John Riccitiello, CEO of Unity Technologies, predicted that tech journalists would start gleefully writing that the virtual reality revolution is over because sales of VR headsets fell short of expectations, and analysts are in the midst of shaving back their predictions. I’m not one of those journalists. For AR and VR, I see 2017 as a year full of two steps forward, one step back and two steps back and one step forward. It’s a complex market with winners and losers for a technology that could change the world and many industries beyond gaming. It’s not a fizzling bubble that is going to disappear like 3D glasses.

Yet I see the market at a point of confusion, poised between action and inaction. Speaking at the recent VRX virtual reality event in San Francisco a couple of weeks ago, Riccitiello wasn’t gleeful about it, but he noted he was right about the “gap of disappointment” at our GamesBeat Summit event in May. Back in May, he said, “From a hardware and a software perspective, it’s a masking tape and twine year. These things are barely making it to the shelf. They’re barely making it to the consumer. They do magical things. I’m a giant bull on the long-term opportunities for VR and AR. But these revenue forecasts for the early years — they’re going to miss their numbers in 2016 by 80 percent. They’ll miss them again in 2017 by 60 percent or more.”

During his talk in May, Riccitiello said, “In the fullness of holograms dancing on your coffee table — $120 billion is not enough to describe that marketplace. That’s coming. But it’s a longer-term burn. The hardware is not there. It’s way too expensive to attract a mass market in the near term. Mobile VR will give you a good experience, but it’s not a good enough experience to hit that ‘Wow!’ point. When I talk about the gap of disappointment, what I’ve referred to is — the bullish analyst forecast is like this. The reality is going to be like this. It’s only a matter of time before people say, ‘Oh, it didn’t happen. VR and AR is all a hoax. It’s a fizzle.’ The New York Times is going to run that on the front page, right before Christmas, to piss us all off. We’re going to get that.”

John Riccitiello (left), CEO of Unity Technologies, and Mike Capps, former president of Epic Games.

Above: John Riccitiello (left), CEO of Unity Technologies, and Mike Capps, former president of Epic Games.

Image Credit: Dean Takahashi

In fact, SuperData Research did recently retreat from a rosy VR forecast for 2016. The big change was the weakness of PlayStation VR sales. As late as October, the market researcher thought Sony would ship 2.6 million VR headsets in 2016. Now it has shared that forecast back to 745,434 units. SuperData still believes VR consumer software will grow from $407 million to $14 billion. But Riccitiello said that we shouldn’t expect that to happen in a straight line.

“I expect a journalist in December or January to say that the industry is a disaster. That’s the gap of disappointment. But that’s a bad conclusion off of a bad forecast. Zero to three billion ain’t bad,” he said, speaking about the growth of both hardware and software VR sales for the past year or so. “It doesn’t mean the industry is bottoming out. Smart money knows that. Don’t get disillusioned.”

The investors who have put money into both the AR and VR industries could get spooked by recent events. Those investors have helped create more than 1,000 VR and AR companies around the world, according to one VC’s observations. Brendan Iribe, the fearless CEO of Oculus, stepped aside from that job to run the PC VR division of Oculus, which could be perceived as a step down. Oculus is searching for an overall leader again, and that comes after a rocky year. The Oculus Rift VR headset is expected to hit only 355,088 sales this year, after eight months of selling, according to the revised SuperData forecast.

And the AR industry took a major blow when The Information published a well-reported but speculative story saying that Magic Leap’s technology is not likely to live up to its demos. That’s pretty scary for the AR industry because Magic Leap raised $793.5 million in its latest financing round, or about half of all the capital invested in both AR and VR in the U.S. in 2016, according to data firm PitchBook.

Based on the poor results, investors who look only at the surface might go into retreat, exacerbating the “gap of disappointment” in 2017. VR and AR startups have been warned to worry about whether they’re going to get their second or third rounds of funding when the money dries up. If the herd of dumb money, including the Asian investors, moves on to other things, it could become very painful and easy to lose your nerve.

VR investment panel at VRX.

Above: VR investment panel at VRX.

