Metaverse venture capital insights

This article was contributed by Luke Thomas, Senior Tech Evangelist at HP Tech Ventures.

Before we immerse ourselves into metaverse venture capital insights, let’s first understand the difference between some of the acronyms that have been buzzing around this space!

The difference between Augmented Reality (AR) and Virtual Reality (VR) is where the user feels present. In virtual reality, the user feels present in a fully simulated environment, while augmented reality makes the user feel present in a combined world of real and virtual content. Thus, VR is an immersive and interactive simulated environment and AR is interactive virtual content spatially overlaid on the real world.

Extended Reality (XR) was a catchphrase created to refer to systems and products that target both AR and VR. The term mixed reality (MR) came about when Microsoft launched the HoloLens in 2016. Microsoft used “mixed reality” in its marketing language, which helped popularize MR and make it interchangeable with AR.

So, what is the metaverse? The metaverse is a persistent and immersive 3D simulated world that is experienced in the first person by large groups of simultaneous users who share a strong sense of mutual presence. It can be fully virtual and self-contained (a virtual metaverse), or it can exist as layers of virtual content overlaid on the real world (an augmented metaverse). It is important to note that access to the metaverse might be through VR or AR, but it could also be through a phone or a browser. In February 2022, Mark Zuckerberg announced that Meta has plans to release a version of Horizon Worlds for mobile phones. This will enable it to reach a greater audience and compete with virtual reality worlds already on smartphones, such as Rec Room. With current technology, a mobile phone cannot provide a fully immersive 3D experience, but these days everyone has one and it is the best way to attract new users and onboard people into the metaverse.

The Web3 vs Web 2.X metaverse

Of late, the terms “metaverse” and “Web3″ have been used interchangeably but it must be noted that they describe different concepts.

Web3 is the third major evolution of the Internet, after the Worldwide Web (Web 1.0) and the user-generated web (Web 2.0 or social media). Web3 is all about a decentralized and democratized Internet built on distributed ledger technologies such as the blockchain, and decentralized autonomous organizations (DAO). This is accomplished by using a decentralized digital wallet such as Metamask or Xumm, with the wallet becoming your identity, which can then allow you to use various decentralized applications on the Internet that need to interact with your currencies, digital assets and properties. This includes decentralized finance applications (DeFi), as well as metaverse experiences that will draw upon NFTs, interoperable avatars and GameFi. Web3 is a powerful concept with the potential to transform how we manage data, governance, and exchange money in a decentralized way. Having said all that, it’s far from guaranteed that this vision for the future of the Internet is one that will be realized.

On the other hand, the metaverse can be thought of as an independent Internet “application” built using existing and future Internet technologies. Those technologies might be Web3, but they may also be Web 3.0 or Web 2.5 or Web-ever-comes-next. Decentraland and The Sandbox are examples of virtual worlds being built using Web3 technologies, while Microsoft’s Mesh and Meta’s Horizon are based on current Web 2.0 technologies.

The open vs. closed metaverse

What is meant by open vs closed? A closed metaverse means that regardless of what digital content is available within a closed metaverse, it can only be used within that metaverse, and not in other virtual worlds. In essence, in a closed metaverse virtual worlds are not interoperable. For example, you can purchase digital goods in Fortnite, but you cannot take them out and into Minecraft.

On the other hand, an open metaverse means that there is full interoperability between virtual worlds. For example, if someone owns a virtual sword or avatar or cryptos that can be used in one game, they can then use that virtual sword or avatar or transfer value (crypto, fiat or CBDC) in a different game. The idea of an open metaverse is that the user (not the platform provider) owns their digital assets, and these digital assets can be used across worlds. ​​​​​​​

The distinction of open and closed is not just limited to technology choices and the extent to which platforms embrace open-source principles with their code and data but importantly whether they have a closed economy, within or across their own proprietary games, or whether they allow transferability of value outside their ecosystem, how that interacts with fiat-based financial systems and to what extent they do or don’t control the monetary and fiscal policy of the underlying economy itself.

