Corporate investors have been fueling a lot of the fundings for augmented reality and virtual reality startups. Like venture capitalists, they’re excited about the opportunities that AR and VR offer. But their aims are often different.

They want AR and VR to succeed, so their own platforms can see accelerated demand. AR and VR are expected to be a $120 billion industry by 2020, according to Digi-Capital.

The UploadVR and VR Accelerated panel on investing in VR content included speakers Ed Ruth of Verizon Ventures and Richard Tapalaga, senior investment manager for Qualcomm Ventures. UploadVR founder Taylor Freeman moderated the panel.

Here’s an edited transcript of the talk. We also covered the panels on early stage VCs and later-stage VCs.

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Microsoft HoloLens

Above: Microsoft HoloLens.

Image Credit: UploadVR

Taylor Freeman: Ed, I know you guys are doing some stuff focused on the tools side, the pipeline, compression, distribution. A lot of people are fighting for that position. How are you thinking about that, and how does Verizon’s strategy play into that? How should I be thinking about big corporates when it comes to my acquisition strategy or partnership strategy?

Ed Ruth: First of all, I’m from Verizon Ventures. Can I get a show of hands from the entrepreneurs in the room? Congratulations. You have a long, hard road in front of you. Show of hands from investors or potential investors? All right. We have a heavy entrepreneur audience with a smattering of investors.

And now, entrepreneurs focused in VR — and let me be clear, in VR as opposed to AR, with AR being reality augmented with certain frameworks and VR being more immersive? And now the AR side?

Let me answer the question. We’re one of the few corporate [investors] that have not yet invested in the space. We’ve been looking at it for some time. I’m going to be a realist here. I don’t mean to sound unenthusiastic. But there’s a reality among investors right now — talking about a bubble insinuates there’s an inflation of some sort. I think there is some inflation. It also leads to the question of whether we’ll see a burst or a deflation, and I don’t think we’re looking at a burst in this space. I do think there’s a slight inflation. It’s due to optimism and enthusiasm, not because there’s a real market. There will be but it’s going to take a little while.

The way we’ve looked at investing in this space — if you have an interesting piece of core technology that is IP protected — these are the early days of how ecosystems are developed. There are platforms. Today, you can consider the [head-mounted displays] platforms. And then there are the tools, the picks and shovels, that we’ll need to create content. We’re in the early days of the picks and shovels. We’re starting to see full-stack companies get closer to market. We see some in the market now.

As an investor, you get very nervous about the market and its time to maturation. We’re focused on tools, picks, and shovels right now because we think it’s the right time to invest in that space. But we’re also going to be meaningful users of the picks and shovels. We’ll help grow that part of the industry.

The Oculus Rift.

Above: The Oculus Rift.

Image Credit: Oculus

On the one hand, you have a big giant telecom infrastructure that’s ultimately going to be the pipes for untethered VR and AR experiences. Today, the majority are tethered, but they’ll very soon become untethered. We’re building the 5G network across the United States as we speak. We’re setting the standard for that, and we’re getting close to a lot of these platform players to understand what demands there will be on the network. We’re trying to get a good sense of what throughput will be required and what experiences will be delivered to those headsets. That will help us understand the types of tools that will be required to create content, what bitrates, what file sizes.

We also have the Verizon Digital Media Services business. You might not know this because you’re not focused on [business-to-business], but we’re Disney’s exclusive partner for all the content that you view on your mobile device. We transcode that, render it, and cache it on the edge of the network. ESPN, Disney Channel, whatever. That’s a big business. It sits in our organization under Tim Armstrong. We look at anything on the rendering side — maybe it’s a higher rendering framework that can be done partially in the cloud and partially on the device — so we can understand the requirements.

Today, we’re focused there. But in a year or two, as these platforms begin to proliferate, and we begin to understand who the winners and losers are going to be on the platform side, services will begin to establish — they’ll have some scalability in that market. From an AOL and Yahoo perspective, it’s not a done deal, but we have a history in those parts of our business of being content aggregators and eyeball aggregators. Ultimately, we run ad networks in that environment. We’ll be looking for [services] that are creating repeat behaviors, aggregating eyeballs, and have an opportunity to monetize in a way that’s consistent with our core business, advertising. Those are the areas we’re looking at right now.

Freeman: Are there specific picks and shovels you’d be willing to point out to the audience that you think are the most valuable tools going into the next year?

Ruth: The time in VR for us, as investors, I wouldn’t say it’s passed, but we’re pausing. Right now, we’re looking heavily at augmented reality. Pokemon Go is a pretty good example of content overlaying the real world, but as you start to extend that further, you can see things like environments that will be delivered. Or the environment you’re in will have the delivery of different types of content. You’ll have geocached information. You’ll have object recognition. Those databases need to be created.

Ultimately, how do you take physical objects and render them digitally in a very lifelike fashion? If you see any of the demos from Magic Leap on YouTube, that’s the beginning. You can imagine the amounts and types of content that will ultimately be overlaid on the world. We think there’s a meaningful business or businesses in that category. We’re looking around that space for opportunities.

Flaming arrows in Minecraft on the Oculus Rift.

