Envisioning The Future Perfect

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Education Could Drive Mass VR Adoption

Education is shaping up to be one of the biggest under-the-radar opportunities in VR. We talked about consumer education related to VR in our VR Excitement Index. Education ranked second in terms of consumer interest in VR content in our 500 person survey, ahead of gaming and exceeded only by entertainment.

VR skeptics point out a valid current pitfall in other VR content: the nature of the experience separates you from the people around you. If you watch a sporting event or movie in VR, you remove yourself from the environment around you and make it a solitary experience, but that isn’t how we experience these events today, live or otherwise. We usually enjoy these events with others. That is a key part of the the sporting or movie experience – sharing it with the person next to you whether you’re in a stadium, a theater, or on your couch. Education doesn’t have that problem. It can be solitary. Questions and collaboration from others can amplify the environment, but it doesn’t matter if that participation comes from someone actually sitting right next to you or a virtual representation of that person.

Another advantage of education is that it can be effective with basic forms of VR. Many educational tools won’t need the same level of tracking capability as an intensive gaming experience. The images may not need to be as sharp as a cinema experience. Educational VR may also not need sensory output to anything other than sight and hearing to be compelling. For example, educational VR can take the obvious form of a classroom type setting where the user interacts with basic digital input, like voice or even a keyboard. Many NFL teams already use StriVR for this and there are applications well beyond sports including corporate training and medicine. We would consider VR exposure therapy — exposing yourself to your fears, which is a common psychological treatment — a form of educational VR. You’re teaching yourself to not be afraid. While low-immersion VR is still very basic, it’s capable of at least offering these types of education in small does. As low-immersion VR improves with Daydream and Gear VR over the next couple of years, the educational experiences can grow with them.

Considering our longer-term view of VR as a fully immersive sense experience, we believe there is a chance that humans have the ability to use advanced VR to live a “lifetime” in the span of just a few moments in real reality. We call this a compressed temporal sense experience (CTSE). More on this theory soon, but in short, it could mean that education in the future is living a life as a pianist, then living as a soldier, then an artist, then a doctor and rolling those skills into your real life. Education could ultimately be about a firsthand experience rather than secondhand information.

There’s a popular rule that it requires 10,000 hours of practice to master something. That may or may not be an accurate estimate, but we can all agree that practice makes you better, no matter your sport or profession. VR is the perfect practice tool for education, and educational content may turn out to be the killer app that drives VR to mass adoption.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.  

