, that's what our investment in emergent VR is focused on. So that was a range of topics that we covered. To me, it's interesting the fact that there's High Fidelity and Altspace are both in the social VR and High Fidelity is taking more of like, you know, let's build something that's open source and kind of like an infrastructure layer.
[00:05:50.095] Joe Kraus: Really, what I see is one of the most visionary approaches towards social VR. And then Altspace, perhaps it'll be more of an enterprise corporate application. They have telepresence use cases.
[00:06:00.578] Kent Bye: But from your perspective, how do you kind of differentiate those two in terms of like social VR? So I think a few things. The first is, I'm a big believer in social as a killer application in VR. And I think that, you know, if we rewind the clock to, let's say, the mid-2000s when the UGC revolution was coming out, a bunch of people thought there would be massive companies built around UGC. And there have been some. But for the most part, UGC is actually a horizontal. It's something you come to expect on every site now, the ability to leave a comment, the ability to do rankings, ratings, reviews, these kinds of things. So I think social is going to be an important element of all VR applications. Like, everything in VR that you do is done better with friends. And I think the most compelling digital social experiences we have are going to be in VR. So as it relates to your specific question, I think of high fidelity as really focusing on building. What can I build in this world? And I think of alt space as focusing on engagement. What am I going to do in this world? And I think they're just different points of view about what's the harder and most important problem to solve. Obviously, both you can build and both you can engage. Like High Fidelity would say, well, we're going to have people build and people can engage in those experiences that other people have built. That's the sense that I really have is really what the core difference is between them.
[00:07:24.205] Joe Kraus: Yeah, because I asked just because I feel like social is going to become more and more a part of VR experiences and you know as a venture capitalist like what are the things that you know is it really that a demo is going to be the thing that if you see a demo and it really blows your mind then you make the decision to invest or is it the team that people have put together, or is it the pitch of the, say, this is the target demographic and market, but what were some of the things that you look at?
[00:07:48.011] Kent Bye: Sure, sure. The truth, I mean, any venture capitalist making any investment will tell you it's a magical combination of team, market, and product, and then ultimately business model. In the VR space, there is no market yet, just not headsets. So it's the promise of a big market, but not a big market yet. So what you're really looking at is, is this a product that feels breakthrough in a category where you think you can get sustained audience and sustained behavior, that has the possibility of a business model that feels defensible, and most importantly, a team that can actually do it? So, it's a slightly narrower formulation because, you know, the market isn't developed yet. And so, what that means for us at GB is we syndicate the deals that we do with other VCs and that we tend to write smaller checks because without a big market already there, you have to be more cautious about You're not going to put tens of millions of dollars to work in a single company, again, because the market isn't quite there yet. But we're aggressive in pursuing VR deals that we like, but we just tend to do them with other firms.
[00:08:59.116] Joe Kraus: And I hear a lot of people when they talk about Google Cardboard, they kind of dismiss it as they may not even include it in the major headsets, largely because there's still a lot of latency issues with any random phone that people may put in there. And so as Google moves forward, are we going to start to see more of like a minimum spec requirements or something more of like a performance that matches a Gear VR?