Above: Flaming arrows in Minecraft on the Oculus Rift.

Image Credit: Microsoft

Freeman: You mentioned that the cycle is pausing, and now you’re looking at AR, which is much farther out. On the corporate side specifically, you’ve laid the foundation. You’ve found the tools you want to invest in. Is it up to the next generation of non-corporate investors to come in and build on top of that? I’m curious about what you’re thinking of the entirety of VC as opposed to just the corporate VC side.

Ruth: One of the things we’ve seen is that the earliest VR picks-and-shovels companies had to be more than picks-and-shovels companies. NextVR is a great example. They’re a picks-and-shovels company. They built, better than anybody else, the ability to capture and render high-definition live content in an immersive environment. But they’re doing the full stack because in the early days they had to. Over time, we’re going to see some streamlining. That’s one of the ones we’d love to have invested in, but we just missed the opportunity.

The pause for us is really around valuations today and the check sizes we write. We don’t have an ownership goal in terms of the company. We’re looking for companies that are strategic to what we do and that are reasonably good financial investments. The pause is really more predicated on … the market is almost played out on picks and shovels, and also, valuations have reached a point where it’s just not the right time for us to invest.

About AR, you’re right. It’s much earlier. But for the size of check that we write — typically that’s $2-5 million. It’s a better environment for us to meaningfully shape, for us to help those companies and secure our investments.

Freeman: Richard, would you like to give a quick intro about yourself?

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

Richard Tapalaga: I’m the investment manager for Qualcomm Ventures. I lead the group’s strategy and investments in all things AR and VR. We’re part of a global organization, and we tend to look at a lot of things that help propel the wireless ecosystem.

We have a couple of core investment themes. One of them is around core chipsets and systems on a chip. The other is frontier technologies, which we see as kind of one big vertical. You have things like AR and VR, automotive, drones, robotics. Then you have the horizontal, with areas like security and cloud. That’s largely where we invest. I will say we’ve invested in AR and VR for a number of years now. We made our first traditional AR investment back in 2011. We’ve invested in AR since it was still in the gimmick phase. Now it’s a real foundation for utility. We’ve done about a half-dozen investments overall.

As I said, we’re a global operation. We have seven offices around the world. Three of those offices have capital investments in VR and AR. We like to be aggressive where we can, and take leadership positions in these companies.

Freeman: You were involved in Magic Leap. You recently invested in Owlchemy Labs, which is [an] awesome company. Companies that are pushing this industry forward, really taking off. How would you advise other corporate VCs to think about these opportunities? On top of that, how would you advise angel and early stage investors to think about companies that are in a position to move toward acquisition or IPO?

Tapalaga: Just as a quick overview, we view the world in two different ways. We look at the lower end and the higher end slightly differently. At the lower end, we’ll be a bit more aggressive. Teams are the most important part of any investment. But what we like to see is true technology leadership as well. It’s a lot rarer than you’d probably think. We like seeing a match between what’s currently going on in the market and the future that everyone’s expecting AR and VR to see.

The future of all these platforms will be untethered, truly wireless. That’s natural for this industry. In order for it to move beyond a console, something that’s a legacy platform, it has to be mobile. It has to be something that … everyone likes to use the analogy about smartphones. If you left your home, and you were five miles away, would you turn around to get your phone? In order for that to happen, it truly has to be mobile. That’s important for a VC to consider.

Freeman: You guys have demonstrated that you’re OK doing hardware. You’re going to push this forward. Is there another center where you’re seeing opportunity right now? Sensors? Inside-out positional tracking? To make this mobile we need full positional tracking. Is there any other area where investors in this room should be thinking about hardware?

The HTC Vive powered by SteamVR.

Above: The HTC Vive powered by SteamVR.

Image Credit: HTC

Tapalaga: Hardware is always interesting. It’s very costly. It takes more money over more time. Even with a modest success, you need more and more money. Hardware is always tough. When we look at a hardware investment, the one thing I always look at — is hardware the core competence of the company? In a lot of cases, it boils down to software. It’s not so much the money. It’s more about how you’re capitalized and how you’re building the company going forward that really matters.

We talked about building the full stack, similar to NextVR. If, at the end of the day, you’re a software technology company, that’s a lot of money getting invested in hardware and making it difficult on the [mergers-and-acquisitions] side.

When we look at these investment areas, we always want to know if you’re solving a real problem. Is there a real hair-on-fire problem here? Don’t go searching for a problem with a solution. Ensure there’s a problem that you’re going to solve, that there’s a real market there, and then build a business.

Particularly when I look at VR, I think that one of those problems is coming up with something that helps convey the true experience of VR. The table stakes that need to be addressed are things like content development and the tools that go along with that, as well as things that help with interaction and navigation within VR. Those problems are currently being addressed nominally, but that’s one place where people need more robust hardware. Although, software is probably equally as big a piece.

Into the future, the next big area for hardware is eye tracking. As soon as eye tracking becomes standard in hardware, the amount of use cases — finding that truly unique VR use case that turns the platform into a true mobile computing environment, where you have full detail. As soon as we see eye tracking get into mobile headsets, things are going to be really interesting.