The Oracle of Mars, Elon Musk, has often alluded to the
conspiracy theory metaphysical possibility that we’re living in a simulation. It’s like that scene from “Animal House” where Pinto the pledge ponders the implication that one atom in his fingernail is an entire universe. Ergo, his universe is but a single atom in the fingernail of another giant being ad infinitum – all while wacked out on the wacky weed with his weird professor. We don’t profess to know the answer to the ultimate question of life, the universe, and everything – but we do know that giving people an escape from their mundane lives is probably one of the biggest industries on this planet (and probably the rest of the multiverse). We’re not just talking about investing in cannabis. Companies providing platforms to create virtual worlds for socializing have been raking in the cash.
About four years ago, we first explored this concept of virtual world-building as a way to hang out with friends to play games, dance, attend concerts, watch sports, and generally immerse yourself in a purely digital environment, increasingly with the help of a virtual reality (VR) headset. It seemed pretty niche, as those seven social VR companies together had raised less than $50 million. Since then, most of our attention for social VR networking has been on virtual collaboration for enterprises. Gaming has always been big business – $150 billion pre-COVID, according to market intelligence firm IDC – but the payoff in VR gaming has remained elusive.
Earlier this year, however, we started to rethink the definition of virtual reality with our coverage of Unity Software (U), a nearly $30 billion company that powers more than half of all mobile games, PC games, and console games. All games are virtual, whether they involve a VR headset or not. That shift in thinking – and we weren’t even puffing the Magic Dragon with Donald Sutherland at the time – made us realize that there are a number of companies that have created platforms that allow users to generate virtual worlds for socializing in both VR and non-VR formats. Some of them are turning virtual currency into real, hard cash.
At the Center of the Metaverse
The company at the center of the universe (or Metaverse, in the vernacular) of user-generated social VR has to be Silicon Valley’s Roblox (RBLX). Founded in 2004, the company had raised about $855 million from the likes of venture capital firms Andreessen Horowitz, Tiger Global Management, and Greylock, along with Warner Music Group (WMG), and Chinese tech giant Tencent (0700.HK), among others. The company IPO’d in March of this year and now has a market cap of nearly $50 billion. The platform is made up of user-generated “experiences” that range from millions of games to virtual events where friends can interact in their own virtual worlds. The looks seems a bit like a ripoff of the Lego movies:
And that certainly speaks to the target audience: About half of the users are reportedly under the age of 13, which you’d think wouldn’t make for that lucrative a business model. You’d be wrong. In 2020, Roblox reported revenue of $924 million, with a net loss of $253 million, which you’d expect from a rapidly growing company. How rapid? In the first quarter of 2021, the company increased year-over-year revenue by 140% to $387 million – so the growth story isn’t connected just to COVID.
Roblox claims more than 42 million daily active users, with most of the growth coming outside of North America.
The app is free to use, but the company makes money through the sale of its in-game currency, advertising, licensing agreements, and royalties. And Roblox isn’t the only one making money off of its platform: Game developers reportedly earned about $328.7 million last year, up nearly 200% from 2019. Yet another reminder that there are better ways to earn money off your MBA degree than a media company. Roblox may well be worth a deep dive for our premium readers in the future, with so few attractive stocks in the current VR/AR metaverse, as it doesn’t seem overly valued based on our simple valuation ratio and the revenue growth is there. We can already tell you that Roblox does have some direct competition, despite its sizable market advantages. Epic Games, the creator of Fortnite, is also moving towards the metauniverse theme. There are also a number of startups dabbling in this space.
A Social VR Startup Pivots
There is Seattle-based Rec Room, another well-funded company providing a platform for users to create virtual worlds it calls rooms for gaming and social interactions. Founded just five years ago in 2016, the startup has raised $149 million, including a $100 million Series D in the same month that Roblox went public. It has the backing of several deep-pocketed VC firms, including Sequoia Capital, Index Ventures, and Madrona Venture out of the Seattle tech scene. Rec Room is now valued at about $1.25 billion. It started out as a dedicated VR app but has expanded its platform to the usual gaming consoles like PlayStation 4 and Xbox, as well as to Apple and (pending) Android systems.
The platform reportedly has about 15 million “lifetime” users, with VR accounting for only about 25% of the user base, according to VentureBeat. Rec Room has more than five million rooms to explore, with more than two million user-generated experiences. This is the first year that Rec Room has offered members compensation for user-generated virtual worlds.
Unity Software Powers VR Platform
Our original list of social VR companies included San Francisco-based VRChat, which has now raised about $95 million following an $80 million Series D last month. Among its investors is HTC (2498.TW), which makes the popular HTC VIVE VR headsets. Founded in 2014, the company leverages Unity’s software, as well as its own software development kit (SDK) and Udon programming language. While the platform is built for VR headsets, users can engage in the social VR experience with just a PC. Like with other social VR platforms, users can build avatars and generate virtual worlds to share with others.
While the platform is free to use, the company is building out an optional paid subscription called VRChat Plus that costs $9.99 per month or $99.99 per year. The subscription unlocks “enhancements and perks,” with plans to expand VRChat Plus to enable purchases on the Oculus platform, among other initiatives to presumably make the company profitable at some virtual time in the future.
More Social VR Startups
A couple of other new-to-us social VR startups popped up during the course of our research:
Founded in 2018 in a place called Zug, Switzerland, Sensorium has raised $7 million. Zug zug is also the term that Ringo Starr’s character Atouk uses to reference sex in the cult classic “Caveman.” This is also relevant because Sensorium is going after an older user base with its entertainment-focused social VR metaverse for at-home raves. It consists of multiple virtual worlds, each of which features a particular type of content, such as musical festivals and concerts. It claims to use artificial intelligence to power its social VR platform, similar to startups like Touchcast and ObEN. Sensorium goes a step further by integrating blockchain and its own cryptocurrency, SENSO tokens, into the mix. Roc Nation, an entertainment agency founded by rapper and entrepreneur Jay-Z, just bought into the Ethereum-based tokens a few days ago.
Founded in 2013, vTime out of the UK has raised $7.6 million for its social VR platform that allows small groups of people, through their avatars, to meet in pre-generated environments. It’s a bit old school in terms of functionality, but the company did release an AR platform last year called vTag that “lets users create 3D avatar moments that live in the real world.” Basically, users can create an avatar, record a message using their own voice and facial expressions, and send that message to friends to view in the real world. Sounds like a lot of work to leave a voicemail.
Of course, there’s the OG of social media, Facebook (FB), which hasn’t met a trend that it isn’t willing to jump on. In this case, the company is developing a social VR platform called Horizon that sounds very much in the vein of Roblox, Rec Room, and VRChat. The app is still in invite-only beta mode and appears designed to specifically work on Oculus (of course). While Facebook brings plenty of firepower to the table the demographics work against them, since many users of the largest social VR platforms are the TikTok crowd, which explains why we’ll continue to invest our money in ventures that play with real money.
There aren’t many ways to invest in virtual reality content. We researched the domain heavily and found one great VR stock that we’re holding long. Become a Nanalyze Premium annual subscriber and see which stock it is along with all 34 tech stocks we’re holding.