Image Credit: Dean Takahashi

There is some smart money in this space. Tipatat Chennavasin, cofounder of the Venture Reality Fund, said in a panel at VRX, “VR is here now. I’m not that concerned about how many units that have sold as much as how startups are doing. Is this a good ecosystem where startups can monetize and survive.”

My mother-in-law Tan Chin tries out VR.

Above: My mother-in-law Tan Chin tries out VR.

Image Credit: Dean Takahashi

And even if the pure investors get spooked, money is still flooding into the platform companies. Mark Zuckerberg, CEO of Facebook, said in October that the company had invested $250 million in the VR ecosystem, and it expects to invest another $250 million, despite the slow start with Oculus Rift sales. Google just launched its Daydream mobile VR headset, and it is getting behind VR and AR in major ways. By all accounts, the Chinese are racing ahead even faster. Joe Kraus of GV (Google Ventures) said he took heart from this commitment, as the platform owners can fill any disappointment gap with their own money and engineering efforts.

If this was all a big mistake, we should start seeing some wrecks. Perhaps the craziest of VR firms was CCP, the Iceland-based company that dove in head first with the VR games Eve Gunjack and Eve Valkyrie. Hilmar Veigar Pétursson, CEO of CCP, acknowledged that his company was fearless in moving so fast into VR. It published 11 products across all the platforms in one year. That could have been disastrous. But Veigar Pétursson said that the company invested more than $30 million in that work and it is almost profitable, generating at least $25 million or so in revenue. I saw Veigar Pétursson having a conversation at VRX with an executive from a very large game company. But rather than taking pity on CCP, the executive was bemoaning the fact that his own company was too risk averse and, as a result, didn’t learn anything in VR yet. He actually envied Veigar Pétursson.

According to Steam Spy, five VR firms have generated more than $1 million in revenue, even with the weaker sales this year. Survios, one of those firms that earned its spot on this list with its Raw Data VR shooter game, was able to get two rounds of funding totaling $50 million, including some money from MGM. If it’s all going to collapse, Survios might be wise to slow its spending and sit on that cash as “dry powder.” But James Iliff, cofounder, said in an interview that they’re put that money to work, starting with funding for other game developers.

“VR is in a very exciting time and also a very scary time,” Iliff said. “Everyone is in VR because they are passionate about it. We believe VR is the ultimate entertainment medium. It’s an amazing dream to have. But it’s also risky. There are failures along the way, and we will learn from those. It’s not a bright and shiny time for everyone in VR all the time. We want to build a healthy VR market.”

I am not risking any of my own money on AR and VR, so take what I say with a grain of salt. I’m not becoming a VR journalist. I’m remaining a game and tech journalist. But I think the worst strategy in this new medium is to slow down and be cautious. I think everybody should put their money and their ideas to work to make the promise of AR and VR come true. The strategy of waiting for some other guy to innovate ahead of you to show you the way is timid.

I can foresee massive consolidation as many of the poorly conceived companies die. But I can also foresee gold miners who strike it rich, and the way to make that happen is to dig for gold. You can’t retreat your way to success.

The way forward isn’t always obvious. The iPhone ramped slowly in its first year, and then it exploded. The adoption curve could be slower for VR, but just as promising, Kraus said. Niantic Labs showed that with Pokémon Go, which generated $600 million in revenue in its first 90 days. That created more excitement for AR, but it reminded us that mobile gaming is alive and well, as it reaches a billion people.

I still see a lot of optimists. SuperData expects the combined AR and VR hardware and software markets to hit $5.4 billion in 2017. And that’s just a stepping stone to true nirvana. Fans who come out of The Void Ghostbusters Dimension VR exhibit at Madame Tussauds in New York are truly wowed by the experience, said Michael Yang at Comcast Ventures. Those of us who have shown VR to people for the first time get a kick out of how excited they can get.

I think that these people should address one problem that the early fans of VR have all faced. Kraus mentioned that, were he not a VR investor, he would not put his VR headset on every day. That means he hasn’t found a killer app yet, and Kraus sees no absolutely compelling reason to engage every day with VR. We don’t have our Pokémon Go yet in VR. Or, perhaps more appropriately, we don’t have our Call of Duty, Uncharted, or Mario. But we’ll get there. I believe it.