The 7 habits of highly effective AR/VR startups

Digi-Capital AR-VR Leaders Q2 2019

There are multiple AR/VR startups thriving in 2019, despite sentiment to the contrary. Surmounting the early stage challenges that every new tech platform faces, AR/VR startups are finding innovative ways to survive and thrive. A few common themes came out of extensive discussions across the industry, and here’s what the CEOs had to say.

1. Solve a critical use case

We think about use cases for new technology platforms in terms of valuable versus critical. Valuable use cases might be cool and technically hard to do, but either don’t fundamentally transform the user experience or aren’t important to users. Critical use cases enable lots of users to do something they really care about, and that couldn’t be done in any other way.

Mobile AR utility platform developer Streem is solving a critical pain point for its enterprise clients by reducing service technician visits by up to 42%. CEO Ryan Fink explained: “With a Streem video call to the customer’s home, a call center representative or expert can take very accurate remote measurements, automatically capture serial or model numbers, or even identify the context for an insurance scenario. In some cases replacing the technician altogether.” And to ensure maximum take-up of the tech, Streem makes onboarding relatively painless. “Our SDK can integrate directly into the client’s existing app or run on a web platform, and the end customer can access the functionality without even downloading an app.” Streem clients are seeing dramatic cost savings from the reduction in unnecessary service truck call outs, as well as significant increases in customer satisfaction from solving their problems faster and more conveniently.

Home renovation and design platform Houzz knows that visualizing products at home is a major pain point for its users. Visual Technologies Lead Sally Huang said: “Houzz’s strategy was to make our 3D visualization tool accessible to a majority of users on their existing phones. Our core investment went into ensuring optimal loading times for models, increasing stability, and making the experience native and responsive even on lower processors.” Houzz’ 2D visualization tool used by 50% of their shoppers had already shown higher user engagement and sales conversion rates. The 3D tool delivered even stronger results, with users engaging with Houzz’s View in My Room 3D tool being 11 times more likely to purchase than those who did not.

2. Make money from day one

Revenue is the best source of funding.

Holographic software startup VNTANA is successfully converting demand for experiential marketing into long term revenue streams. “Many of our clients start with one-offs to engage their customers via holograms. We track who is using it, what products/features they engage with, gender, age, sentiment, and all the data is stored on our cloud platform which syncs with the client’s CRM. The whole system ties back to our clients’ sales,” said CEO Ashley Crowder. The tracking feature has been critical in converting one-off engagements into long term relationships. “One of our clients, Lexus, started off with a two week trial that has now been running for three years. Our solution has helped them more than double their qualified leads compared to the traditional car showroom experience.”

AR/VR education startup zSpace grew revenue dramatically after pivoting from Enterprise to K12 schools. CMO Mike Harper said: “After starting with In-Q-Tel [the CIA’s VC fund], our first customer and source of funding, followed by various enterprise industries like manufacturing, we did an entire re-envisioning of the company and created a complete education solution to meet teachers’ need and engage students.” The pivot to education came about after extensive product and user testing. “We discovered that in the enterprise market, compelling tech was not enough to generate significant revenue and that creating preference for new systems would require long term investment. We found the opposite in education where our solution worked better than their existing systems from a user acceptance perspective. It was engaging kids in new ways and a win-win for teachers on two core measures: high engagement and improved student grades.” Harper added that zSpace is now generating high tens of millions in revenue.

Mobile gesture recognition startup Xesto is finding opportunities to generate revenue while the AR/VR market gets going. The University of Toronto based startup is solving a pain point for eCommerce footwear retailers by enabling users to measure their feet from home before purchasing shoes online. “We’re looking to the future but with an eye on the present,” said CEO Sophie Howe. “We were working on some technically complex solutions, now with a simple AI measurement tool we’re aiming to own a vertical for measurement of feet, hands and wrists as an integrated tool for shopping using the iPhone X.” Generating revenue was critical for the young startup as this qualified it for significant government funding. “One grant reimburses 35% of our annual R&D salaries. We’re now leveraging significant academic resources through partnerships that extend our R&D resources beyond the core team, which is not common for small research based startups in our space.”

Industrial AR software/hardware developer Holo-Light ramped up revenue growth by targeting low hanging fruit. CEO/COO husband-and-wife team Florian and Susanne Haspinger explained: “In our German-speaking home markets — Germany, Austria, Switzerland — the high concentration of industrial companies who already believe in AR have driven demand for us. They needed off-the-shelf point solutions that fit their processes. So we focused on quality assurance and prototyping solutions which are critical to engineering departments, but don’t require additional integration.”

3. Know what you look like to VCs

It’s important to know from a VC’s perspective whether your early stage company looks more like a startup or a service provider. VCs love startups but can be wary of service providers.

Enterprise AR startup Scope AR was built as a product pure play and has attracted significant VC funding, most recently a $9.7 million Series A. “Scalability and maintainability of work instructions is critical for enterprise clients. Our solution is a SaaS product suite that can be easily rolled out across the enterprise,” said CEO Scott Montgomerie.

Conquer Experience, developer of nurse training mobile/VR simulator PeriopSIM, attracted VC funding by spinning-out of mobile services parent company (avoiding the optics of a service provider to VCs). CEO Angela Robert explained: “At first, we incubated PeriopSIM within Conquer Mobile. Thanks to the company’s track record in generating revenue, we received significant R&D grants from the Canadian government. Then in 2018, we spun it out to fit the VC funding model.”

4. Make powerful friends

Wherever possible, leverage existing relationships or partnership opportunities to get noticed and supercharge growth.

