Virtual and augmented reality - The changing M&A opportunity

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2 Virtual and augmented reality - The changing M&A opportunity Science fiction is becoming fact as Augmented and Virtual Reality (AR/VR) enters our daily lives. The arrival and disappearance of 3D television was a false dawn, but signalled the beginning of a new era that is resulting in consumers and businesses around the world engaging with AR and VR in combination with smart devices. Despite the still emerging nature of the technology, companies and investors are already identifying potential industries that could benefit from Integration with AR/VR. Naturally, given AR/VR s history, the industry showing the most interest is entertainment, specifically gaming and video, where technological advances are directly correlated with sales success. People may have already experienced unknowingly the immersive world of AR/VR through their smartphone and voted with their wallets. Popular mobile game Pokémon Go, was the quickest mobile in history to reach $1 billion in revenue. It is a perfect example of mobile augmented reality in action. Snapchat s hugely popular, interactive filters and characters also feature augmented reality from the click of a button or tap of a screen. Another industry that is set to benefit is retail personal apparel, in which virtual mapping will allow consumers to visualise items on themselves before acquiring. This would align with the current shift to online shopping retailers from traditional high street chains. Marketing and advertising across sectors will also benefit from AR/VR through the creation of campaigns based on the ability to provide a more immersive and engaging marketing experience for consumers. Against this background, M&A deals are already providing an insight into how acquisitions are prioritising different areas of the industry as commercialisation takes hold. Over the last 12 months, approximately 80 per cent of the $620+ million worth of deals in AR/VR were related to hardware development as companies seek to establish the platforms on which applications will run. Hampleton director, Jonathan Simnett, predicts that as the sector develops and grows, there will be a reallocation of interest amongst the tech giants to more software-based companies as the market for hardware production stabilises. That is going to drive a new round of activity that we will see an overall shift in M&A, as companies begin to fully commercialise their VR/AR offerings at speed and look for opportunities to leverage hardware investments, he says. Jonathan Simnett Director 1 10 AR/VR M&A Overview 2H 2017

3 Summary Investment grows fast AR/VR has experienced strong year on year growth in investment since 2013, highlighting the increasing interest from companies and consumers for the new technology. Current investment has reached $1.2 billion in 1H 2017 and is expected to continue resulting in a record year. Whilst investment and funding has accelerated, M&A transaction volume remains relatively low compared to the heated fundraising market. This is a common characteristic of new tech markets and as AR/VR companies continue to grow, Hampleton Partners expects a gradual shift from investment to M&A. Investment M&A Deals Pulling ahead Although it is still early days in the AR/VR sector, it is already possible to see who are the important players moving forward. In the start-up scene, Magic Leap is gradually setting itself apart from the crowd, having acquired an impressive $1.4 billion in funding over three rounds, and is expected to go forward with a series D round in the near future. One the other side are the large tech corporations, which are in competition to develop their own AR/VR products. Facebook, Microsoft, Google and HTC have all brought hardware to market and are looking towards further developing its capabilities. Apple has taken a different route and has focused its current efforts on pushing new AR development software in an attempt to lead the way in mobile augmented reality. US is #1 The United States continues to hold the majority geographical share of transactions with 61% of the total amount, significantly higher than that of second-placed China at 7%. Silicon Valley s reputation and geographical placement is perfect for start-ups seeking fertile ground among VC s looking to invest and tech giants looking to acquire. Silicon Valley 2 10 AR/VR M&A Overview 2H 2017

4 Sub-sector breakdown The augmented reality (AR) and virtual reality (VR) industry has garnered a lot of attention from both investors and consumers. However, the AR/VR sector needs to be looked at in a more granular fashion as it incorporates multiple sub-sectors that vary in development and production. Hardware At the core of AR/VR technology is the hardware used to create the reality. One example from mobile AR/VR using any smartphone as hardware, is the popular mobile game Pokémon Go. It uses AR to bring a long established franchise to life and it was the fastest mobile game in history to generate $1 billion in revenue since it was rolled out in On the other side of the spectrum, hardware development is an exciting prospect amongst both start-ups such as Magic Leap, in addition to established tech giants such as Facebook and its VR headset, Oculus Rift. Software Development Application development consists of the programs that allow users to emerge themselves into different realities. This area has been particularly explored within the gaming industry, with Sony already rolling out VR Ready games for its PlayStation headset. More recently, the scope for software has widened into other industries such as medicine, retail and business. As the race to bring fully functional hardware to market stabilises, the opportunity for growth in software applications will continue to thrive. Distribution Services With AR/VR hardware and software development still being in its infancy, consumer demand for owning AR/VR products remains relatively low. In light of this, there is a growing number of companies offering experiences to try and entice consumers to the world of augmented and virtual reality. One example of these services was created by Los Angeles-based start-up, Dreamscape, which use VR to create a more immersive cinema experience. Industry potential for AR/VR Entertainment The potential market for AR/VR in entertainment is widespread and could open doors for video platforms, gaming and other multimedia Military Uses for AR/VR in military surveillance, in addition to training via realistic scenarios for soldiers/law enforcement Retail Development of virtual mapping allows online shoppers to visualise items before purchasing Marketing/Advertising AR/VR provides the opportunity for immersive advertising that can better interact with consumers Business Potential for AR/VR in business extends to better connectivity between companies. The use of AR/VR in recruitment is also currently being explored Medicine Use for AR/VR in both medical and surgical training 3 10 AR/VR M&A Overview 2H 2017

