The Virtual and Augmented Reality Market

Introduction & Definitions

While virtual and augmented reality’s spectacular capabilities have drawn the attention of technology enthusiasts globally, the public generally overlooks the serious business potential of the products. Virtual reality (VR) and augmented reality (AR) leverage similar technologies to present a user with sensory stimuli that create a perceived change in environment. Virtual reality fully immerses the user into an imagined or replicated digital world, while augmented reality overlays digital imagery onto the real world environment. While the technology has existed for decades, it has only recently received investment attention, sparked by Facebook’s $2 billion acquisition of Oculus in 2014. At the current stage in development, virtual and augmented reality generally lack compelling content and capabilities, but present a tremendous amount of market potential.

The Market

Virtual and augmented reality create a much more intuitive way to interact with a computer: through physical gestures and movements rather than keystrokes. Additionally, expanding the computer interface beyond a physical screen opens doors for new types of applications and functions. For these reasons, leaders in technology predict virtual and augmented reality to become one of the next mainstream personal computing platforms. Looking back at the historical adoption of similarly disruptive technologies such as the smartphone, the internet, and the personal computer, we can predict the future growth trajectory for augmented and virtual reality. Due to similarity of the technologies and potential use cases in both personal entertainment applications and enterprise solutions, VR and AR adoption is expected to most closely resemble that of the PC.

Historical personal computer adoption. Source: Goldman Sachs

The proliferation of VR and AR is contingent upon a continued focus on product development. Further technological progress will bring an improved user experience at a lower cost, making the product more accessible and attractive to the general market. Potential challenges that the technology faces include limits in computing power and cyber security, among others. A Goldman Sachs base case projection has total industry revenue reaching $85 billion by 2025, with $35 billion coming from software and $45 billion coming from hardware. Revenue is expected to be split about 50/50 between entertainment and enterprise applications.


The Value Chain

The virtual and augmented reality value chain resembles that of any other computing device. Infrastructure includes hardware and hardware components required to experience the content. Next, development tools are utilized as a platform to create VR and AR content, which is then delivered to the consumer. Major technology players, including Google, Facebook, Sony, HTC, and Samsung, among others, are involved across the value chain, namely in the infrastructure space. Other smaller startups are drawing attention at all areas of the value chain as well.


The Financing Environment

Virtual and augmented reality companies have received a significant amount of attention from strategic and financial investors alike, from the seed to growth stages. In 2017, virtual and augmented reality startups received over $3.5 billion in financing, which was fueled by a growing focus on augmented reality. Total funding has been dominated by a few unicorns, including Magic Leap, Improbable, and Unity, raising multi-hundred million dollar rounds. Hardware and entertainment have received the majority of investment attention, but interest is shifting towards development tools and enterprise services. Geographically, the United States has seen the most investment activity, but China has begun to emerge as a key player in the VR and AR space.


A number of different types of investors have been involved in the area. VR and AR specialist venture capital funds have been most heavily involved in the space, focusing on the whole range of verticals at the seed and Series A stages. Generalist, typically technology focused, VCs have also been heavily involved at the early stages and tend to focus on the intersection of VR and AR with other frontier technologies, like artificial intelligence and blockchain. Megafunds and institutional asset management firms have led the largest funding rounds at the growth and later stages, typically with a focus on hardware and development tools. Finally, strategic investors have played a significant role in the area as well. Most of the largest multinational technology companies have made investments in the space in attempt to become the leader in one of the next disruptive technologies. Other technology and non-technology focused companies have made investments with the intention of using the VR and AR to facilitate other business processes and activities.



Despite the traction that virtual and augmented reality have gained so far, there is a large technological gap that must close for each to reach its full potential. Continued investment and product development is the solution to this problem. Looking ahead, large technology companies will continue to build their VR and AR capabilities. Enterprise use will drive investment and adoption at an increasing pace, and a few high valuation startups will likely continue raising multi-million dollar funding rounds. Ultimately, mass adoption is most likely still a number of years down the road.

Sources: CB Insights, Goldman Sachs, PitchBook Data, PwC, VRVCA

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