Matt McIlwain is a managing director at the Madrona Venture Group, which recently announced their first investment in the virtual reality space with a $4 million Series A round of funding for Envelop VR. Matt talks about why Seattle is one of the top hotbeds for augmented and virtual reality because there’s a wide variety of hardware, software, gaming, and cloud computing companies including HTC, Valve, Oculus, Facebook, Amazon AWS & Twitch, Microsoft Xbox & Hololens, and Nintendo of America. Matt talks about Madrona’s investment in Envelop VR as well as their strategy finding companies building horizontal software for AR and VR as well as other vertical commercial opportunities of new models of distribution that AR and VR enables.
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Here’s an excerpt from a post that Matt wrote that elaborates he sees Seattle as a hotbed for virtual reality, as well as Madrona’s quest to find and fund the killer VR apps.
We are also delighted to be announcing Madrona’s investment in Envelop VR in conjunction with the second annual Seattle VR conference, taking place today (10/28/15) The conference highlights the breadth and depth of virtual and augmented reality talent in greater Seattle. Microsoft is a major player in both augmented and virtual reality with HoloLens, Minecraft in VR and the XboxOne partnerships with Facebook. Facebook itself has multiple Oculus offices in Seattle and is investing in a variety of strategies across the category. Valve with its Vive/HTC partnership (and HTC North America is also in Seattle), Steam game distribution platform and leading gaming experiences. And, an extensive group of gaming industry leaders including Nintendo USA, PopCap/Electronic Arts, Amazon.com/twitch.tv and Bigfish games. These companies are the foundations upon which a next generation of smart headset ecosystem players will be built.
Seattle is already and will increasingly be seen as a powerhouse in the smart headset and virtual/augmented reality era. We are delighted to be partnering with the Envelop VR team, SEA-VR conference and future VR/AR related companies in the years ahead to help make the smart headset era as successful as the previous hardware computing eras.
The Seattle VR conference was indeed a great gathering of a lot of impressive and cutting edge VR demos, and I’ll continue to have more Voices of VR coverage from the event. Also be sure to check out Michael Glombicki’s summary of the event.
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Rough Transcript
[00:00:05.452] Kent Bye: The Voices of VR Podcast.
[00:00:11.995] Matt McIlwain: I'm Matt McElwain with Madrona Venture Group, and we're an early stage venture capital firm based here in Seattle, Washington. And we have been focused for well over a year now on trying to understand and map out the virtual reality, augmented reality space. One, because we believe the time has come for this to be a really disruptive area of innovation. And secondly, we think that the greater Seattle area is one of the hotbeds.
[00:00:33.417] Kent Bye: Yeah, there's certainly a lot of activity in Seattle. Maybe you could tell me why you see Seattle as one of the hotbeds of virtual reality and augmented reality.
[00:00:42.093] Matt McIlwain: Sure. Well, we think that some of the foundations of why virtual reality is ready now for prime time is because you go all the way back to the phone itself and all the component parts of the phone. And this is a town that's got an incredible history in wireless, both from a service provider perspective and a handset provider perspective. Going back to McCall, which became AT&T Wireless and T-Mobile, et cetera, but also several handset players, including HTC's North American operations. Microsoft, even Amazon. Notwithstanding the fact that some of these guys haven't had the biggest successes in their phone areas, it's a key place. Add to that gaming. So, not only do you have the Xbox gaming platform, but you've also got many games that have been built on top of Xbox, but also we've got PopCap, of course. Valve is a huge player in games. Nintendo USA is based here as well. And then finally when you look to specifically the virtual reality and augmented reality space, once again we come back to Valve. And the Valve and HTC partnership around Vibe is here. One of Oculus' largest offices, actually they have three offices in greater Seattle area on top of the Facebook office. So there's a big presence of Oculus folks here. And then you go to Microsoft, with Microsoft, what they're doing with HoloLens, and the list goes on. So we see an extensive number of the key early players up and down the stack of VR.
