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« Augmented Reality: Not exciting to "normal" users... | Main | Future Vision 2012: Augmented Reality Predictions »
Friday
Oct302009

Venture Capital and Augmented Reality

Yesterday, Marshall Kilpatrick asked, in readwriteweb.com, “Why aren’t VCs backing Augmented Reality?” He made some interesting observations and I would like to add to those here, with my own comments and thoughts.

First, I’m going to comment a bit on the early stage of the industry and then we get to have some fun and take a look at some of the typical responses I have encountered in my own efforts talking to venture capitalists. Keep in mind that I haven’t done a formal “roadshow”, and I have not engaged in a comprehensive “call everyone you can find” campaign either.

The augmented reality industry is in its infancy, and it is going to need the support, resources, and infrastructure of venture capital to grow into a mature, world-changing industry. I feel like most technology venture capitalists still haven’t heard about augmented reality (you would think that these guys would be watching industry news, twitter, and blogs like hawks looking for new opportunities, wouldn’t you?), or they have already formed an opinion based on stuff that is a year or more old, or that they simply don’t understand the tecnology and the potential of AR. Ok, no problem. We can fix that.

If you are a venture capitalist and are reading this, Please please please, email me or any one else that is active and vocal in this sector and start asking questions. Even if you aren’t interested in AR now, or think that we are all lunatics, call us anyway. I promise you that in a few years you will be kicking yourself if you don’t start learning about this now. Being informed will help you make good investment decisions later on.

Most ventures in the AR space are also extremely young and are either still at the “friends and family” stage, or getting into the “angel” stage. This means, we are too early for VCs. However, startups should be establishing contacts and relationships with VCs NOW, not later, and they should be investing some time to get them up to speed and educated on the technology and the industry. Oh, one quick note…I went back and reread the venturebeat article that broke the story about Layar getting funded. It doesnt say they were funded by venture capitalists, it says “overrun by investors, with 35 offers to date.” That means it is likely mostly angel investors or investor groups and maybe one or more venture capitalists. I suspect, given the amount listed, and that there was still some room, it is primarily angel funding.

Expect to see more announcements of various AR startups clearing the $1M mark (mostly angel sources) and probably one of us will nail a $5M+ deal by June.

I have left Total Immersion (1999) and Metaio (2003) mostly out of the conversation because they have been around for a long time, and certainly aren’t startups. They are established, have been making revenues for a long time, and are generally not focused on the consumer market (although it appears that Metaio is shifting their focus here). It wouldn’t surprise me to learn that one or both has received venture funding in the past, and I expect that they will in the future, but the point of this blog post is the AR startups and the activities (or lack thereof) from the venture capital community.

Anyway, AR tech still has a lot of missing pieces and a few problems that have yet to be solved, but I think these should be characterized as excellent opportunities for a new startup in the sector. And sure, there is plenty of risk, but again, this is an opportunity. I’d venture to say that nearly every AR startup that manages to actually do or build something is going to be a prime acquisition candidate fairly soon once the really big companies start making their move (Microsoft, Google, etc.).

The industry might still be too early for venture capitalists to get into, but the industry is primed to explode any time. I firmly believe that we are getting very close to the same place the internet was right before the explosive growth the world wide web experienced. The startups today in the AR space have the potential to be the next Apple, Microsoft, Google, Yahoo, AOL, EBay, Amazon, etc.

You know what would be really useful, is having a group of ambitious and forward looking venture capitalists allocating high risk funds and seeding smart startups with a couple hundred k as matching funds for whatever they can raise from angels. Even $100k or $200k would go a long way, and any ecent entrepreneur can leverage the promise of matching funds to excite the angel community and get some traction. Hell, why isn’t there any stimulus money allocated for seeding technology companies anyway? How many jobs did cash for clunkers create? Think about a $3B injection into high-tech startups… Look at what we did with the Internet. Techpreneurs know how to create a lot of jobs, fast, and high paying ones to boot. Not only that, but we can innovate faster and better than the large corporations that are slow and heavy with bureaucracy. You want better methods to get into space? More efficient and clean transportation? Alternative energy sources? Ways to completely revolutionize media, education, medicine, training, and entertainment? Support the high-tech startup community.

