Back in March, I attended a crowded panel at the Upload Collective, where a number of venture capitalists and investors talked about investing in virtual reality and augmented reality startups.

And last week, I returned to attend another series of panels that took the temperature on the VR and AR markets again. I’ll be writing about each of these panels. Now that the VR headsets have launched (or soon, as is the case with Sony’s PlayStation VR), investors are turning to a new focus: the content that will run on these new systems.

The UploadVR and VR Accelerated panel on investing in VR content included speakers Mark Linao, associate at Technicolor Ventures; Marc Jackson, managing director at Seahorn Capital; and Jon Goldman, venture partner at Greycroft.

UploadVR founder Taylor Freeman moderated the panel. The summary: Brands are investing in VR content, driving it forward for branding reasons rather than just pure revenue. Los Angeles is a hotbed for VR content investments, including those that go beyond games. VR is exploding in China. And storytelling will be one of VR’s advantages.

Here’s an edited transcript of their conversation.

Investor panel at UploadVR (left to right): Jon Goldman, Marc Jackson, and Taylor Freeman.

Above: Investor panel at UploadVR (left to right): Jon Goldman, Marc Jackson, Mark Linao, and Taylor Freeman.

Image Credit: Dean Takahashi

Taylor Freeman: All these gentlemen came up here from Los Angeles, and I’m interested in what’s going in there compared to here as far as content, which you’re all brave enough to invest in. Mark, we know you’re super active in the VR industry. You’ve had your voice published on several sites. What trends are you seeing in the adoption and the data? How can the investors here leverage that knowledge to increase their probability of a high return?

Mark Linao: Some of the things I’m tracking — I’m trying to take a very bird’s-eye view of how VR is being adopted. I can talk about a few things I’m looking at right now. We all know marketing — there’s something there. Brands are spending money. No one knows how much, but we’ll say it’s big money. I’m taking some data points on how brands are using VR, what platforms they’re advertising through, and what budgets they’re putting toward that. A thing I don’t know is, we don’t have marketing ROI now. But the reason I look at that is because it will be big. People are advertising as much as you would think.

If you’ve followed anything about marketing technology in the past, companies like SalesForce did really well because marketers were using CRMs to sell more. That was the basis of their business. That’s one thing I’m looking at.

The next thing I’ll say, looking a lot at what the activity is in Steam — less people have the Vive consumer edition. Looking at what’s going on in terms of gaming and whatever else is shipping on the Steam platform, what genres are people engaging in? Are there opportunities for more genres, different genres? It’s interesting to see HTC trying to monetize non-gaming content. That’s another way I’m trying to look at data in the VR space.

There’s also a lot of data there against play time and how much time people are spending in VR. Someone mentioned that they’re spending an hour a day in VR. I’m curious about how much time people are really spending in VR. NBC recently mentioned that they’re going to be streaming 85 hours worth of Olympic Games content. That’s for the Samsung Gear. For me, the question is, how many people are actually looking at that content, and how much?

I’m not saying that this isn’t a good time to invest. By the time VR is already adopted by a billion users, it’s going to be too late. The opportunities won’t be there.

The Oculus Rift.

Above: The Oculus Rift.

Image Credit: Oculus

We’re all looking from an investment standpoint at VR and AR. If you look at the acquirers in the space and the investors and the space, you’ll notice that in the early days, the Oculus — Oculus first started this revolution. Around the time they were acquired by Facebook, the investors in the space were looking mainly at technology companies. Fast forward to now, we’re seeing Disney and Fox and the other studios that Technicolor services investing in the space. As well as Technicolor itself and our competitors. It’s an important piece of data, to know who will be potentially buying you or your companies, giving you those awesome exits.

Freeman: Comparing the Bay Area, which seems to be more tech-focused, to Los Angeles and more the creative content scene — looking at the difference in the investors and the expectations going into it, I’d be curious to hear your thoughts on who the major investment players are in that area. You mentioned Fox and Disney getting in. What are their real intentions? What should investors and founders be thinking about when they enter that market?

Linao: Let’s start off with financial investors, talking about activity in the venture space in L.A. first. We have Greycroft. Upfront recently added a new partner in Los Angeles. Also, there are a few seed funds out there who have invested in VR companies. Prospect is one smaller seed fund in Los Angeles.

A lot of what’s going on now in terms of investment — yes, L.A. is definitely looking. Are they looking for content to invest in? Yes and no. There’s a lot of pressure for L.A. investors to be investing in technology for VR. Not just VR content. There’s a lot of interest in marketing technology and ad tech. That’s in our DNA. How do we invest in the OTT space? What’s the next content consumption platform? You’ve got Wevr and other companies trying to be the solution for 360 video content. Those are some signs that I’m seeing.

