VC and the Metaverse: Investing in the Next Frontier

n 2020, Travis Scott hosted the highest attended concert in history in the Fortnite metaverse to a crowd of 12.3 million. In 2022 Roblox, an online gaming platform, reached 55 million daily active users, Microsoft acquired Activision Blizzard for $69 billion, and a16z announced a $600 million fund for metaverse and gaming.

As we reflect on these impressive milestones, it becomes abundantly clear that the fusion of technology and imagination is reshaping the landscape of investment opportunities. The metaverse isn't just a trend; it's a transformative force that is set to redefine the way we work, play, and connect.

In the following blog post, we will delve deeper into the Metaverse's potential, explore the key areas of interest for venture capitalists, and uncover the strategies that can help you navigate this uncharted territory. 

Understanding the Metaverse

Sci-fi author Neal Stephenson coined the term "metaverse" in his 1992 novel Snow Crash, describing it as a multiuser environment where physical and digital reality come together to form a virtual universe where users can communicate with each other.

The metaverse however, should not be confused with crypto and NFTs, equated with Zuckerberg’s Meta, or confined to gaming. Rather, it refers to a combination of immersive tech like augmented reality (AR) and virtual reality (VR), 3D content, and online social interaction in virtual worlds. All in all, the metaverse falls into four categories; content and experiences, platforms, infrastructure and hardware, and enablers (like security, payments, etc). 

There’s also an important distinction to make between the open and closed metaverse. The ultimate vision for the metaverse is an “open metaverse”, often synonymous with a decentralized metaverse or what some envision as the "New Internet." A world where no company controls or owns the metaverse, and where different virtual worlds are interoperable. This, of course, doesn’t exist yet. Right now, there are various virtual worlds being built by different companies, in other words, a “closed metaverse”. 

Major Industry Players 

There are several major web2 and web3 industry players, racing to be at the forefront of this new, promising online world. Investors have been betting their money on products and services like VR headsets, interactive platforms, 3D creation software, semiconductors, and security. Overall, gaming is by far the sector that has seen most activity.

Some popular companies operating in the metaverse right now are: 

• Google, with its offerings in AR and VR, including Google Earth and Google Glass.
• Epic Games, celebrated for the wildly popular Fortnite game and actively building the Epic Metaverse.
• Apple, and its AR Vision Pro headset.
• Meta, with its VR headsets and the recent unveiling of Ray-Ban I Meta smart glasses.
• Yuga Labs, the visionary creator behind the Bored Ape Club NFTs and the virtual world "Otherside."
• The Sandbox, a leading web3 gaming platform.
• Voxels, a virtual realm predominantly dedicated to art and music events.
• Decentraland, pioneering the world's first decentralized world on the blockchain.
• Roblox, hosts more than 40 million user-generated experiences and lets users build their own from scratch.
• Magic Leap, developers of the mixed-reality headset Magic Leap One.
• Nvidia, building the Omniverse platform to enable engineers and designers to construct industrial metaverse applications.

Problems to Overcome 

Despite notable advancements in the last decade, the metaverse is still a few years away from a true tipping point. There are still many hurdles to overcome:

• Current audiences are mostly gamers & quite tech savvy.
• There is no connection between the various metaverses yet (so an open metaverse is a long way away).
• The technology is not there yet in terms of edge computing, hardware, and software.
  

Although Nvidia has been flying under the radar, it's perhaps one of the most prominent builders and supporters of the metaverse. Its CEO, Jensen Huang, believes the metaverse could have a larger economy than the physical world. He is also an avid supporter of the open metaverse, saying that there are four requirements for software engineers to make the metaverse to truly work: they must be able to render high-fidelity images; create worlds, avatars, content, etc. that obey the law of physics; be scalable and in the cloud; and be completely open.

The Omniverse platform aims to fulfill many of these requirements, and it has already achieved some of them, such as being entirely open. Nvidia has also partnered up with names like Pixar, Adobe, and Apple, to establish The Alliance for Open USD. The organization is looking to advance USD and establish it as a universal standard for 3D content, with the ultimate goal of creating an open and interoperable metaverse. USD is a framework and ecosystem pioneered by Pixar, enabling the description, composition, and simulation of 3D environments. 

The Funding Landscape 

So what is driving investment? 

McKinsey released a report in 2022 called ‘Value Creation in the Metaverse,’ showing that investments into space are more than double of the 2021 figure at $120 billion, and projected to reach $5 trillion by 2030. That is roughly the size of Japan’s economy, the third largest in the world. 

According to the McKinsey Technology Council, the metaverse combines many of the top elements which have huge growth potential, such as AI, immersive tech, and web3. 