Anyway, I didn’t mean to get off track there. I’m just annoyed at seeing a lot of ideas go up in smoke because of the lack of resources to get anywhere. Back to augmented reality…

The world is changing, and augmented reality has the inherent potential to have an effect on nearly every aspect of our daily lives and the way we communicate with each other, consume media and content, and understand the world around us. Some people think this is all still a dream or wishful thinking, but I’m telling you, the puzzle pieces are there, the various tidbits of different technologies are out there, and we just need to bring it all together. We can do this, and we can do it now.

Don’t give up the fight if you are a startup struggling to get to the next milestone or in desperation for a little funding. Your time is coming and you will be part of a revolution in technology, media, and culture. Hang in there. The tidal wave is coming and you are all getting positioned to ride it. Sure there are going to be a few thousand companies doing something or other with or in AR in five or ten years, but for those of us doing it now, we are the pioneers. Many researchers, scientists, and innovators have gone before us and laid the groundwork, or created the base technologies, and now it is our job to take the baton and run the next leg of the race, which is commercializing the technology and making it useful, practical and pretty damn awesome. The future is ours to make, but we can’t do it alone. The VC community needs to step up and help us with funding, as well as provide other intangibles (experience, insight, etc.) and help us grow a whole new industry.

So, let’s do this. Yes, we are “too early” for them in many regards, but we are also “just right” in other areas that they are beginning to wake up to. Focus on angel funding, but be building those VC relationships and contacts now. Help them understand the potential of the technology and the business models that are likely the ways we are going to monetize this. Cultivate now, reap later.

Good luck.

While some of my comments next may seem critical, they absolutely are and meant to be. However, this is not representative of the whole VC sector. There are a lot of stellar and fantastic venture capitalists out there, that not only bring resources to a company, but also a lot of insight, wisdom, experience, and relationships.

And now, for your amusement and edification:

The top 12 things I’ve heard from VCs when pitching augmented reality in 2008 and 2009.

1) “I’m sorry, we don’t do games”

You would be amazed at how many times I have heard this. The second you say “3D”, “Social”, or “virtual” anything, you get pigeonholed as a game, and no one does games anymore. This even happened to me once after I explicitely stated we were focused on technology and building a platform, not content or specific applications.

2) “You are too early for us”

This is to be expected. The usual method is: your money, your friends and family’s money, angel money, and then venture funding. In the AR sector right now, with very few exceptions (like Total Immersion and Metaio) everyone is generally very young as a company, and only experiencing any real market traction within the last six to nine months (or less). However, the thing that just kills me, are VCs that have “seed stage” or “early stage” plastered all over their website, or that like to brag about deals in the past where some young valley entrepreneurs had an idea on a napkin and they funded them on the spot. Every last one of these that I have talked to have effectively said they are only doing “first round” deals, and only if another VC is leading the round building a syndicate. Seriously guys, put that on your website so I don’t waste time calling you.

3) “Keep us posted”

Anyone who has been through the VC process will tell you that these guys are loathe to say no. They don’t want to say no and miss out on a huge opportunity later. Entrepreneurs want a quick and decisive yes or no. We don’t have the time or energy to jump through hoops to amuse you (I’ve met a few people that enjoyed playing the role of a VC without any real intention of investing), and the longer you string us along, the harder it is for us to build a company. If you aren’t interested, tell me right off, and then tell me why. Then give me the chance to come back later and revisit the opportunity with you. But don’t give me a lukewarm “maybe, keep us posted” answer. That is useless to both of us.

 

4) “We are definitely interested in this area, please keep us in mind after you find a lead VC”

 

Uh, ok. You are interested in the opportunity, but not really, at least unless someone else is interested in it already. Tell me why we should come back and invite you to the party? Thats usually how I feel about this answer, however there are exceptions. Some institutional funds simply do not lead funding deals, and the reasons are legitimate and vary. In some cases, especially with smaller funds, they don’t have the domain expertise or enough staffing to conduct comprehensive due diligence on your startup, or the new industry. This is especially difficult in the case of augmented reality where the industry is barely newborn and there are no benchmarks, metrics, or other data to look at to evaluate a deal, opportunity, or even the industry itself. Any VC putting money in right now has got to have a clear understanding of at least similar sectors (mobile, virtual, social, etc.) and have a forward looking ambition to give birth to an industry (making zillions in the process).