Freeman: Now we have Marc Jackson, an accomplished professional in the game industry. He’s been fostering the VR scene in L.A. Marc, we know you used to carry more than $150 million for traditional video games, specifically around independent publishing. Now you’re looking at reinvesting in the content creation business in VR. How are you thinking about that? What are the opportunities and the key learnings from prior platforms? How are the content creators of today capitalizing on this next wave?

There was a long line to try out the Oculus Rift at CES 2016.

Above: There was a long line to try out the Oculus Rift at CES 2016.

Image Credit: Dean Takahashi

Marc Jackson: I’m flattered to be here among a primarily equity- and tech-focused crowd. I’m relatively new to equity investing myself, having spent most of my career assisting independent interactive developers and creators to find access to project financing, capital that comes not through equity but through other sources.

One of the most telling experiences I had — I started my career more than 20 years ago. I was with Walt Disney Imaginarium. I had the amazing opportunity to work as a junior project manager on the Euro Disney park. That experience is coming back now in VR. In video games I started with a publisher called Infogrames, which later became Atari, and moved to L.A. with them.

I eventually set up a company around a very talented team of software engineers, designers, and artists who were coming out of the Sony Imagesoft studios in Santa Monica, people who’d created content for the first PlayStation. With that company, where I eventually became the CEO, we tried to raise capital ahead of time, and it was absolutely impossible to get venture capital. We ended up having to bootstrap and raise funds through selling our designs to publishers. My experience was very specific to that problem — being a content creator and seeing the difficulty the venture capital community had with evaluating the potential return, always bumping up against the hit list.

I can make a couple of quick observations. Both Hollywood, which I’ve been close to for a long time, and the Bay Area, where I’ve spent a lot of my time dealing with video game publishers — the community around financing films and the community around financing tech companies have a very difficult time understanding what interactive entertainment is. Interactive entertainment, for a very long time, has been a key storytelling medium. I think of game design and interactive entertainment as very often being a business model in itself. Some designers are so talented that they can come up with ways of engaging consumers. We’ve seen this in the mobile revolution. You can design around a specific engagement application that brings in consumers in ways that surround them with story, but also engage them and make them part of the storyteller’s vision.

I say all that because what I later did after I ran a game development company was I transitioned into a support mode. I began applying film project finance methods to video game productions. Always with independent studios that were looking to receive funding based on getting a publisher to agree with their original design and fund it through third-party bank financing and other types of specialized funding, which is typical of the film industry. In fact that’s very much the norm in film and television, for decades, to fund through what’s called negative pickup deals, or structured project finance.

The HTC Vive virtual reality headset with hand controls and sensors.

Above: The HTC Vive virtual reality headset with hand controls and sensors.

Image Credit: Dean Takahashi

I began as one of a couple pioneers in the game industry, applying those methods in the early 2000s. That’s where the fund comes from. Very rapidly we were working with independent productions around $10 or $20 million, which is relatively low now for big console video game projects. The fundamentals of evaluating these types of projects and putting in place risk containment methods are similar to venture capital. It almost always comes down to scrutinizing the team, the core idea, and being willing to hedge risk.

I worked for three years with a company called Film Finances, which does performance and completion auditing on film projects. They’re the biggest company doing that in the space. They take the foul-weather risk, and the film studios or video game publishers take the fair-weather risk, saying, “We’ll buy the project at the end when it’s finished.” It’s a fairly simple mechanism, very much in practice in the film industry, but very foreign to video games and interactive entertainment.

Now I see, for the first time in my career, a true convergence coming in VR. That’s why I’ve committed my career to what I consider the best storytelling talent, doing primarily interactive storytelling, in the VR medium. My hope is I can help create a new type of financing mechanism for these companies.

Freeman: I just got back from a trip to Asia, where this was especially interesting. People are talking about all these experience centers. It’s exploding in China and Korea and others. Hundreds of experience centers opening up everywhere that are just dying for amazing content. They’re all looking to us to find out how we get this content over to the U.S. from all these content creators in China and other Asian countries.

There are tremendous rules and regulations around film. Gaming has its own limitations. VR is in a unique position right now where if we strategize correctly, we can capitalize on that and help U.S. content creators get access to money from abroad that will enable them to continue with not only capital, but also alternative forms of funding, so I’d be curious to hear your thoughts on that pipeline to Asia.

Jackson: Asia, and particularly China — we’ve seen this for decades, where major companies like Sony have bought into the ecosystem of Hollywood and content creation for film. That’s accelerating. I don’t think we realize how fast it’s going to happen. I would say that among the largest content-focused media companies in Hollywood, the shared understanding is now very international and very Asia-focused. You’re seeing so many Chinese companies move into the equity capital area, using interesting slate financing and direction financing mechanisms that will enable Chinese companies to gain that access.