5 M&A transactions M&A Deals - $620m in total (12 month period) Early days AR/VR M&A market is still in its infancy, however M&A transactions are already providing an insight into how acquirers are prioritising different areas of the industry as commercialisation takes hold. Over the last 12 months, approximately 80 per cent of the $620+ million worth of deals in AR/VR were related to hardware development as companies seek to establish the platforms on which applications will run. Over $600m Hardware Acquire and absorb The current race for tech giants to get commercial products to market has led to acquisitions of start-ups purely to integrate and absorb technology. This will drive growth in AR/VR as tech giants are in a position to bring several key components together and connect them to create new products and platforms. Examples of this include Apple s acquisition of SensoMotoric Instruments and Flyby Media, GoPro s acquisition of Kolor and Microsoft s acquisition of Simplygon to improve its already existing HoloLens technology AR/VR M&A Overview 2H 2017

6 Investment Onthe rise AR/VR Financing Investment in AR/VR has seen a significant rise in recent years as the industry begins to gain traction. The 2797m (Full-Year Run Rate) sharp increase from 2015 to 2016 is largely due to Magic Leap s record series C round, in which it pulled in 2061m $795m of funding with Alibaba leading the way for investors. Impressively, despite this special case, 2017 is still expected to break records with a projected fullyear run rate of $2.8 billion, having already reached $1.2 billion in 1H. As the sector develops, it is likely that 825m 945m 1187m investment will continue to rise as companies begin to focus more on software and application development. 278m Source: CB Insights Focus on foundations The funding invested in AR/VR and the M&A environment share a similar sub-sector split. Technology and hardware lead the way in development at 51% and the more specialist software sub-sectors such as Navigation and Education Services remain relatively subdued. Despite the still emerging nature of the technology, companies and investors are already identifying potential industries that could benefit from integration with AR/VR. Naturally, given AR/VR s history, the industry showing the most interest is entertainment, specifically gaming and video, where technological advances are directly correlated with sales success $1.2 billion invested 1H 2017 Other ecommerce Location based Navigation Advertising Social Education Services Smartglasses Peripherals Games Video Tech 5 10 AR/VR M&A Overview 2H 2017

7 Top investors Investors Investments YTD AR/VR Funding Meta AR hardware and software developers Jaunt VR Cinema developers Emergent VR software developers Mindshow Realities VR software engineering TheWaveVr Music festival VR SculptrVR VR architecture design Limitless Cloud-based VR software The Rogue Initiative VR Cinema developers Mindesk VR software developers InstaVR VR software developers Vizor VR hardware and software developers Immersv VR hardware and software developers VREAL VR software developers Scope AR AR software developers Simbe Robotics development Applied VR Healthcare VR software developers IrisVR VR software developers Fantasmo Studios 3D AR developers Fishbowl VR VR software testing Fove Eye-tracking VR hardware developers Psychic VR Lab VR and AI software developers US leading the way The United States has continually dominated geographical share in recent years with 61% of deals occurring within the country. Silicon 7% 5% Deal Geographical Breakdown YTD 3% 3% United States Valley remains to be a global hub for new Rest of World technology and provides both start-ups and China tech giants/venture capitalists with a large network of connections to spur investment. There is still however a significant presence in other countries such as China at 7% and third- 22% 61% United Kingdom Canada France placed United Kingdom at 5%. Source: CB Insights 6 10 AR/VR M&A Overview 2H 2017

8 Players bottom up As with most technologies in early stage development, it is the start-up environment that provides the most interest for future developments. Listed below are the top 5 most funded start-ups in the sector. Most Funded in AR/VR over past 30 months m 115m 210m 689m 1390m MindMaze NextVR Lytro Unity Technologies Magic Leap Magic Leap One of the most interesting and most funded start-ups is Magic Leap, a start-up based in Florida specialising in the development of a photonic chip which uses digitally rendered photons to supplement reality. Despite Magic Leap s secrecy in its product, it has received an impressive $1.4 billion total funding after its series C round, with significant investments from Google in 2014 and Alibaba in The company is expected to enter its series D round in the coming months with a possible valuation of $6-8 billion. However, the increased pressure from competitors and investors to see a final product have been noted, with Magic Leap reportedly aiming to have a prototype product released by late 2017 to early MindMaze Whilst a significant proportion of AR/VR attention is centred on entertainment and gaming, other startups such as MindMaze are exploring the uses of this technology in healthcare. The 2012-founded company offers products that help combine the world of VR with neuroscience and brain imaging. One such platform MindMotion is an FDAcleared therapeutic product designed for neurorehabilitation of stroke, or traumatic injury patients in the United States. The Swiss-based company has so far raised $109 million in funding, illustrating the market for AR/VR is already expanding into multiple markets AR/VR M&A Overview 2H 2017

