Tim Merel

Crunch Network Contributor

Tim Merel is the founder and CEO of Eyetouch Reality and Digi-Capital.

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The reality of augmented and virtual reality venture capital

The reality of AR/VR business models

How to join the network

VR will be big, AR will be bigger (and take longer). But as in most early-stage tech markets, growth will be curved, not straight. There will be a few billion dollars of revenue this year, a progressive ramp in 2017 and a hoped-for inflection point in 2018 (when AR could deliver that magic combination of hero device, long battery life, cellular capability, strong app ecosystem and telco cross-subsidization).

But AR/VR is still in the first of the four stages of tech market development (hype cycle, facing reality, liftoff, sustainable market). Its installed base, from low-end Cardboard through high-end HoloLens, is unlikely to top 100 million until 2018. So how can AR/VR startups survive when long-term AR/VR business models won’t have the scale they need to thrive for 18-24 months? You just need to know where to look. So let’s look.

Get bought

Oculus. Enough said.

Raise a ton of money

Magic Leap. Enough said.

Do something else

Existing businesses that intersect strongly with AR/VR are profitable springboards into the new market. Lightfield capture, render and streaming firm OTOY’s founders Jules Urbach and Alissa Grainger have been “working profitably with visual effects, TV, film, technology and games companies for years, whether as a high-end production service or via software licensing. We’re also serving 150,000 customers through cloud-based rendering and SaaS solutions.” So they can afford to invest in “the emerging wearable lightfield streaming business.”

Cubic Motion chairman Andy Wood is also “accelerating in AR/VR by doing more of what we already do — helping creative minds express themselves with facial animation and tracking, now in real time. So we are experimenting and investing during the early market.” 3D model publishing platform Sketchfab CEO Alban Denoyel “doesn’t need VR to be successful, as our content can be consumed already with critical mass on the web (500,000 3D creators, one million 3D files, four million uniques). VR will take time to reach this scale for us. We make money from creators today, and long term will monetize through advertising and premium content.”

Find a publisher

The publishing model is pretty standard for the games industry, and is already helping AR/VR games studios build their businesses via development contracts with platform holders. The end product often has some sort of exclusivity at launch, which has not been without controversy.

Own a vertical

zSpace’s CEO Paul Kellenberger is providing a complete screen VR solution for education. “We’re now installed in over 300 school districts and 130 universities, with hundreds of thousands of users already. Our industry focus has delivered over 300 percent year on year revenue growth since 2013.” AR/VR unicorn MindMaze CEO Tej Tadi’s focus is on VR in healthcare “for motor recovery solutions post-brain injury. We use a subscription model, where hospitals get our hardware for free and pay for neuro-healthcare exercise/games content and analytics. We also have a subscription-based home product for compliance and training.”

Have wealthy parents

Aiming for the strategic high ground as a platform play sounds great, but requires serious piles of cash to make it work. If you’re a division of Facebook, Google, Sony, Microsoft, Samsung or other majors, a parent with deep pockets can see you through the early years. You could also get bought by one (see above).

Sell picks and shovels

High-end game engine leader Epic Games CEO Tim Sweeney says that “VR is already a profitable business for us from game developers and enterprise customers adopting VR for design visualization.” AR SDK company Vuforia president and general manager Jay Wright serves “almost a quarter of a million developers, and over 25,000 apps.” Kudan CEO Tomo Ohno has been profitable since year one, “We’ve been making money from app development, customized AR engine licensing and AR engine sales and have been able to fill the gap left from when Metaio was bought by Apple.”

Lumus VP of business development Ari Grobman explains that “we sell see-through optical display modules that customers like DAQRI, Atheer and Thales use for industrial, medical and enterprise markets. Ultimately, we see ourselves enabling the larger consumer market too.” Natural gesture and body tracking firm Gestigon CEO Moritz Von Grotthus sees the early market as an investment case. “We started biz dev with OEMs, but that is still an investment. Then custom work with OEMs to generate non-recurring engineering project revenue in 2016/2017. Finally a software licensing model when commercial units are deployed next year.”

VR will be big, AR will be bigger.

Lytro CEO Jason Rosenthal “rents our lightfield cameras to Hollywood studios, VR video platforms, game developers and sports leagues, as well as enabling processing and editing of digital lightfield data. Third parties might also end up buying our equipment to provide their own production services.” Chipmaker AMD Alliances, content and VR corporate VP Roy Taylor “sells direct to consumers and via OEMs, as well as providing software to make it easier for the entire ecosystem.” Eye-tracking startup Eyefluence CEO Jim Marggraff also makes money “consulting with Head Mounted Display (HMD) makers, creating proof-of-concept projects, and licensing our eye-tracking and eye-interaction tech and IP.”

