Virtual Reality / Augmented Reality: Real Investment and M&A Trends

November 12, 2017

The image above is from Magic Leap, an augmented reality company that has never shipped or even shown a product, but in October 2017 received a $502 million investment on top of its nearly $1.4 billion in existing funding. The round was led by Singapore holding company Temasek, and includes major existing investors like Google, Alibaba, and J.P. Morgan Investment Management. The company may be launching a device called “Magic Leap One” and gearing up to ship that device to a “small group of users” in the next six months. It is rumored that Magic Leap stands people in a demo room and challenges them to identify what’s real.

What is certainly real is the large amount of capital being invested in the sector and the increasing amount of M&A exits for AR/VR companies with minimal, if any, revenue. One reason for the rapid capital flows into the sector are the practical applications of AR/VR in the B2B context. AR/VR is already in in use in the real world and no whales need to leap.

Real World Applications

It’s hard to wire a wind turbine while juggling a thick technical manual, or to ask offsite experts for help without being able to show them exactly what you see. Augmented reality can help, overlaying digital data onto the real world to give workers immediate access to vital information. Augmented reality headsets are already popular in factories, hospitals, and other workplaces.

Large companies, such as Boeing, that use AR/VR every day in their operations for part installation as well as design, are increasingly buying companies in the sector. In August 2017, Boeing purchased Pittsburgh-based C360 Technologies which specializes in high-density video and distribution, including applications for live and on-demand augmented/virtual reality on multiple platforms.

Another practical application is the medical sector. Medical students use AR technology to practice surgery in a controlled environment. Visualizations aid in explaining complex medical conditions to patients. Augmented reality can reduce the risk of an operation by giving the surgeon improved sensory perception. Neurosurgery is at the forefront when it comes to surgical applications of augmented reality. The ability to image the brain in 3D on top of the patient’s actual anatomy is powerful for the surgeon.

AR/VR Funding

The following graphs highlight venture investing trends through July 2017.

The analysis below summarizes the average company funding in each VR category. The VR Environment Creation category leads the sector with around $51M in average funding per company, followed by the Augmented Reality category with around $41M in average funding per company.

AR/VR M&A Trends

Despite Facebook’s blockbuster $3 billion Oculus acquisition in 2014, virtual and augmented reality have been too early-stage for large-scale mergers and acquisitions so far. But that’s set to change in the next 12 months, so let’s look at what could drive M&A deals going forward.

Major corporations are actively honing their strategies on where and who to buy. Startups are also considering larger corporate parents to provide safe harbor, until the market is big enough for their business models to shine. And as often happens, early-stage companies that can’t raise the next round are looking for mergers with better funded startups to leverage their tech and talent.

Digi-Capital’s Augmented/Virtual Reality Report Q1 2017 and deals database tracked $1.5 billion investments in the last 12 months to Q1 2017, and found only $600 million of M&As in the same period. That dynamic of investments outstripping M&As is typical of early-stage tech markets, when deal making is all about investment for growth rather than consolidation for dominance or cost.

Here is a video on Elon Musk contending that we could be living in an AI simulation already. Considering the fact that we may already be living in a simulation, it makes even greater sense to invest in AI. Cheers!

Ben Boissevain, Managing Director, Ascento Capital