Another month, another wave of Israeli-based acquisitions… and last month, one of them was the acquisition of Pebbles by Facebook (or Oculus, to be exact). Now Oculus – the virtual reality company – will have a development center in Israel, but it won’t be the first R&D center in Israel related to VR, with Magic Leap also announcing that they will be opening a development center in Israel. In fact, Israel has the potential become a real center of excellence in the world of virtual reality.

When we analyze what makes VR amazing, it’s a combination of many technologies: computer graphics, machine vision, data processing, and many others. These are all areas where we excel, which means that Israeli startups can really shine in the world of VR. But, is there a real investment opportunity here in Israel?

First of all, it’s important to define the world of virtual reality. The term itself is comprised of 2 words – Virtual and Reality – and in a kind of cool way, all the different products range between complete reality and complete virtual. Here is a simple visual that shows the range of different products:

Virtual Reality Definitions Chart

Here are a few examples:
Reality: Basically this is the real world, although I assume we all see the world a bit differently.
Augmented Reality: An example of this would be looking at the Eiffel Tower and seeing information about it, like height, or history.
Augmented Virtual Reality: This would be like looking at the Eiffel Tower and seeing an alien sitting on it.
Immersive Virtual Real Reality: This would be akin to sitting at home and walking through the streets of Paris.
Immersive Virtual Reality: This would be like sitting at home but living in Westeros (The world of Game of Thrones).

Based on recent reports, the VR hardware market will reach almost $3 billion in 2020, growing at around 100% CAGR. This year, the market was around $37 million, so the majority of the growth is still ahead of us. Clearly, the actual launch of Oculus Rift will be a major driver in this market. Set for Q1 2016, there are many consumers that are eagerly awaiting the GA of the product.

On the application side, the biggest initial driver for VR will be gaming, although it will be interesting to see if the other applications will catch on, and whether they will be driven mostly through OEM solutions. Consumers will probably buy a VR directly mostly for entertainment, but we may see Real Estate agents/brokers pushing VR as a means to increase sales.

5 Key trends in the emergence of Virtual Reality

1. Gaming Content is King.
Clearly the initial driver for the adoption of VR will be around gaming. Content is currently being developed, but the overall quality and innovation will be a major driver in the market. Looking back at the Microsoft Kinect, one of the main inhibitors of usage was the lack of good content. However, gaming is not the only relevant content. Simple movies will be interesting as well (especially summer movies. Imagine watching Batman vs. Superman on a virtual huge screen). Finally, the “dark side” of the internet will also be relevant. A little bit of gaming, but definitely also adult content…

2. VR as a sales tool
Related to the Immersive Virtual real reality, it will be interesting to see VR as a sales tool for tourism and real estate. Will architects and real estate agents approach customers with a VR simulation of future products? This might be possible but only if production tools are easy to use, enabling non-techies to easily convert videos and design products to 3D virtual reality scenes.

3. Building the Matrix
What virtual reality developers really want is to create a truly immersive scene. Current VR products do a great job of simulating vision, but it will be interesting to see if they can add additional senses like touch, smell, and even actual movements. In my latest personal experience with VR, the demo was amazing (I was truly frightened by a charging Dinosaur), but it would have been great to be able to touch it, smell it, and most importantly – to run away from it! We are probably decades away from “The Matrix”, but no doubt technology will try to add more to the VR scenes.

4. High-end (PC) vs. Low-end (Mobile)
As the tech giants compete for the VR market, we are already seeing the different approaches of Facebook, Google and Microsoft.

Facebook acquired Oculus and is truly betting on the high-end of the market. Oculus rift is a real, PC-connected tech device, producing the best possible experience in the market today. Facebook is perceived as the market leader despite the fact that product hasn’t launched yet. In the meantime, Google is pushing hard at the low end of the market, with Google Cardboard. A cheap and easy-to-use head cover (with nothing on it) that converts a mobile phone to a VR system.

Who will win in the battle for VR market supremacy in the end? Both. The market will definitely absorb a high end product and a low end product. The experience will be very different, but the advantages of the simple mobile solutions are clear.

And what about Microsoft? They are building HoloLens and betting on Augmented Reality as opposed to Virtual Reality. A truly ambitious and cool device, the launch is planned for later this year. As mentioned before, we hope that HoloLens will have great content and software associated with it.

5. Monetization
It will be interesting to see whether new types of monetization models will emerge in the world of virtual reality. The most relevant will probably be around in-app purchases and digital goods. Advertising may also transform, with real immersive in-game (or in-experience) ads. In fact, advertising is a particularly interesting area when discussing augmented reality, because of the potential for the real world to be augmented with personalized relevant ads. Imagine white billboards where we project our own ads based on our personal preferences.

A scene from movie Minority Report (2002) that predicted personal advertising via virtual reality

Investment Opportunities
With the great growth and revolution of VR still ahead of us, where are the investment opportunities? It seems that the world of hardware is already settled so investing in a new device is probably too risky and too expensive. However, there are definitely opportunities around software:

First movers in content
The immediate opportunity is around content. Traditionally, first movers on new platforms almost always make money (for example Zynga on Facebook). Is Oculus a new platform that will enable new content players to emerge? Great content will be in high demand in the early days post launch, and the same is true for HoloLens. As always, great content is king.

Underlying technologies
As these platforms launch in the next 6-12 months, the relevant companies (Facebook, Google and Microsoft) will be looking for technologies to improve and enhance their products. Pebbles is probably relevant in this category. There will be additional companies and exits supporting a better experience, although it’s not clear whether they can become very big companies.

Brave new world
VR and AR will herald a new world. As I mentioned above, tourism, real-estate, and social interactions have the potential to be significantly transformed with these technologies and I believe that new applications around VR will provide the best investment opportunities in the near future.

To sum up…
Here at Viola Ventures, we are big believers in the VR and AR worlds and we hope to find interesting companies in the space. We REALLY (not virtually) feel that a true revolution is upon us.