Tipatat Chennavasin was not surprised when VR metaverse startup Rec Room raised $100 million at a reported $1.25 billion valuation last week. As general partner of Venture Reality Fund, Chennavasin invested in Rec Room early on, betting that the small and agile team behind it was on the right track with its take on social VR.
VR Fund has also backed Beat Games, the maker of Beat Saber, as well as Vacation Simulator maker Owlchemy Labs, two companies that have since been acquired by Facebook and Google, respectively. More recently, the company began to raise a new $50 million fund with participation from French telco giant Orange.
To evaluate companies, Chennavasin spends a lot of time crunching publicly available data and correlating it with information he receives from his portfolio companies, similar to the approach app analytics providers like App Annie and Sensor Tower take in the mobile space. In an interview with Protocol, Chennavasin shares some of the secrets behind his data analysis, opines on the role Apple's much-rumored headset will play in the AR space and predicts that we will see more unicorn valuations and M&A deals.
The interview has been edited for clarity and brevity.
What was your reaction to the Rec Room news?
I'm not surprised at all that they're the first VR software company to hit unicorn status, and to do it in such a short term. They have a million MAUs in VR, which is huge, considering how big VR is right now. But that's still just a subset of how many users they have; Rec Room started in VR, but now it's on console and on mobile.
They have 15 million users in general, and 2 million of those users are creators. That's really important. When you look at most creator platforms, typically it's a very small percentage of creators compared to consumers or players. In Rec Room, you're seeing a much bigger percentage of creators. I honestly think it's related to their VR DNA, and how much fun it is to create in VR, be creative in VR. VR democratizes 3D creation.
Do you think we'll see more such VR unicorns?
I believe so. Unicorn status is pretty rarefied, but we are definitely seeing VR companies hitting revenue points where they can be valued at that size both on the consumer side and on the enterprise side.
Beat Games got acquired by Facebook, so they're not an independent company, and can't be considered a unicorn. But [it's been reported that] they made $180 million in the past three years, and half of that revenue is from last year alone. You're definitely approaching that status where, if [it were] a standalone company, [it] would be considered a unicorn.
Most of the enterprise companies don't really talk about revenues as publicly as some of the gaming studios. But on the enterprise side, we are seeing companies making significant ARR, dozens of companies easily doing a million dollars, and [some are] getting to $5 [million] to $10 million or more ARR. That's definitely putting them closer and closer towards unicorn status.
Speak a little bit about how you track VR companies.
I come from mobile gaming, so we look at the number of ratings and reviews, and then try to extrapolate that to how much revenue is being generated. And fortunately, because of my portfolio and also because of having friendly relationships with lots of different game studios out there, I have a lot of different data points, and I can come up with some kind of understanding of what the market looks like.
Once Oculus put out their numbers, I was able to backtrack and see if this is actually accurate. And I was pleasantly surprised that I was fairly accurate.
Any interesting insights you gained this way recently?
When we saw the growth of the Quest from year one to year two, we saw over 5x growth in terms of the market revenue. And Oculus has already said 60 titles made over a million dollars, six titles have done over $10 million. Now, when we look at Steam, [and by] doing the same kind of [calculations], [we can extrapolate that] four titles have done over $10 million in revenue, and at least 40 titles have done over a million dollars in revenue.
People [tend to think that the] Quest is growing, but PC VR is on the decline. But thanks to Half-Life: Alyx and the halo effect that it had, we saw PC VR also jump about 4x in terms of revenue from the previous year.
That is interesting. Are these markets going to keep growing at the same rates?
The Quest will grow faster and bigger. PC VR really grew because of a huge game like Half-Life: Alyx, and there are no other huge games like it on the immediate horizon. PC VR did well this year, but I don't think it will grow 4x next year.
How will Apple's long-rumored headset change things?
The first Apple headset [is reportedly] for professionals, and it's going to be a mixed-reality headset, a pass-through AR headset. It's not necessarily a consumer headset. I don't think they're trying to compete against the Quest or the Valve Index. I think what they're really doing is creating a developer station that will allow people to create AR apps for their next headset, to get people thinking about the kind of applications and use cases that are going to make sense for a spatial world. Kind of like how you have to have the MacBook to make apps for the iPhone. You don't make iPhone apps on the iPhone.
But Zuckerberg has said: Once we get to 10 million [users] that's going to be when the ecosystem is legitimized. We'll have a really robust, self-sustaining ecosystem. I think we're going to get there sooner rather than later, and that's also going to drive other companies to come in and say, "We see the success, and we want to be a part of this." That's going to be another inflection moment for the industry.
What other trends are you seeing emerge these days?
I think we're going to see more companies making real revenue in this space. We're going to see a lot more funding announcements, and we're going to see some really interesting M&A [activity]. When we look at the M&A that happened last year: 21 deals for VR, AR and related AI were done, and the most active acquirers were Apple, Facebook and Snap.
If we look at their acquisitions across all the different sectors, we could see that the majority of their acquisitions were in the VR/AR/XR space — 40% of Apple's acquisition, 66% of Facebook's acquisitions and 75% of Snap's acquisitions were XR. That's really interesting, and really telling.
And look at what types of companies are being acquired. We see the switch now from pure technology companies being acquired for fundamental technologies like computer vision, to application companies, content creation companies, game studios. Thirty percent [of those deals] were content studios, showing a maturity of the ecosystem.
How else has the industry changed since you began investing in VR?
Five years ago, when we started this fund, the question was: What comes after the iPhone? And at that time, [people thought] it could be this XR thing. It could be smartwatches. It could be smart speakers.
Fast forward five years, and those devices have sold hundreds of millions. They've been great, successful products for Apple, Amazon and Google, but they haven't been able to create a developer ecosystem, where third-party software developers can make millions of dollars off of hundreds of millions of users and devices.
VR definitely has a much smaller installed base. Especially for proper high-end VR, six degrees of freedom, [there are likely] 10-ish million devices out there. But there are dozens of companies making over a million dollars, [with some even making] over $100 million in revenue in this space, both on the consumer and the enterprise side. Clearly, this is the beginning of a new ecosystem, of a new platform.
