The bulk of AR/VR startups aren’t selling outside their own backyards, at a time when growing revenue and extending financial runways are critical to survival. So while there is money to be had internationally, many are simply leaving it on the table. Although Chinese computer vision/AR investment grew 3x to $3.9 billion over the last 12 months, in stark contrast North American VC investment in AR/VR startups dropped below $120 million in Q3 2018. So North American startups (63% of revenue generated domestically) not making money in Asia (only 11% of revenue coming from the largest revenue region) or Europe (just 16% of revenue from the second largest revenue region) could be putting themselves at risk.
Digi-Capital and Augmented World Expo (AWE) surveyed the global XR (AR/VR) community in September with selected highlights below. The full results can be found as part of Digi-Capital’s new 300 page Augmented/Virtual Reality Report Q4 2018, with all market data/analytics in Digi-Capital’s 500,000+ data point AR/VR/XR Analytics Platform. Digi-Capital Managing Director Tim Merel will present the results and more at AWE Europe on October 18th. (To participate in the next survey, email info [at] digi-capital.com)
Go East, young man
As discussed above, North American companies generate limited revenue in Europe (15%), which Digi-Capital’s Analytics Platform forecasts growing larger than North America this year. Despite its scale, Asia is a source of only 11% of North American companies’ revenue.
European companies’ international ambitions are North American focused (18%), also with limited revenue from Asia (9%). Given high levels of competition in North America, an increased Asian focus might be an effective complement to European companies’ international development.
Asian companies’ revenues outside home markets favor the highly competitive North American (19%) market over Europe (12%). While Europe holds significant potential for Asian companies, managing European fragmentation requires experienced local partners. This in itself could be an opportunity for pan-European players to help Asian counterparts, building both sets of businesses in partnership.
Outside domestic markets, Latin American companies are focused on North America (32%) due to geographical proximity and scale. But for companies in this region with international potential, Asia (3%) and Europe (6%) are significantly under-indexed.
Companies based in the Middle East and Africa appear to be truly international, with their own region MEA (33%) indexing similarly to North America (32%). Asia (18%) and Europe (15%) also make up a significant portion of revenue. This could reflect the relatively smaller potential of the domestic MEA market, requiring companies to focus their growth efforts abroad.
The view from the top
The early stage of the industry was highlighted by many of the rest of the findings, as well as a strong enterprise/B2B focus. Looking forward to the next 12 months, participants gave clear priorities for growth and roadmaps to build their businesses and scale the industry as a whole.
The survey saw more than half of respondents from startups (53%), as well as corporates (15%) and service providers (15%). One third (32%) of respondents were CEOs, who together with CXOs/Corporate VPs (42% in total) makes the survey primarily the view from the top of the industry.
It’s all about that base
Mobile AR (76%) matters to more companies than smartglasses (65%) or VR (62%) today, and in that market ARKit (77%) and ARCore (73%) featured far more prominently than other platforms. Companies in the smartglasses market are most focused on Microsoft HoloLens (75%) and Magic Leap One (57%), with other smartglasses platforms indexing significantly lower. Unsurprisingly for VR, headsets from HTC (73%), Facebook/Oculus (70%) and Microsoft (53%) came in strongly, but surprisingly Google (39%) and Sony (29%) platforms did not have as strong a response (Sony underindexing could be due to survey participants being broader than just games companies).
The customer’s always right
In terms of end users, at this stage more industry companies are focused on enterprise (60%) than consumer (44%) or B2B (44%) customers (who incorporate what they’re buying into their own products/services to sell to others). Participants said that enterprise customers’ number one reason for buying is to improve productivity (70%), as opposed to B2B customers where this purchasing driver indexed lowest (44%). For B2B customers, competitive advantage (76%) indexed much higher. This difference suggests that enterprise customers might care more about efficiency (and potentially be more price-sensitive), where B2B customers could be more focused on effectiveness (and potentially be less price sensitive). Unsurprisingly, consumer focused companies say their customers buy mainly to have fun (54%), learn (47%) and explore (44%).
Show me the money
When it comes to business models, enterprise/B2B (61%) is the standout. However, combining all the individual consumer focused business models gives a larger overall response with significant overlap. When comparing current business model concentration with Digi-Capital’s actual and forecast revenue, “Blue Ocean” opportunities appear in eCommerce (15%) and Advertising (22%), by virtue of being less crowded today with high revenue growth potential in coming years.
In the consumer market, there is significant concentration for appstore (in-app purchase/premium apps) driven companies around entertainment, in particular games (56%) and non-games entertainment (56%). The next largest category by far is education (49%). Breakout apps in non-entertainment categories (such as navigation with Google Lens) could change the industry’s focus in future.
Unsurprisingly, more than half of advertising driven companies are focused on entertainment (64%), media (60%), retail (59%) and automotive (54%) advertiser categories. eCommerce driven companies overindex in media (48%), followed by consumer electronics, health/personal care, furniture, automotive, toys/hobby, clothing, food/drink and office equipment.
Given the early stage of the market, some enterprise focused companies operate in single enterprise verticals, including education (50%), manufacturing/resources (45%) and construction/real estate (42%). TMT (Tech/Media/Telecom), retail, healthcare, transportation and utilities also index strongly. Perhaps surprisingly given their revenue potential, government (including military) (28%) and financial services (16%) did not index highly.
The early stage of the industry is reflected in the distribution of annual revenue per company for startups producing less than $1 million (56%) and $1 million to $5 million (15%), with startups between $5 million and $100 million indexing much lower. Corporates and later-stage startups delivering over $100 million revenue make up the remaining 14% of companies in the survey.
The only way is up
Participating companies gave a clear priority order of what they think the industry needs to do to scale, including critical use cases (53%) and active users (50%), as well as lower priorities for critical hardware, critical apps and more. The market recognizes that it’s all about the user, but also realizes that the ecosystem must come together as an integrated whole to scale.
Participants were clear about what their own companies need to do to achieve scale, including new products/services (35%), bigger customer/client budgets (32%), more effective go-to-market (29%) and more effective industry partners (27%). Better ROI from their own products/services (18%) indexed surprisingly low, as productivity is a key driver for enterprise customers.
When asked about their roadmaps for the next 12 months, the number one priority is strategic partnerships (58%). This indicates that early stage companies realize that both recognized brands and route to market could be critical for success in the next stage of market development.
The early stage of the market came out strongly, with the industry refreshingly realistic about today’s market and what it needs to do to scale. While startups remain focused on addressing their own pieces of the puzzle, there is a general consensus that platforms like Apple, Google, Facebook, Alibaba and others need to become more effective leaders for the market to realize its full potential.
(Tim Merel is Managing Director and Isabelle Hierholtz is User Strategy Director of Silicon Valley AR/VR adviser Digi-Capital)