An Open Letter To Snap Ahead Of Its IPO

Dear Snap, Inc.,
Congratulations on your S-1 filing this past week.  It’s a great accomplishment as a company and great for the tech industry.  During our 35+ collective years as stock analysts, we’ve helped a lot of companies go public.  We know you have great banks working on your deal that will give you good advice, but we thought we’d share our most important learnings about how the best companies handle IPO’ing and being a public company.
  1. Manage Expectations.  Set an achievable bar for revenue and earnings and stick to it.  Obvious, but easier said than done.  You want to be Bill Belichick (go Pats), not Rex Ryan here.  We’ve seen too many companies agree that this is the right approach, only to miss a quarter out of the gate or within the first year.  The easiest quarter to get right should be the first one out of the gate, your first quarter as a public company.  If you miss your first quarter out, you’re in for a year of buy side investors disbelieving everything you say and you’ll have to slowly rebuild your credibility.  We believe it’s better to take a slight hit on your valuation at the IPO with conservative numbers you have a very good chance to beat than more aggressive numbers you think you might hit, but aren’t 100% certain.  The slight hit to IPO valuation may not even happen because smart investors will work through your conservative numbers and recognize that you understand the game.
  2. Guidance.  Give some level of guidance because it will make your life easier.  Every great tech company takes a different approach to guidance.  Neither Google nor Facebook offer formal quarterly or annual guidance, but both occasionally give directional color.  Facebook more than Google.  An example is Facebook’s policy of offering verbal expense growth guidance quarter-to-quarter.  Both Apple and Amazon offer one quarter out guidance for total revenue and the ability to work toward an operating number.  Microsoft offers one quarter out guidance with segment level detail as well as high-level thoughts for the full year.  Tesla also offers one quarter out color on units shipped with a full-year expectation.  The bottom line is this: guidance gives you the ability to influence the conversation around your numbers, particularly as a new company, so we think it makes sense to offer it.  When we were analysts, we always had a lot of positive feedback on how Microsoft handled guidance and we didn’t even cover that stock, so a quarter out with a little color on the full year will make investors happiest.  We’d recommend the full-year color be high level and about things you directly control (expenses, CAPEX, product launches, etc.) without commenting on revenue.  One additional thing we’d suggest around guidance, while not formal, is to directionally explain the long-term model (5+ years out).  The company is investing heavily in product and talent, thus operating at a loss today.  What do operating margins look like in 5 years?  Should we expect Facebook margins?  This leads in to the next suggestion…
  3. Paint The Long-Term Picture.  While every great tech company treats guidance differently, they treat talking about the long-term the same.  Explaining the long-term strategy brings in long-term investors, not all that dissimilar to pitching venture investors.  Hedge funds and traders might move your stock day-to-day, but long-term investors will shape your stock chart over years.  Facebook and Google are among the best at painting the long-term picture of their businesses.  Facebook explicitly updates its 3, 5, and 10 year plan every earnings call, which tends not to change much, as it shouldn’t.  Google tends to speak more thematically and has been emphasizing AI and machine learning as the future of their business over the past several quarters.  Use your time with investors on the roadshow to explain what it means to be a camera company and why that’s important for the future because text is dead.  Explain how this is good for advertisers.  Incorporate AR into the discussion.  The camera is the basis for computer vision.  Lenses is emerging as a product to do interesting things with AR in the near term and Spectacles are the most usable AR product on the market today.  Tell investors how those products evolve over the next few years.  Facebook’s 3/5/10 window presentation is the cleanest and would suggest something similar.  It’s not like they haven’t borrowed from you before.
  4. Optionality.  All great tech companies have optionality to their stories.  We define optionality as key products or services that have little to no direct revenue contribution today, but do have the potential to be significant in the future.  Usually stocks with optionality are rewarded with higher multiples.  Some examples: Amazon with Alexa and original content, Facebook with VR and Messenger/WhatsApp, Google with Waymo and Cloud, Tesla with Powerwall/Powerpack and Solar City, Apple with the car and AR.  Snap’s optionality story is probably in AR wearables.  As noted above, Spectacles are the most usable AR product on the market today.  They focus on one simple feature: the camera.  Give investors enough of your vision here so they can dream about the future.

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The 5 Focuses: Analyzing The Top Priorities Of The Top Tech Companies

As a new fund, we think it is important to share how we view the world beyond our long-term purpose to pursue The Future Perfect. Our Philosophy Series details our most important learnings from our time covering the Internet space and how we plan to transfer that knowledge to venture investing. 

The 5 Focuses

There’s a famous story about Warren Buffett helping his pilot set priorities in his life. Buffett advises the pilot to make a list of all the things that he wants to accomplish in life. Anything that comes to mind, even if the list is 100 items long. Then Buffett tells the pilot to take that list and narrow it down to the five most important things. You only have capacity to truly focus on five things in your life. Whether that’s family, work, hobbies, etc. They all require resource commitment. All the other things that didn’t make the top five are your ‘Stop Doing’ list. You should avoid these things at all cost because they will only serve to distract you from your more important goals. While this is great advice for individuals, we think it is equally important for companies, from small startups to Fortune 100s, to establish their five focus areas. And a company’s five focuses should be driven by their greater purpose — their mission statement. In this note, we go through Apple, Google, Facebook, and Amazon’s five focuses and how they will impact the VR, AR, AI, and robotics spaces on which we are focused.

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VR Over The Holidays: What To Expect For Oculus and Vive Sales In Q4

VR headsets may not have been the “it” gift of the holiday season, but there was definitely a pick up in consumer interest. Based on our analysis of Google Trends data, we believe that Oculus sold about 55k Rifts in Q4 and HTC sold about 65k Vives. We note that based on Facebook’s quarterly reports in Q2 and Q3, Oculus was selling around 40k units per quarter.  Thus the holiday season appears to have brought about a 40% increase in unit volume for Oculus.

While Facebook does not report Oculus unit sales (we back into them), management will likely offer some additional VR related commentary on February 1st. We would expect management to maintain their consistent commentary that VR is still early. Beyond that, we may get an updated number of Gear VR users (the company reported 1 million monthly actives at the Q2 call) or additional color on future VR investment (they announced an incremental $250 million in VR investment during the Q3 call). Net-net, we expect Facebook’s Q4 update to be a modest positive to the VR ecosystem.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.