Let’s get phygital

As technology develops, we will continue to see the real world and digital world synchronize in new and interesting ways. One way the metaverse is doing this is by bridging the physical and digital worlds to create a cohesive customer experience. The need for this seamless physical-digital experience is growing, with Google’s research indicating that omnichannel experiences will drive 86% of sales growth across Europe and the US in the next five years. Thanks to NFTs, the metaverse “phygital” (a bundle of physical and digital goods) is arguably one of the most exciting applications of these blended experiences.

By proving authenticity, NFTs can play a major role in adding value to physical objects, especially objects whose authenticity matters a great deal to the buyer. Take wine for example. By storing all the relevant information about a wine’s provenance on the blockchain, manual processes are no longer needed for authentication, and the risk of fraud is significantly reduced. In other words, by providing better proof of a wine’s provenance, NFTs can enhance the sense of its authenticity and boost its perceived value. It is a great example of how the blockchain can have an impact well beyond the confines of digital trust, affecting physical trust and the way people value real, tangible goods.

Brands are creating NFTs and/or creating virtual storefronts in the metaverse to offer their products to a wider audience. Exclusive virtual fashion houses are being developed like The Fabricant, which makes virtual clothing that can be used and traded in virtual worlds. Several brands are betting big on the metaverse and acquiring phygital companies too. For example, Nike who recently purchased RTFKT (which makes virtual sneakers that Nike is now pairing with their physical sneakers) is now diversifying into sectors within the virtual fashion industry by bringing phygital perfume to the Metaverse too.

With the gradual adoption of the metaverse phygital infiltrating every sector in the coming years -particularly in retail shopping, the physical footfall will no longer tell the entire story when it comes to shopping malls. Eventually, metaverse phygital will be at the center of communities (particularly Gen Z) with more people starting to gather and engage, which in turn will inadvertently influence their buying behaviors and purchasing patterns in the metaverse and beyond.

With the perpetual secondary sales royalties that come along with phygital NFTs, brands and/or creators are also interested in the metaverse phygital space as they can claim a pre-determined percentage on every resale — which means that every time the NFT gets traded, brands and/or creators get a percentage out of it, which is generally in the range of 5–10%. This after-market royalty distribution was not possible before the concept of NFTs. Furthermore, launching “limited-time” products as phygital NFTs brings in the benefits of high resale value which automatically increases the associated downstream royalty value.

Thus, traditional physical brands are collaborating with popular NFT platforms to reach a newer audience in the metaverse and build better connections with their existing customers. Collaborations like Gucci and Superplastic, Adidas and Bored Ape, GAP and Frank Ape are leading the way by launching rare collectibles and developing new wealth creation channels, and also showing the audience their favorite brands are up to date with the latest trends.

Opportunities for startups and the venture capital ecosystem

Between Jan 2021 and November 2021, companies related to the metaverse (tagged under gaming, online games, virtual worlds, and augmented reality) have raised nearly $10.4 billion across 612 deals, with Epic Games’ $1 billion funding round in April 2021 leading the pack. That’s a significant jump from the $5.9 billion companies tagged in those categories raised in 2020, and by far the most amount raised for the broader “metaverse category” in a single year in the last decade. Funding in 2021 broadly broke down into four big categories:

• Gaming: about $7.5 billion (382 rounds)
• Online Games: about $2.5 billion (110 rounds)
• Augmented Reality: about $2.1 billion (176 rounds)
• Virtual world: $62.8 million (9 rounds)

There are at least 20 Web 3 startups with $1B+ valuations today. This chart includes the major players that best fit the Web3 definition. Ten out of the 20 Web 3 unicorns listed focus on NFTs or gaming. Leading the pack is OpenSea, an NFT marketplace with a $13.3B valuation. The second-most valuable NFT unicorn is Dapper Labs ($7.6B), the developer of the blockchain game CryptoKitties and the NBA Top Shot NFT marketplace. Animoca Brands, an NFT gaming developer, investor, and creator of the virtual world The Sandbox, follows with a $5B valuation.