[00:09:20.668] Kent Bye: I can't speak to what the Cardboard team is going to do, but I actually think that Cardboard has a really important contribution to the VR space. You need a range of solutions in any given ecosystem, from the expensive and high performant to the cheap and maybe less performant, but nonetheless giving people access. And the fact that they pumped a million of those things out with the New York Times on Sunday. And as I said on the panel, my son, who has seen every kind of VR headset out there, his reaction to cardboard was unexpected to me, given the fidelity that he has witnessed. The magic of putting his phone in and transforming his phone at 13 years old, into something else, into a portal, into another kind of 3D world, was magical for him. He asked me to bring like 10 more of them home, and did he need my market feedback with Hill and Hisman, all his friends. So I actually, I understand why people don't include it. It doesn't have positional tracking, but nor does the Gear VR. And it's got some drift issues because of different performance in phones. But in VR, it's such an experiential platform, you can't describe VR. Seeing is buying, experiencing is buying, and giving people even a taste of the experience. You know, I think many purists worry, oh, their first experience is going to be on cardboard. It's going to suck. They're never going to look at it. I've never seen somebody look at cardboard that's never seen VR and go, that's terrible. They instead go, wow, this is really neat. It's incredible. I think it wets their appetite far more than it turns. Like I said, I've never seen a person who has not seen VR see cardboard for the first time and be turned off. They just, again, you know, one of the things I meant to mention this in the panel, since I see a lot of companies, one mistake that I see that's somewhat common is that entrepreneurs mistake novelty for value. So they get such strong reaction. to their experiences from people, especially people who've never seen VR, that they mistake the shock novelty reaction of people seeing VR in their experience for we have something of sustained value. And those aren't the same thing. And it's tough at times to tease out whether you've created something of sustained value when you're getting such smiling, emphatic reactions from people who've never seen it before.
[00:11:46.884] Joe Kraus: Yeah, and because you do see a lot of companies, both in the context of Google Ventures, but also your own personal investments, how do you kind of differentiate, this is not a good fit for Google Ventures, but actually I may do some personal investment in it because I'm really interested. And the things that you've personally invested in, what are the kind of the common characteristics that you see in those companies?
[00:12:05.075] Kent Bye: It's tough to draw precise lines. You know, it has to do with the dynamics of a partnership and what do we all agree on and what can I present and sell effectively. So I wouldn't say there's any hard and fast rules one way or another. Okay. And finally, what do you see as kind of the ultimate potential of virtual reality and what it might be able to enable? Well, look, I think VR is taking us down a path towards AR. I think they both have a role, but I know what I want. And I don't think it's by the laws of physics possible, but I can describe what I want. And I like anything where I can describe a future in which I know what I want. And I bet, in a different form factor, I can get close sooner than I want. So what I want is I want a contact lens, like the one I'm wearing now. that's capable of full transparency, selective occlusion, essentially AR, so I can be sitting and having this conversation with you from afar, but it appears that you're right in front of me. And I want lights out VR when I want a fully immersive experience and transport myself somewhere else. So I think we're the first step on a spectrum between reality to virtual reality to augmented reality. And I think in 10 to 15 years you will have that ability to have that full spectrum, not in a contact lens package, but I think you would absolutely have that full spectrum ability in like an Oakley ski goggle, maybe even like the glasses that you're wearing, I don't know. It's hard to do the full blackout with light coming in from the side. So I just, I am confident that this will happen because the consumer demand for storytelling, for anything from wonder to escapism is so strong that I am confident we will be able to do this, to transport people to other places. I mean, just imagine the ability to teleport yourself anywhere on earth. Like, one thing I didn't talk about up on stage is somebody is going to build a service that essentially can put you anywhere on the globe. It seems like a natural extension of, you know, what Google does or what Microsoft does with regard or Apple does in terms of like the Street View style component. But I want to be able to be put anywhere on earth right now to see what's happening. I lived in Rome for a year. I want to be able to be back there right now and see what's happening. I want to be able to share experiences with the friends I made there now. Again, I don't think that's tomorrow or even five years, but I think 15 years from now, 10 to 15 years, I think it's like people in 1993 couldn't imagine the idea of the world's knowledge in your pocket, and yet only stretching it here, yeah, about 15 years later from that time, you had it. So I'm confident of this ability to be transported anywhere through a combination of virtual reality and augmented reality will happen in that time. Do you think that the virtual retina display approach that Tom Furness invented that Magic Leap is using is more along that path rather than using something like cell phone AMOLED screens? I don't know. I feel like if I knew exactly what technology path was going to be the winner, I would be A, keeping it quiet, B, making investments, and then C, talking it up. So I don't know yet. Okay, great. Thank you.
[00:15:26.633] Joe Kraus: Thank you. And thank you for listening. If you'd like to support the Voices of VR podcast, then please consider becoming a patron at patreon.com slash Voices of VR.