Why is this growth possible? There’s several factors at play:

• The metaverse could bring experiences to people worldwide that they might not otherwise have access to due to financial and geographical restrictions.
• Consumers have already shown they are ready to spend on metaverse assets & are open to adopting new technologies.
• Companies are investing heavily in the required infrastructure.
• Brands experimenting in the metaverse are finding that customers are excited.

McKinsey identified several key areas of opportunity across consumer and enterprise, with e-commerce being the largest area for economic impact in the metaverse. They estimate it may have a market impact of $2 trillion to $2.6 trillion by 2030, depending on whether a base or upside case for the metaverse’s development is realized. Sectors such as academic virtual learning are estimated to have a $180 billion to $270 billion impact by 2030, advertising $144 billion to $206 billion, and gaming a $108 billion to $125 billion impact.

Use cases seen so far:

• Creators using voxels to create virtual clothing and other items that can be used in virtual worlds
  
• Product advertisements on billboards in virtual worlds
  
• Online work spaces to work with colleagues and also for students to learn digitally
  
• Shopping
• Online concerts and other entertainment events
• Virtual real estate
• Trading collectibles such as NFTs
• Online gaming and related services
  

“With its potential to generate up to $5 trillion in value by 2030, the metaverse is simply too big to be ignored. It will have a major impact on our commercial and personal lives, which is why businesses, policymakers, consumers, and citizens are well advised to explore and understand as much as they can about this phenomenon, the technology that will underpin it, and the ramifications it will have for both our economies and wider society” - Value Creation in the Metaverse, McKinsey

VCs Investing in the Metaverse 

There are several funds that focus on investing in companies building the metaverse:

Verizon Ventures: One of the largest telecommunications providers in the world. They invested in StatusPRO, a sports-orientated AR/VR company, and also struck a partnership deal with Meta to develop 5G-powered experiences in the metaverse.

Animoca Brands: Perhaps the most popular metaverse investment fund, they’ve invested in popular web3 companies like Sky Mavis, the Sandbox, OpenSea, and Yuga Labs.

Play Ventures: A big player in the VR world. They’ve invested in over two dozen startups, including MetaSoccer, Blackpool, and Trailblazer.

Hiro Capital: A European VC firm and one of the most active investors in the VR/AR industry.

FOV Ventures: Founded by David Haynes, in 2022, he set up a €25 million fund to help early-stage startups working on metaverse technology.

Metaverse Ventures: A seed-stage venture fund set up by a group of entrepreneurs, academics, and investors. They’ve invested in various metaverse startups, including Vegas City, Decentral Games, and Artie.

The Metaverse Landscape in 2023

The current funding landscape looks very different to what it was in late 2021. We’ve seen a significant downturn not only in dollars but also in deal flow. Funding has dropped by 77% from the final quarter of 2021 to the first quarter of 2023, per Crunchbase data. In the first two quarters of 2023 only $284 million was invested in startups in the metaverse and 46 total deals done. 

2021 ended with some massive deals, like a $500 million investment in augmented reality startup Magic Leap, as well as a $300 million Series D for fellow AR player Niantic. This year, however, we’ve seen nothing like that. 

The largest deal was hardly what one would consider a “metaverse” startup and rather on the fringes of it - AI-powered car buying platform Impel landed a $104 million round in January. 

But it’s not only VC investors that have been winding down on their investments, Microsoft shut down its social virtual reality platform Altspace VR, and Disney said goodbye to its metaverse plans.

On the other hand, Meta and Apple recently put a spotlight back on the space. Meta dropped a huge partnership announcement in September, announcing the launch of Ray-Ban I Meta smart glasses, offering the first-ever eyewear with live streaming and Meta AI built-in. On top of that, they look sleek enough to wear unlike the typical clunky VR headsets. 

Apple also revealed its new Vision Pro in June, and they acquired Los Angeles-based Mira, an AR startup that makes lightweight headsets for industrial companies and the U.S. military.

So there is still hope, and the metaverse isn’t dead just yet. It’s still too early to say whether it’s a fad or worth celebrating, as the infrastructure for ideas like this takes a long time to build. 

The metaverse is still a relatively new and untested market, so investing in it is a high risk-proposition. As VR and AR technologies become cheaper and more accessible, we’re likely to see an increase in daily users. 

“If history is our guide, this next phase of the internet is going to evolve in ways we have not anticipated. While broad adoption of the metaverse may be years away, investors are playing the long game with their metaverse strategies.” - Cliff Justice, U.S. leader of Enterprise Innovation, KPMG.

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