Today, brands and retailers are trying to foster new forms of customer engagement in the metaverse to sell more products, fintech is jumping on the opportunity to capitalize on new financial needs, while a slew of startups are creating new virtual products entirely, as well as phygital bundle offerings. Some of the most exciting ones we’ve seen are:

• Latent Space develops an AI-rendered 3D engine, while rct AI offers a cloud service and algorithmic platform that helps developers generate more dynamic, interactive, and personalized gaming content.
• Gravity Sketch provides tools to produce virtual content and assets, ranging from synthetic media to holograms to AR content.
• HP Tech Ventures portfolio company Mojo Vision’s AR contact lenses could project the digital world into our retinas, perhaps helping us navigate the metaverse.
• Avegant, develops light field displays that make virtual objects look more realistic, while 3D Live designs LED display systems for more realistic holograms to be used at live events, concerts, amusement parks, and more.
• Genies lets users create personalized avatars. The company plans to allow users to “carry” this avatar across various platforms via extensive partnerships it will announce later this year.
• AuthenticID’s cross-product strategic partnership with 1Kosmos allows it to support every identity use case for the physical, digital, blockchain, and metaverse ‘Web3.0’ economies. The combined platform leverages blockchain for credential verification keeping privacy by design principle at the core.
• Decentralized identity management startup Avarta, which provides a multi-chain, multi-asset digital wallet secured with biometrics, has selected FaceTec’s 3D Face Liveness and biometric matching software to power its identity proofing and authentication for the metaverse.​​​​​​​
• Mighty Jaxx, an award-winning future culture company that designs and produces ‘phygital’ collectibles, announced the first close of US$ 20 million in their oversubscribed Series A+ funding round, pushing the company’s valuation to over US$ 200 million. The funding round, fueled by burgeoning interest in the phygital and metaverse future, was led by East Ventures (Growth Fund) and includes new strategic investor Mirana Ventures — the venture partner of Bybit and BitDAO.
• Highstreet, the world’s first commerce-centered metaverse with a decentralized finance marketplace for limited-edition products, has raised $5 million in funding. The funds will expand Highstreet’s engineering team, especially on the Unity side, to weave all features into a sustainable commerce-based metaverse enabling the future of retail on the blockchain. Mobile and browser companion apps will be released in the market sooner, allowing users to access the metaverse anywhere.
• Animoca Brands subsidiary, The Sandbox, has raised $93 million following a Series B funding round and will use the investment to expand beyond gaming into fashion, architecture, virtual concerts and shows, art galleries, museums, and more.
• Fortnite creator Epic Games raised $2 billion from Sony and LEGO parent KIRKBI, at a $31.5 billion valuation, which includes its ambition to build the metaverse and create spaces where players can have fun with friends, brands can build creative and immersive experiences, and creators can build a community and thrive.
• Bored Ape Yacht Club creator raised $450 million to build an NFT metaverse and plans to use the money to build a media empire around NFTs, starting with games and its own metaverse project.
• Yuga Labs — the owners of the two most popular NFT collections — announced the completion of a $450 million fundraiser to develop its NFT metaverse project -bringing the company’s valuation up to $4 billion.
• Metaverse gaming company Animoca Brands raised nearly $360 million in a funding round led by Liberty City Ventures, valuing the firm at more than $5 billion. Animoca Brands said it would use the proceeds for acquisitions, investments, product development and to buy licenses for popular intellectual property.
• BUD, a nascent app taking a shot at creating a metaverse for Gen Z to play and interact with each other, closed $36.8 million in a Series B round led by Sequoia Capital India, not long after it secured a Series A extension in February. The new infusion brings BUD’s total financing to over $60 million.

Future outlook

It’s still too early to tell exactly how the metaverse will evolve around us. Will it be a collection of closed virtual worlds that operate independently and without interoperability? Or will it be an open metaverse that allows digital assets, property, and currencies to be owned by its users and flow across physical and virtual worlds? Will it be a metaverse built on today’s Web 2.0 internet, or will it be a metaverse built on emerging Web3 infrastructure and protocols? Will the metaverse be the new place to test and launch products and experiences? There are many forces in play that will determine the answer that aren’t just technological in nature, but include everything from the corporate and business power plays of existing incumbents through to the rise of the Web3 movement being driven by an active and passionate community of developers and entrepreneurs who believe that a decentralized and democratized Internet is the only future worth writing code for. ​​​​​​​

What do you think the future of the metaverse holds?