 

5) “What if Google does it first?” (or some other large company)

I really, really, really hate this question. If Google was going to do it, they would have done so already. Since they haven’t, it is a good opportunity for us, because you can bet that at some point they will do it, and gobble up anyone and everything that is competitive or can add to their overall market strategy. I should also point out that Google is not an AR company, just like it isn’t a concrete company. If it wanted to, sure, it could dominate both. Seriously, think about how much money Google could make if it made a move in the concrete industry. I bet they would make a fortune on construction in China alone.

6) “I haven’t read the business plan you sent me, can you just tell me over the phone?”

I’ve heard it all. Too busy, lots of deals, overbooked with meetings, calling from the golf course, ADD, etc. etc. So let me get this straight. You are making decisions worth millions of dollars, with other people’s money, and you don’t have time to read a business plan or sit in a meeting for longer than 15 minutes. If a startup is just making widgets that are already made by someone else and easily recognizable, this is not a problem. However, with a new technology and a new industry, this is really hard to explain to people in the span of a few minutes. I’ve seen people “get it” in five minutes after seeing a youtube video or two, and others take a good hour before the proverbial light bulb goes off. So much about augmented reality is new and there arent many good frames of reference or context for it. I had one guy argue with me for a good half an hour that AR absolutely could NOT be done without expensive and large laser projecters installed everywhere.

So, note to startups. Invest some money into getting a short 45 second video made that visually explains your elevator pitch, what makes you different, what your target market is, and a conceptual piece showing it all working. That’s about all you are going to get before you are expected to condense a 30 page business plan into ten minutes on the phone.

7) “We would love for you to fly out here and present to us”

Ok, so startups generally are starving for cash, and VCs (who have all the money) want you to fly out to their offices on your dime for the pitch. Ok, fine, I’ll take the risk on this IF I’ve got a clear indication that the VC is really interested, and there is a better than even chance of walking away with a term sheet. However in the past, I’ve been naieve and got suckered. What is even worse, is when you get there, the meeting starts late, not everyone that was supposed to be there is there, then you are rushed through your presentation, you don’t get to finish, they ask some inane questions that show they really have no clue what you are talking about (and no, they still haven’t read the business plan), and then its time to go, we will call you, keep in touch. Oh, also, you are too early for us to do a deal and we only do deals with local startups.

The last time this happened to me, it was at one of the larger VC funds on the west coast and I totally felt violated and robbed after the fact. The whole experience left a very bad taste in my mouth.

This is almost as bad as angel groups charging entrepreneurs money for the opportunity to pitch them. Yeah. No kidding. See what Jason Calacanis has to say about THAT. I agree with him by the way.

8) “How is this different from Second Life?”

Yeah. I’ve heard that more than once. Without getting into a long rant about how Second Life is so “1996”, still, or that it is not innovative, a game, or the greatest thing to happen on the Internet (with all due respect for advancing the cause of virtual worlds), this one really gets my panties in a bunch. I can’t even begin to explain where this question comes from, other than mentioning that the next statement I usually get is “we don’t do games”.

9) “We only invest in companies that are local to our offices”

This is why the US is lagging other countries in innovation and technical advancement. Welcome to the global economy guys. You are missing out on phenemonal deals in other regions all over the US in nearly every major population center. People still look at me funny when I tell them I am in Raleigh. If you haven’t heard of the Research Triangle Park in North Carolina, you are missing out. IBM, Red Hat, Epic, Glaxo-Wellcome, Red Storm/Ubisoft, Cisco, Duke, NC State, UNC, Wake Forest, SAS, the list goes on and on. You know there are almost FORTY game developers and publishers here? Or that Cary (SE Raleigh) used to have the highest concentration of PhDs per capita in the United States? With some aggressive venture capital movement, RTP could easily become another silicon valley (cheaper, and with prettier trees to boot). Of course, there are other cities with the right ingredients that just need venture infrastructure to kickstart it. There are hundreds of thousands of jobs that could be created in short order if we shifted capital from pooling in the west coast tar pits to other areas.