[00:01:56.290] Kent Bye: Yeah, and when I look at all of the cities in the United States, I really see Seattle as like number three, with the Bay Area as number one, then the LA area with all Hollywood and stuff, and then, yeah, all the stuff with even this expo here is certainly a pretty impressive combination of a lot of different really cutting-edge technology, but also developers that are here. And as a venture capitalist, then, you know, there's a little bit of virtual reality that can be geographically agnostic in terms of just takes a handful of people to really focus in on, you know, creating something that's really compelling in the VR space. And so maybe you could talk about, like, what is your strategy? Like, how do you understand this space of VR, and how are you making these decisions as to what to actually invest in?
[00:02:38.558] Matt McIlwain: Well I think that's a great setup. We do believe that there's a lot of expertise in the smart headset and so more generically the hardware and peripherals area of virtual reality and augmented reality here. We think that's generally a harder category for the venture capitalists to be successful in. We do think, though, that software, of course, with Microsoft's history and even what Amazon's done in turning hardware into software with the Amazon Cloud, is a very, very important area. Not just because of the software expertise, but because as we increasingly get into virtual reality use cases, which are not just one person in VR, but multiple people in VR, that understanding how to leverage the backend cloud is going to be super important in Seattle, for many reasons, is the cloud capital of the world. Then on top of that, there's a lot of the content, more so on the gaming side, and gameplay and game interaction here. Amazon owns Twitch, back to Valve again, Microsoft, certainly plenty of history there. So while we definitely will see, to Los Angeles, the entertainment side of content, we think from a gaming and other things that will get innovated on over time, including the Twitch-like dynamics that will eventually get into VR, Seattle's an incredible town.
[00:03:42.332] Kent Bye: Great, so how do you understand the space of VR then? How do you kind of break it up in your mind in the different sectors?
[00:03:48.745] Matt McIlwain: Well, I think I was just trying to a little bit lay out those different categories. And for us, the area that we think is the sweet spot now is some more horizontal software plays. As you may have heard today, we just announced our investment in Envelop VR. Envelop VR is a company that helps people go from being in the physical world with their workspace, their physical environment, to a virtual environment or a virtual workspace where you can just do amazing things and unlock that potential of taking your existing applications and operating systems and running them in a virtual environment. So, you know, that's a good example of a horizontal software play, and we see from a venture capital perspective that being a good spot. Will we look at other things? Absolutely. And will there be some kinds of content studio companies that can break out? Sure, there's going to be those opportunities, but those tend to be harder from a hits-driven business perspective, and so we'll likely be more cautious. But one other thing I'll mention is I think there's going to be new forms of distribution and ecosystem around distribution that are created in the virtual reality and augmented world. And I think that's both going to occur on the consumer side or the individual side, but also on the commercial side. And this is really more the focus of what Microsoft is doing with HoloLens today. And so we're going to be looking for some more commercial vertical opportunities on that side of the house.
[00:05:01.645] Kent Bye: Now in terms of virtual reality, there's a lot of kind of like the basics in terms of, you know, creating a solid VR experience and hitting the frame rates and performance and all that stuff. You've had time the last year of looking into VR, so you've had enough to kind of explore it. Could you imagine like stepping into a VR demo or things that you've already seen and you're just being totally blown away, but yet also being convinced that there's some sort of like problem that's being solved in a solid market. And so, How do you kind of balance that between, maybe they have a great idea, but until they actually get in the demo and you see it, it could be terrible.
[00:05:33.269] Matt McIlwain: Well, I do think that experiencing it is to believe it, right? This is a, and not just one experience, but multiple experiences over an extended period of time. And we've been investing in that for, as I said, well over a year now. And I would encourage other people to do that as well, because that experience is believing is what's really important. There's so many things, not just in the headsets themselves, but how content gets captured and what that enables you to do. There's a whole bunch of areas around audio that can be innovated and must be innovated on. Head tracking systems, we could go on and on. So there's many dimensions to what the experience being in a VR environment, an environment you want to spend a substantial amount of time because it's substantially better for a particular use case than what the real world is for that use case. And that's what we're looking for. I think it's a very holistic set of things that are going to be innovated upon and we're going to be looking for horizontal software-driven opportunities primarily to make our early investments in the area.
[00:06:31.102] Kent Bye: And so when it comes to the total VR market, in a lot of ways people don't really know as to how this is going to play out with how large of penetration the virtual reality is going to have, how long it's going to take. And so as an investment firm trying to mitigate your risk, how do you even handle that uncertainty? Like what are the types of projections that you have or how is it that you've been able to justify this?