We’re going to see an acceleration in the coming years and that will impact VR, absolutely. The Chinese market may not adopt as quickly, but I’m very excited. We’re going to see a lot of new methods that benefit creators of content in this area.

Freeman: Now we have Jon Goldman from Greycroft. I’ve had the pleasure to get to know Jon pretty well over the past couple of months here, learning that he’s an incredible entrepreneur as well as a venture partner. Foundation 9 was bootstrapped to more than a thousand people, which at the time was the largest independent gaming company —

Job Simulator is a launch title on the HTC Vive.

Above: Job Simulator is a launch title on the HTC Vive.

Image Credit: Owlchemy Labs

Jon Goldman: We were the largest independent developer of games, yeah.

Freeman: With that knowledge, looking at all these pioneers in virtual reality gaming and content, what business models are you seeing that will stick, things that can actually generate revenue, things that you see as trends that these content creators could adopt when they’re thinking about how to be successful? And for the business audience specifically, investors looking at content creators, not only what to look for, but also how they can bend some of their current investments toward something more stable.

Goldman: Let me take a couple of those. In terms of shaping content, historically, if you’re a content developer, there’s a double-edged sword at the beginning of a platform. There’s very little installed base, but if you do something really nice, you can get a high attach rate. You can get recognition in a way that’s hard when there’s a lot of users and a lot more content out there. It becomes more of a customer acquisition challenge.

The typical models have been, as opposed to pure commercial art, where generally you go to people who do slate financing — versus a publishing play, where you’re building infrastructure around your content that is about cross-promotion and customer acquisition. Increasingly we’re seeing things in mobile game development that are going to apply to VR, which is becoming a social platform. That’s things like live operations.

When I was an active operator in the consumer games industry, it was a packaged goods business. You made something, put in a box, and in a couple weeks it would go to GameStop while you prayed and held your breath. Now you launch a game and that’s just the beginning. Increasingly we’ll see that with narrative in VR. That’s the unanswered question. Compared to watching a TV show or a movie, how do you bring in a community? What social aspects do you bring to a narrative and how does that change the creation of the narrative?

As to your next question, if you’re investing in content, how do you look at that? For those of you who don’t know Greycroft, we’ve been very active in media and technology over the past 10 years. The Huffington Post was an early investment. Maker Studios is a recent one. We have a lot of expertise in online video. We’ve started to be active in this space as well. We’ve not announced anything yet, but we have been active in some companies that have been mentioned tonight.

So what do I look for in something that’s more of a content play? It’s not just magic and wishful thinking. A few of the filters I go through — of course, like everyone said, team is the most important thing. But I start my filter from genre. There’s lots of historic data around genre, whether it’s film genres or game genres. What are the sales cycles there? Looking at those cycles, you can see the ups and downs.

From genre, does a team have technology that supports a genre in an interesting way? That’s where it becomes more of a venture bet, where you can see there’s some kind of technical competence that undergirds that genre. Finally, is that team capable of doing something interesting with the technology in that genre? Do they have a history that ties them to this particular project? What are their contacts in this space? I’m always a bit nervous when I see entrepreneurs, particularly in a new market like this, who are jumping in without a wide set of contacts related to what they’re doing. As it turns out, in the early stages of a platform, the early adopters are other people in the industry.

This wouldn't look right at 90 frames per second.

Above: This wouldn’t look right at 90 frames per second.

Image Credit: ILMxLab

Freeman: One thing we’ve recently is the Pokemon Go craze. Some people argue that’s AR. Some people argue it’s not. But regardless, it demonstrates one very important thing, which is the power of IP. It’s incredible. They launched on the backbone of Niantic, which had built the technology, and overnight it was a global phenomenon.

I’m interested because I know about Walking Dead and some other interesting IP you guys have. What do you think about getting IP into the VR industry? What does that look like? What do entrepreneurs need to be thinking about? As we’ve seen, it can really start to make waves.

Goldman: What Taylor’s referring to, I have a day job and a night job. I don’t just invest. I’m also involved in an entertainment company in Los Angeles called Skybound. We’re the IP holders of Walking Dead. We’ve had a lot of experience commercializing that world.

A known IP is an amazing way to rise above the noise. But I would also say that in the early stages of a platform, this is the moment when you can create original IP. For something like Walking Dead, as far as I can tell from all the demos and pitches I’ve seen, a lot of people seem to think that zombies are a good idea in VR. I see a lot of that.

When you have a big brand, you can afford to hang around the hoop for a while until there’s a large audience, a large installed base, and you can make lots of money. That’s something that, as entrepreneurs — you can have a licensing strategy. You need to be smart about that in terms of timing. Right now, it’s a fantastic time to be an original creator, an original voice. These early adopters picking up these platforms want fresh, original stuff. They’re much more exploratory than the more mature users that will hopefully come in the next several years.

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