Get sponsored

VR entertainment pioneer Two Bit Circus CEO Brent Bushnell is “focused on brand-funded content. Brands can rationalize this in a marketing budget and get early mover visibility for whatever they’re trying to promote.” VR video livestreaming firm Next VR CEO Brad Allen is also focused on sponsorship, but for slightly different reasons. “We’re already seeing sponsorship from major brands for major sporting events, and have had great success with concerts. However we think the resolution, and therefore the experience from AR/VR devices needs to be higher than today for pay-per-view and subscription models to work well.”

Enable advertisers

As an AR/VR unicorn, Blippar CEO Rish Mitra “engages brands, agencies and media owners to turn static media into AR interactive content, with real-time performance data. We monetize with platform access fees and performance-based pricing.” So enabling other forms of advertising to act as smartphone-based AR advertising is already yielding results.

Sell to enterprises

ODG CEO Ralph Osterhout has been selling to enterprises and governments for decades, and that’s what he’s doing now. “We sell ODG smartglasses directly to enterprises, but the largest orders come from our value-added reseller network today. With more Fortune 50 AR pilots underway, our pipeline of direct sales will yield larger orders still. Demand is growing so quickly that we are already back-ordered through 2016.” This theme is echoed by Epson Product Manager Eric Mizufuka for its AR HMD business. “We’re leveraging five years of investment, integrated manufacturing and our brand to sell both directly and via channel partners to enterprises. We’re building a sustainable, profitable AR business in the next year, not in a few years’ time.”

Existing businesses that intersect strongly with AR/VR are profitable springboards into the new market.

Nokia’s head of digital media tech Paul Melin is already seeing demand for the company’s $60,000 OZO 360-degree camera from “sports, music, news, entertainment and advertising sectors. We are investing early, and are one of the first companies generating revenue.” Atheer CEO Alberto Torres is focusing its AR HMD exclusively on “medical, insurance, warehousing, oil and gas, utilities, aerospace and manufacturing enterprise clients. Our pilot projects could lead to large enterprise deployments in the next one to two years.”

Sell to users

AR/VR-focused Boost VC managing director Adam Draper thinks that as well as making content for studios, “early-stage developers will make money by selling AR/VR apps for money in the app stores. There isn’t real in-app purchasing yet.” Virtual-world builder High Fidelity CEO Philip Rosedale’s approach to making money is “to build marketplaces and tools that help people share content, and collect fees on those marketplaces. We believe that there will be a Cambrian explosion of 3D content development happening, as people figure out how to build with these new headsets and hand controllers.”

GoPro business development director Mehrshad Mansouri describes how the company “will make most of our VR revenue from hardware sales direct to consumers. We’re also providing professional solutions from our Kolor acquisition.” Avegant’s Glyph HMD works with mobiles, consoles and drones already. CEO Joerg Tewes explains that, “We don’t need a new ecosystem, although that will come as an added bonus. We will expand into custom content and games, which will be an additional revenue stream for us.”

Merge VR CEO Franklin Lyons is also going consumer. “We’re making mobile VR HMD revenue from retail sales, as well as some enterprise.” While Seebright CMO Simon Solotko describes how it “is selling affordable mobile AR systems. Emerging capabilities like Tango are bending smartphones to AR, while we’re in the market for only $40. Entry-level mobile AR is a massive opportunity.”

Be lean

“It will take time to reach critical mass. I found out in mobile that there is huge value in learning during the early market, because the real opportunity might not be clear yet. Many of the first mobile games companies aren’t leaders today, and the same thing could happen in AR/VR,” says VR games developer Resolution Games CEO Tommy Palm. “There is no ultimate answer, but investors with a good understanding of timing are invaluable. AR/VR project work to help larger companies might be good for revenue today, but you could miss the actual opportunity with resources tied up to deliver short-term profits. The most important thing today is to stay lean.”

It’s worth keeping in mind that AR/VR is still a very early-stage market.

Sequoia Partner Matt Huang describes this approach eloquently. “If you’re a startup in a market with uncertain timing like AR/VR, breaking into a curve is safer than accelerating.” VR animation startup Baobab Studios CEO Maureen Fan is more emphatic. “We raised a good amount of money from strategic investors who we know will stand by us, but we don’t want to be a unicorn just yet. For now we would much rather be a cockroach!”


VR/AR animated storyteller Penrose Studios CEO Eugene Chung is “focused on business model innovation in the next 18-24 months, rather than legacy monetization models today. Some of the most valuable tech companies today grew by creating revolutionary new models, and AR/VR could follow a similar path. For companies that monetize too early, there’s a danger of becoming addicted to that monetization approach, rather than innovating business models as the industry develops.”

It’s worth keeping in mind that AR/VR is still a very early-stage market, with major innovations and upheavals yet to come. In the words of Leon Megginson (apocryphally quoting Darwin), “It is not the most intellectual of the species that survives. It is not the strongest that survives. But the species that survives is the one that is able to adapt to and to adjust best to the changing environment in which it finds itself.”

Featured Image: Bryce Durbin

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