[00:06:55.870] Matt McIlwain: So, I think you start with that experiencing is believing idea. Secondly, I actually would have a slightly different take, which is to say, we believe this is going to be very big. We believe that smart headsets as a platform is the next platform of personal computing that where a lot of innovation is going to happen on. And I'm using that term kind of generically, but I think you get the idea and how that relates to VR and AR. The risk in our mind is when? When will these headsets that are commercially available at scale actually be out? And our view is that there might be over the next couple of quarters a little bit of disappointment as things yet again take longer to be out. But by the back half of 2016 we're going to see some very viable commercially available at scale offerings and then into 2017. But that's the uncertainty and that's the risk that we're betting is going to happen sooner relatively than later.
[00:07:43.479] Kent Bye: And so if somebody has working on some of these horizontal scale VR applications, is this something that you're going out and trying to find them? Or are they coming to you? And how do you kind of sift through and filter whether or not something's worth looking at and considering?
[00:07:57.828] Matt McIlwain: Well, it's definitely a both. We're out there. It's why we're a big sponsor of the Seattle VR Conference. It's why we've hosted VR hackathons and been involved with them, hosted meetups in the VR community. We're very much trying to be out there in the community trying to be a resource. I'll be giving a talk a little bit later on on fundraising dynamics, how it relates to VR and AR companies. so that it's a two-way street. The people are coming to us, we're having conversations, we're going out to meet them, going out to experience what they've got. I think that's a good way to set the stage. We're only going to invest in one out of a hundred companies that we look at and that's just the dynamic of venture capitalists. So we want to be very helpful and additive to the entire innovation ecosystem around VR and AR so that the whole pie gets bigger and we'll find a couple of great teams to partner with within that bigger pie.
[00:08:41.857] Kent Bye: And so what are the main points that you want to try to get across to the audience here in terms of what are the dynamics like for fundraising for VR and AR?
[00:08:49.401] Matt McIlwain: Well, at the end of the day, and I know this is a little overly simplified, you know, we believe in the category, so we think it's a race worth winning. And so then it's a question of, is this a team that's trying to solve a very specific problem that they can solve better, they believe, than anybody else? And that that's a problem that's really worth solving in the emerging AR VR space. So what I'm looking for, which is what I'm looking for across all kinds of investments is, are you understanding a customer problem? Are you focused on that customer problem? And why do you think your team can go build a better solution than anybody else? It doesn't have to be the hugest expansive piece. We want to believe that it can emerge into that over time, but start by focusing on a specific problem and getting that addressed.
[00:09:30.950] Kent Bye: And so what type of experiences do you want to have in virtual reality then?
[00:09:34.471] Matt McIlwain: Oh, one of the things that I'm super excited about in virtual reality is being able to interact with friends and family that might be in different places around the world. And even if that interaction is just talking to my daughter who's off at college, or my son when he's doing a summer internship away from town, or my mom down in Florida, that you can have these richer, interactive experiences in VR, not just individually, which I really like, and I'm looking forward to doing that too, but also some of those more shared presence experiences.
[00:10:03.680] Kent Bye: And finally, what do you see as kind of the ultimate potential of virtual reality and what it might be able to enable?
[00:10:09.825] Matt McIlwain: Well, on the ultimate potential side, I think it's hard to see right now because we are still such early days. But, you know, why wouldn't I want to have 10 screens that I can interact with in my workspace? And that's something you can do in virtual reality. Why wouldn't I be able to have a really fully immersive interactive experience with friends and family wherever we happen to be, you know, throughout the world? And also, what about the experiences of other types of content, whether it's a sporting event or a game playing experience, that are just going to be fundamentally transformed by this world of AR and VR. And then I'm really talking more VR there, because on the AR side, think about all the things and the types of headsets and forms that I'm going to interact with in my working life, if I'm more of an industrial worker, or even if I'm getting around town in my car. So there's a lot of potential yet. The next decade's going to be fantastic, and we're just delighted to be a part of it.
[00:10:57.138] Kent Bye: Awesome. Well, thank you.
[00:10:58.299] Matt McIlwain: Thank you very much.
[00:10:59.572] Kent Bye: 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 voicesofvr.