AR enterprise startup Taqtile has teamed up with industry leaders to accelerate revenue growth and reach new sectors and geographies. “50% of our revenue now comes through partnerships,” said CEO Dirck Schou. “Beyond our Microsoft HoloLens partnership, we have regional partners in Asia and Europe for our work with HoloLens. We have a go-to-market partnership with Booz Allen Hamilton for the military sector, and fulfillment relationships with SHI and Insight for state/local government contracts to eliminate lengthy onboarding processes.”

As a startup it can be hard to break into enterprise when customers are wondering if you’ll be around next year to support your product. AR enterprise specialist RE’FLEKT Inc. President Dirk Schart credits their enterprise specialist investors Bosch, BASF and Prosegur for helping them sell AR into enterprise: “They really understand the startup/enterprise customer dynamic and helped us build our reputation, open doors, and integrate into our enterprise customers’ existing infrastructure.”

For young startups with little revenue or limited access to VC funding, grants can help them punch above their weight, as well as extend runway. VR training for the elders space startup Embodied Labs has raised nearly $2 million in funding, including $400,000 in grants. CEO Carrie Shaw explained: “Our non-dilutive equity funding includes a quarter of a million dollars from The Gates Foundation. We’ve used these grants to raise our profile in the healthcare space and are now closing deals with the largest players in the sector.”

Conquer Experience’s Angela Robert also described how after their pilot project with AORN, the world’s largest professional association for perioperative nurses, winning first prize at the International Meeting on Simulation in Healthcare led to working with Siemens Healthineers’ sales teams. So prizes are good too.

5. Don’t leave money on the table

Think creatively about money making opportunities, it all counts when it comes to extending runway.

Periscape VR provides plug and play location-based entertainment for airports, retail locations and enterprise use. Founder and CEO Lynn Rosenthal worked out how to maximize revenue within the first couple of weeks of their JFK pilot. “The key was to test and pivot as quickly as possible. Internal data showed 89% of customer traffic was in a ten-hour window, so we cut hours of operations, reduced staff by 75% and doubled our revenue. This is notable as many startups tend to underprice their products and/or overspend on costs.” Rosenthal said.

She also used the experience to refine her business strategy: “We’re now also focused on Asia and the Middle East where airports and malls have higher footfall and advertising opportunities are bigger and easier to execute. We’ve settled on a ticketing/on-site advertising hybrid model which is fully automated and are looking at integrating shopping into the experience by using adjacent stores for fulfillment in addition to delivering to the customer’s boarding gate or home.”

The approach of micro amusement park Two Bit Circus has more in common with mobile games than location-based entertainment, with its focus on customer lifetime value (delivering maximum value to customers while maximizing revenue from their first visit and keeping them coming back for more). CEO Brent Bushnell said: “There is no entry fee. We provide a pay-as-you-go combination of interactive entertainment, including VR, plus food and drink. People tend to come in pairs or groups. We found that multi-player VR experiences work better than single player, and can last anywhere from 4 to 15 minutes.”

The park is also designed to encourage a repeat experience. “We’ve built it so that there’s just too much to do in one visit, so people want to come back. We’re also focusing on content that makes people want to play again and again. For our VR attractions, that means more skill-based games than story-based experiences but we love both.”

6. Be the best at what you love

“Godmother of VR” and Emblematic Media CEO Nonny de la Peña has been steering the company with her vision of what VR/AR immersive journalism should be, including the REACH platform to help others create and distribute content. “As a bootstrapped startup with all the limitations and challenges that this entails, we’ve managed to punch above our weight in terms of reputation and quality of output because of the talent and hard work of the team. We just love what we do,” said de la Peña.

For immersive entertainment studio Felix & Paul Studios, the focus is on consistently producing experiences with very high production values to ensure maximum impact on audiences from this new medium. “Our studio’s DNA has always been about combining storytelling with technological innovation to bring immersive experiences to life,” said co-founder and CEO Stéphane Rituit. “This allows new creative opportunities to happen organically and enables us to explore various genres within virtual reality, as well as leverage new interactive platforms including augmented and mixed reality.”

7. Be ready to catch the whale

Prepare for success.

VR training startup Strivr transformed from scrappy startup to enterprise software company when Walmart rolled out Strivr’s software and training modules to its nearly 4700 stores nationwide. “Ironically, the pivot from sports to enterprise wasn’t that much of a transition, at least from the training perspective, as the challenges they are trying to solve are quite similar,” said CEO Derek Belch. Belch went on to explain how Strivr has evolved to handle its enterprise customers: “The real challenge was transitioning to service an enterprise customer. We had to get bigger, faster and stronger. We bulked up to 130 employees, made our product ‘enterprise ready’ and are committed to providing end to end immersive learning solutions for enterprise clients, rather than just one piece of the puzzle.”

Standing on the shoulders of giants

While there are a lot of great lessons to be learnt from those who are making it work, they don’t guarantee success for everyone. For those companies who can combine what makes them special with practical ways of building their businesses, the only way is up.

See more details in Digi-Capital’s Augmented/Virtual Reality Report Q2 2019.

Thanks to Phiar CEO Ivy Li, Sketchfab CEO Alban Denoyel, HP’s Global Head of Virtual Reality for Location Based Entertainment Joanna Popper, Norwest Venture Partners’ Amanda Robson, and WXR Fund’s Managing Partner Amy LaMeyer for their help in writing this story.

Isabelle Hierholtz is User Strategy Director of Silicon Valley AR/VR adviser Digi-Capital.