Anyway, investing locally is a nice idea, but if you feel like a startup has to be so close to a VC for the convenience of monitoring and watching over their shoulders, do you really want to invest in them?

10) “Why can’t you just hire some college students and fund development for yourself? Its easy building a company with under $50k”

Welcome to the “Gen-Y, create a widget in the basement generation”. I don’t care how little money it took to build the first versions of digg.com, twitter.com, or facebook. Good for them. Sure, you can make an iphone app or some other widget on a shoestring and start making money in no time, but if thats the case, why are those guys taking down massive venture deals? What about the other opportunities to build real technology, infrastructure, or innovation of immense value? How many things that could have solved big problems or created a better standard of living for the world have been lost because of lack of resources?

Also, I’m broke. I’ve invested insane amounts of time, energy, and limited resources. I don’t have a trust fund, I haven’t cashed out on an IPO, and no one has given me any stimulus money. Not all entrepreneurs have gobs of cash in the bank to work for free for a year and pay a staff either. Also, you just can’t build some things with under $50k.

11) “How are you going to convert websites into augmented reality?”

Well, we aren’t. If anyone tells you they are, then tell them to have a nice day and move on. The whole point to AR is that is is contextual, locative, and relevant…otherwise, its just a graphical gimmick that adds your webcam video to something 3D without adding any real value. Converting websites is the absolute wrong way to think about it. Rather, think about how you can leverage data on websites for the world around you.

12) And my favorite:

“We are only interested in deals that are close to us, for facebook, running on the iphone, with integrated twitter, already generating revenues, previously funded by founders/angels, has offices with at least 10 people, is willing to change your business model to focus on a different market niche, and we want to put in a new CEO to “take the company to the next level”. Oh, and you have to take these terms, its what everyone else is doing right now”

Yeah. This sounds funny, and over exaggerated, but this is more common than you can imagine. Sure, I’m paraphrasing, and I’m combining several experiences into one here, but the basic point of view and thought behind this one is pretty spot on. Ok, maybe I’m crazy and the outlier in terms of the average experience. If thats the case, then I hope you had a good chuckle. If not, then feel free to comment here with some anecdotal experiences of your own (even if you aren’t an AR startup).

What do you think?

OBEY. FUND US. INVEST IN NEOGENCE. DO IT NOW.

APPLE MUST OPEN VIDEO API. OBEY.

Otherwise Rowdy Roddy Piper will beat you up!

 

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Reader Comments (12)

Wow, the first part is very inspiring, got me thinking what I'm doing - only blogging about AR and not starting my own company.
And then I read the second part, with your actual experience ... :\

a point about (5) - what if google does it first:
As we've seen only this week, when Google entered the GPS navigation market, it doesn't always buy an incumbent to enter a new market, and they have any problem to offer something for free just to take on the incumbents.

October 31, 2009 | Unregistered Commenterrouli

I do not have an AR company but I am the CEO of Station X. I started out last year to make Station X an Internet TV station. With years in traditional broadcast and the internet I was very confident in raising money. Revision 3, Next New Networks and a few others were just starting. Our state Arkansas, launched a program www.innovatearkansas.org to help tech entrepreneurs of which Station X was the fist to join the program. I spent almost a year working on business plans, models and strategy to pitch to a local VC firm. The pitch went great they got the idea but said "What if someone bigger with more money enters your space." Also they wanted a company that made 20 million in 5 yrs instead of my conservative and 5 million in 5 years. I have talked to other start ups that all got the same responses.

So this year Station X started started providing consulting, ad agency services, and video production to pay the bills. We are still developing our own Internet video content, Twitter aps, and I am researching getting into Augmented Reality. We are surviving and working harder than ever. I stopped looking for VC money and have decided to dig in and do it myself. So do not let the lack of money stop you, stop chasing money and start building value. Over time the money will come

October 31, 2009 | Unregistered CommenterBrant Collins

Hi Robert,

Just FYI as far I as I know Total Immersion have received at least two rounds of Venture Capital funding - they received 5.6 million of second round funding in 2006. See http://www.elaia.com/index2.php?lg=uk&page=actualites&id=14

I presume they have raised more venture money since then. So at least one AR company has been successful with the VCs :)

October 31, 2009 | Unregistered CommenterMark

Total Immersion and Metaio are European societies. Not a coincidence I think.