9 Players top down Mobile AR in pole position It is not just start-ups who are spurring interest in the industry. Long-established tech giants have also weighed in on the action and have identified AR/VR as a potential next step for future growth. One of the early signs of this was in 2014 with Facebook s $2 billion dollar acquisition of Oculus, who specialise in VR headsets. Since then, both Microsoft and Sony have scrambled to bring VR headsets to market. Apple have taken a different route, and in June, announced their intentions to follow suit in the AR sector. Apple s focus, however, is set on mobile AR and the company has since provided the software to develop augmented reality programs for ios, claiming that it would one day grow into the largest AR platform in the world. The various acquisition made by Apple (amongst others), illustrate the strong interest in AR/VR for the future. Apple s acquisition of German company SensoMotoric Instruments in June was the latest in a string of acquisitions made by the tech giant that could help further develop options for AR/VR. Apple stands in a particularly strong position in mobile AR moving forward due to its presence in both hardware (iphone, ipad) and software development (ARKit for ios). Apple s large market share for smartphones and tablets means that consumers already own the necessary hardware to experience mobile AR/VR, thus providing a significant advantage over competitors in the race to bring products to market. Although Facebook s own hardware capabilities are limited in AR, their mobile platforms across ios and Android also provide opportunities to take advantage of the already established hardware base. Battle of the headsets While mobile AR is currently the most accessible solution, the race to bring practical and user-friendly headsets to market remains in progress. Where as VR headsets have been on the market for some time, AR headsets remain further behind in the development process. Microsoft s HoloLens and Google Glass 2.0 are two such products put forward by large tech firms, however, with software availability being limited, consumer demand remains low. Despite this, as time progresses and the development of AR/VR continues and becomes increasingly affordable, consumer demand will increase and the battle for market share will intensify AR/VR M&A Overview 2H 2017

10 Notable Acquisitions Top acquirers Target Target abstract SensoMotoric Instruments GmbH FlyBy Media Emotient Inc. Owlchemy Labs Eyefluence Inc. Thrive Audio Sensor-based eye tracking systems Mobile virtual reality software Facial recognition & analytics SaaS Virtual reality-based online video games Sensor-based eye tracking systems Virtual reality headphone system SimplyGon Mojang 3D optimisation software & SaaS Swedish video game developer TheEyeTribe.com Two Big Ears Ltd. Surreal Vision Enterspace AB epawn InfinitEye VR SAS TGT Studios Shooterboy Entertainment Into the VR World FuzzyCube Software Dacuda NorthBit Ltd. Sensor-based eye tracking systems VR audio software & SDKs 3D virtual reality software Location-based VR software development AR software developers French virtual reality headset Australian mobile game asset VR mobile video game asset VR online retailer Mobile game development studio 3D software division Mobile application test & development 9 10 AR/VR M&A Overview 2H 2017

11 Conclusions & contacts During just a few years we have witnessed the development of an impressive AR/VR ecosystem, thanks both to the passion of many startups, as well as large investments from VCs and tech companies. This ecosystem covers nearly every tech category available hardware, platforms, tools and so on. We anticipate a future shift of majority investment from hardware to software as companies bring capable Heiko Garrelfs Sector Principal heiko@hampletonpartners.com products to market and begin to focus on content. This will only open up future opportunities for M&A and will make for an exciting deals environment. Ralph Hübner Marketing & E-Commerce Sector Principal ralph@hampletonpartners.com Jonathan Simnett Director jonathan@hampletonpartners.com Hampleton produces regular reports on M&A activity in the following sectors: Automotive Technology Digital Marketing E-Commerce Internet of Things SaaS and Cloud Enterprise Software IT Services Fintech Industry 4.0 Artificial Intelligence AR/VR Cybersecurity You can subscribe to these reports at Hampleton provides independent M&A and corporate finance advice to owners of Internet, IT Services, Software and High-Tech Industrial companies. Our reports aim to provide our clients with current analysis of the transactions, trends and valuations within our focus areas. research Data Source: We have based our findings on data provided by industry recognised sources. Data and information for this publication was collated from the 451 Research database ( a division of The 451 Group. For more information on this or anything else related to our research, please the address provided below. Disclaimer: This publication contains general information only and Hampleton Ltd, is not, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. Hampleton Ltd shall not be responsible for any loss whatsoever sustained by any person who relies on this publication For more information please contact Hampleton Ltd. London 17 Woodstock Street W1C 2AJ United Kingdom Frankfurt Taunusanlage Frankfurt Germany San Francisco 1714 Stockton Street San Francisco, CA United States AR/VR M&A Overview 2H 2017