GamesBeat: The spectator or esports angle to the game business, then?

Thompson: Yeah, where the game is probably off to one side. We’ve talked to a VR gaming company that we’re very interested in.

GamesBeat: I think the interesting thing about you guys is you still choose to retain the gaming knowledge, even though sometimes you go quiet and the market isn’t necessarily something you’d invest in. Whereas a lot of the other companies, they lose their expertise in gaming and move on to the next thing. If they come back into gaming, they’re realizing too late that they have another opportunity.

Thompson: For larger, established firms that have multiple practice areas, they have to get things through the partnership. [laughs] We see in a few areas, the partnerships are just allergic. Guys say, “I can’t even bring it to my partners. They don’t want to listen.” That’s probably the case with mobile gaming. VR is different. I suspect that when the time comes, you’ll see companies have some investments in mobile.

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Digi-Capital says 65% of AR/VR investors are mainstream VCs.

Above: Digi-Capital says 65% of AR/VR investors are mainstream VCs.

Image Credit: Digi-Capital

GamesBeat: Digi Capital’s recent quarterly report said that the thing they notice that was different about this third quarter was the bulk of the investors were mainstream, traditional VCs. 65 percent were mainstream, 20 percent were corporate, and the rest were other investors.

Dhillon: The corporate investors have been stepping up big time. You have Intel, Qualcomm, Samsung, Nvidia, they all have vested interests in pushing hardware out to market. The headsets, I think Oculus announced $250 million as its content investment since inception, with its grants through Jason Rubin’s studios team. Subsidized or vested-interest investments from corporate or the headsets themselves will continue while we see the ramp-up of hardware.

Thompson: Is any of that $250 million unrestricted grants?

Dhillon: None of them are equity investments. There are certain exclusivity ties that come with the money, but they’re different. They’re not uniform across each production. I think Playful, the guys who made Lucky’s Tale, got something like $20 million at the outset when they were building the first game.

Where you can limit content risk with game designers, programmers, and so on who are able to develop games within particular archetypes – MOBA, first-person shooter, RTS, action-RPG — that have proven they can deliver products multiple times within budget and on time — they understand the game design elements. They understand free-to-play mechanics on the existing platforms. A lot of the balance and game design risk that would be incorporated into “hit-driven risk” — finding those types of people when it comes to VR now, you’ll always been taken that risk. Signia is comfortable with that, perhaps more than many other VCs, fair-weather VCs within gaming.

We’re not blind. You’re obviously investing in teams that have a track record with successfully executing from a game design to a launch timing perspective in the past. We keep an eye to that when it comes to thinking about games and new distribution platforms now.

Where you can limit your risk relative to other VCs that are just riding the distribution wave with mobile or Facebook — now, when we’re looking at an early new platform, where it’s murky waters out there and we’re feeling our way through, diminishing what we can as far as content risk with an experienced team, one that’s done a MOBA before and can port that over to new platform, you limit that element of execution risk as much as you can going for those kinds of teams. That’s what we’re looking for.

Thompson: We’re looking at doing our first one.

Dhillon: It fits within that model.

GamesBeat: I worried at first that a lot of these people in game development were using VR as their lifeboat to get away from mobile. But hearing about Facebook investing $250 million and all the strategics — I didn’t anticipate that so much money would be coming in to help them along in the growth stage, early stage of the business. I see more of them surviving than I would have thought, just because they’re able to access some of this money from corporate and others.

Thompson: That’s only talking about games, though. There are other elements of content and entertainment, like filmed content, that have been getting venture money as well. Baobab, all these Pixars of VR that have been emerging for content.

The exciting near-term gaming monetizing opportunity comes in two things. One, it comes from VR arcades. You’ll see that as a big ramp-up, from what I saw in Japan a few months ago, in the Akihabara arcade area. It’s exciting to see some early experiments they’ve got with HTC Vives being filmed in mixed reality. It’s useful for spectators to be cheering on their friend hacking up zombies and so on. Arcades in general will see a resurgence as a near-term monetizing opportunity while headset penetration is still so low in the home.

Another one, within the home in particular, is PlayStation VR. The shipping numbers are pretty positive. 80,000 units sold in the first week globally was the last number I read. Next year’s Project Scorpio from Xbox, with developments such as asynchronous space warp that were announced at Oculus Connect 3, that require a machine to run content at a lower framerate—basically that means cheaper PCs, lower-end hardware, can run a Rift headset.

My guess, without being confirmed, is that the next iteration of the Xbox will be able to run a Rift headset and compete against PlayStation VR in a meaningful way with better controllers and tracking. Oculus hardware is proving to be a bit better there. That emerges as an interesting near-term monetizable opportunity for VR gaming. There will be more places to play, a larger penetration of hardware, than the PC-tethered, more expensive, more hardcore audience.

VR Bangers is making 360-degree porn VR videos.

Above: VR Bangers is making 360-degree porn VR videos.

Image Credit: VR Bangers

GamesBeat: I interviewed one former Call of Duty and Guitar Hero developer who’s using porn as his lifeboat. He says it’s where a lot of his fellow game developers are going.

Thompson: It’ll be interesting to see. Do the existing porn companies — I don’t know if I can name any, but I’m aware of some.

GamesBeat: He says all of them are diving into VR.

Thompson: They’d be missing if they didn’t. But do they dominate this, or do they create opportunities for new startups to have meaningful….

GamesBeat: They may create the opportunity for a wider user base. People will use it and VR gets into homes.

Thompson: It’ll drive headset sales.

GamesBeat: VR gets into homes and that benefits other companies.

Thompson: Do they still have those booths in San Francisco where you can go in and pop in quarters? You’re probably too young to remember. I can imagine the arcades you were talking about.

Dhillon: I was talking about a very different kind of arcades. [laughter] But you’re right. In the early days of a new platform, games and adult content are always going to be forms of content adopted by early adopters. There’s been a bunch of VR hackathons and stuff going on at and elsewhere around the country. You won’t see traditional venture funding going into adult content, obviously, with pension funds as LPs and things like that. But in terms of innovation in monetization, managing community, influencer-driven outreach to audiences and so on, you might see some innovation in that space, sure. It’s a form of content that has a growing user base on a new distribution model like anything else.