November 1, 2009 | Unregistered Commenternot a coincidence

Excellent articulation of the opportunity for VC's to capitalize on the emerging AR trend for industry, consumer and advertiser use as well as the challenges AR development businesses seeking capital infusion. Thank you for sharing.

I find it difficult to quanitfy the market opportunity (AR use-penetration, rate of growth in advertising, and even the number of devices used to display-ie,webcams, glasses,although iMacs and smartphone data available). This makes developing financial models and business plans using concrete industry data particularly difficult.

If you have a source of information which could answer these questions, please either post or email me if you have the time and/or desire to do so: steube@yahoo.com.

Much appreciated and love forward to reading more from you. Regards - Fred Steube

November 1, 2009 | Unregistered CommenterFred Steube

It's interesting how mainstream AR has become in the last few months. It was once something used in fighter planes and now it's become mainstream with several new applications launched on the iPhone such as Layer, John Mayer's new music video implements augmented reality and even the Ultra-Thin which turns an A4 sheet of paper into a laptop...I'm interested to see the impact of these new technologies. It's amazing how many big brands are taking this up as a new stream of revenue and therefore the fact that VCs aren't seems to be interested - perhaps they think it's a passing phase...

November 2, 2009 | Unregistered CommenterSharmee

Whilst I feel a lot of sympathy for your experiences, none of these answers seem to be about AR, they could be descriptive of VC responses to any application area. Have you never heard "Current implementations of AR are at best tech demos and at worst unusable UIs, there isn't really a future in people waving their phones around to see what is happening around them. Come back when you have AR implemented in spectacles or ideally contact lenses."?

November 2, 2009 | Unregistered CommenterRoger Nolan

If you can't make money without venture capital, how can you expect to make money with it? Funding isn't revenue.

Every hour you spend on the phone trying to convince idiots to give you their money is time you could have spent building your business.

Find an organisation that really needs AR and sell it to them.

November 2, 2009 | Unregistered Commenterbarongus

Barongus, it takes funding to hire people to build things to sell. You can't build a business without resources, and you cant sell AR to an organization that needs it, if you don't have anything to sell.

Funding isn't revenue of course, but vapor isn't product either.

November 2, 2009 | Registered CommenterRobert Rice

Interesting article. Thank you.

I especially liked the top ten list of VC responses. To me, these are mostly reasonable questions that I would also ask if someone wanted something from me. Some of the responses indicate being tired and unthinking and uninterested, and are probably heavily influenced by having too many hands come by for servicing.

Ibm, Microsoft, Yahoo, Google, and Twitter all had their startup phase. There were always a series of other companies around at the same time, which were also doing the same thing at the same time, but with some seeming important differentiator that made "them" "obviously" better at the time that even a child of five would get it. Some of them you know about, some you will have forgotten, and some you couldn't hear about unless you were close to their specific sphere of influence.

A couple things tend to guide me. One is a saying of my mother: "The harder you work, the luckier you tend to be". The other is a belief in a series of perfect storms, which are very hard to predict before the storm occurs and blatantly plain after it passes, but ultimately serve as a crucible to burn away the extraneous and leave only the essence of the idea.

Eo my $.02

November 2, 2009 | Unregistered CommenterProdigal Curmudgeon

I really appreciated this article, thanks for sharing it.

I am actually thinking to start something new, my own activity, which could be much more interesting than what I am doing now. But the second part of the article made me reflect on your own experiences...That's why i will take my time! ;)

November 4, 2009 | Unregistered CommenterHilde Aumalbilder

I am really enjoyed reading your articles, I am a student and I love to learn new things about world and people relationship. You obviously know what you are talking about! I’ve bookmarked it in my favourite sites.

October 24, 2010 | Unregistered CommenterTopaz

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