Last month I said:[quote]
On VR Indie Growth & Survival:
Eventually, I'm going to have to get more people to join my team. Growth is going to be very tricky to manage correctly -- especially in the VR industry, which is brand new. The biggest danger is that a company gets a short term influx of money and then they use that money to staff up. They have to make payroll every two weeks. Their costs exceed their income. Eventually, they can't make payroll and the studio has to either lay people off or shut their doors. They grew too fast and their cashflow was negative for too long. That's especially dangerous for the VR industry right now because the VR market is so small. The size of the market is growing, but I don't think it's going to be that explosive exponential growth for at least another 2-4 years. The VR industry will be lead almost exclusively by gaming. Everyone else is out solving problems for which there isn't a market yet so it's not going to be profitable for at least 4-6 years. If you don't pace your burn rate with the market growth rate, you're going to either need another influx of cash via investment or you will have to cut labor costs or go out of business. And in the game of business, you have to survive before you can thrive. Investment money is just a scaffolding for your business to prop it up while you build the core business model. Success is not equal to getting funded and looking forward to a life of martinis on the beach, if anything, it should be a kick in the pants to get into high gear. Anyways, back to full time employees: They become a fixed cost which has to be paid on a monthly basis, and the more employees you add, the more your overhead costs rise (hiring support staff).[/quote]
The big news of the week in the VR industry is that EnvelopVR has shutdown. I was 95% certain this would happen to them and they were the first local company that came to mind when I wrote that paragraph last month. EnvelopVR was a "large" company with about 20-30? employees working on building a VR desktop. They were aiming for enterprise customers and staging themselves for being a big player in the future of VR. Their business plan was conceptually sound: There will be much demand for VR desktop applications. Envelop wanted to get a head start on their competitors by being first to market. That all sounds good and juicy and makes a lot of sense. At first glance, it sounds pretty good!
About a year ago, I went and visited the managing partners at Madrona Group, a big VC company here in Seattle. I foolishly thought they would be interested in investing in me, but really, what they wanted was to pick my brain a bit and... they asked me what I thought about EnvelopVR. I didn't know it, but they were thinking about investing. I was a bit tight lipped with my assessment of their business and I didn't want to hurt their chances at getting funded, so I didn't say much. Even then, I didn't think they had a very interesting product, but what do I know? Enterprise VR is outside of my target market. But... having worked in enterprise before, I knew it would be an uphill battle from the very beginning. Why? It's extremely simple business math: If you're running an enterprise with 1,000+ desks, and then VR comes and you want to put a VR HMD on ever client workstation, and each workstation is generally underpowered to support VR, you're going to be looking at a workstation upgrade cost of $1500 per seat, followed by $800 for the HMD, followed by $X? for the EnvelopVR desktop application. So, the initial cost to upgrade 1000 seats to VR would be 1000 * $2300 = $2.3 million + licensing costs.
That's already a WTF number. So, the follow up question for the enterprise manager is, "Okay, how do I get my ROI back?" and if there isn't an immediate and obvious answer, the answer is a flat out "NO." On the side of Envelop, how many large enterprise clients would they need to acquire before they are at least 100% cost neutral?
Again, I was very tight lipped about other peoples' business and their prospects, and ultimately, Madrona gave about $4m in funding last year to EnvelopVR. I think next time a VC wants to pick my brain about a potential investment, I'll tell them to give me 10% of their offering and in exchange, I'll make sure they don't lose 100% of it. $400k sounds nice in my fantasy land :)
It's safe to say that enterprise is generally 2-3 years behind the cutting edge in terms of technological adoption. They have to be, with their scale. So... if VR is only 9 months old on the market, Enterprise isn't going to adopt it for at least another 2-3 years. Minimum. And their adoption curve will be a phased adoption based on test trials for business viability.
So, EnvelopVR had a "large" FTE staff compared to most VR companies. They got funded by Madrona a few months after I met their managing partners, and then they burned through their cash. They released a prototype into the market. The existing market didn't really care about it. They didn't make much, if any, money. Bottom line: Their costs exceeded their income. The biggest flaw in their business plan? They built a product for a market which wasn't ready for their product yet and they couldn't stay in business long enough to wait for the VR market to catch up and mature. In my humble opinion, their long term business plan was a good, viable strategy, but they were 2-3 years too early for the market. They staffed up a little to quickly, but otherwise, they could have eventually grown into a sizable company within the VR industry.
Here's the thing: VR *is* going to be *huge*!!! ... in the distant future. In 2016 and 2017? Every VR company MUST be SMALL. Survival depends on it. The VR market is small. It's going to continue to be small for the next 4-6 years. Maybe longer. But it will grow and pickup steam. Gaming and entertainment is going to be the tip of the spear which leads the growth of the VR market -- NOT enterprise or non-gaming apps. If you are doing VR right now, you *need* to understand this. Survival depends on it. In 4-6 years after the hardware becomes more ubiquitous in the market, non-gaming apps will become more viable, but it's still going to be a rough battle. The current leader in VR gaming has sold $3m worth of games. That's like the GTA5 of the industry. And everyone else is way, way below that number. If VR games are like the traditional gaming market, where 5% of the industry makes 90% of the revenue, you can read between the lines and bet that there are going to be a lot of starving VR indie game developers (*ahem*). My prediction still holds: There will be a LOT of VR companies quietly imploding in the next few years because their expenses exceeded their income for too long while they waited for the market to mature. EnvelopVR is just the canary in the coal mine, the first of many to die. If you are a VR business in 2017, you need to be extremely conservative with your cash flow or else you too will be a statistic / historical anecdote.
My goal? Survival. I need to survive and build this super awesome VR game. If it's as cool as I believe it's going to be and I can build it, I will be okay. My biggest challenge will be managing scope. Having ambitions is fine, I just need to grow the scope with a pace which is sustainable with the VR market growth.