73. Virtual Reality Investing, Part 1 (Adam Draper)

Nick: Welcome to another episode of The Full Ratchet. Today we welcome #Adam Draper of the #Boost VC Accelerator to discuss Virtual Reality Investing. We will cover questions including – What it’s like to be a multi generational VC in the Draper family, #Adam’s first experience with VR and why he became interested as an investor, the similarities and differences between VR and AR, what sub categories exist within the VR segment, and what makes up the virtual reality stack, the nascent applications with the most significant market opportunity for VR, and we’ll wrap up Part 1 by discussing the industries most likely to be disrupted by VR. If you like transformational technologies, this episode is for you. Here’s Part 1 with #Adam Draper of #Boost VC.

Nick: Today #Adam Draper joins us from San Mateo, California. He’s a 4th generation venture capitalist and Founder of #Boost VC, a startup accelerator focused on virtual reality and the blockchain. Adam, thank you for joining us.

Adam: Thanks for having me, #Nick. And how’s it going?

Nick: It’s good. So I’m sure you get the legacy question all the time, but can you talk a little bit about sort of the, the generational VC background and also how you got involved in venture capital?

Adam: Yeah, sure, no, I’m happy to, I’m really, what I generally say is like I’m really proud of what my family has been able to accomplish in the venture capital world. Each generation sort of added something new in nuance, which is really it’s great to be a part of that. That lazy but more than that it makes really large shoes that I have to try and do things with and fill. And so yeah. First I’ll give a little history on my family. So my great grandfather was a venture capitalist. He started something called # Draper, Gaither and Anderson. He actually founded the, limited partnership agreement, which is basically how all venture funds are structured today.

Nick: Sure

Adam: And then my, my grandfather worked for him and then he left and founded something called #Draper Johnson, which turned into something called #Sutter Hill Ventures, which is still technically around. And then he actually went and he worked as the Head of the World Bank under I believe it was George Bush. And then my dad actually started #Draper Associates , which turned into #DFJ. And then my grandpa came back and he didn’t want to compete with my dad so what he did was he left and he founded the First Fund in India. So it was called #Draper International. And it’s great. He wrote a book and a couple of the stories are actually about this part of his life. But he returned 16x the funds, which is pretty insane and no one does these days. And he created a monopoly where there wasn’t one. So he was one of the first international venture capitalists. My dad then he felt that entrepreneurs were everywhere, he founded these micro funds that were all over the world. There was the #DFJ venture network, which he had 28 funds at one point in 26 different countries. And through that network he was actually able to find #Baidu, which was huge investment for #DFJ and #Skype, which were both great ventures. I still believe entrepreneurs are everywhere in the world. But I believe that Silicon Valley is one of the best places to, to have a network because we have investors and entrepreneurs who have a risk tolerance above some other areas. #Boost VC is an accelerator program. It’s a 3 month program where we provide housing, office space, and we invest in the startups. We’ve done 7 tribes- we call them tribes, they’re sessions – over the course of three and a half years. And we are known for blockchain and virtual reality. And I believe, and we’ll be talking about a bunch of virtual reality stuff today.

Nick: You’ve done, what, 120 some investments?

Adam: Yeah, 134 investments over the last three and a half years.

Nick: Wow.

Adam: Yeah, yeah, I know, we’re busy. It’s been a lot of fun.

Nick: Any healthy rivalries between the, the father-son relationships in your family?

Adam: Always. We play a lot of Monopoly and Chess. As far as on the business side, we want to be able to help each other more than anything else. But, you know, you always want to be right.

Nick: I’ve got an older brother and of course with my father we were quite competitive on everything. So, it makes for fun holidays

Adam: Yeah, I’m super competitive with my dad and my brother, Basketball, Chess, Monopoly, Risk. I’m actually , I have my 30th birthday this weekend and it’s going to be filled of board games that I plan to win. So it will be fun.

Nick: Well, happy birthday!

Adam: Thank you

Nick: Man, you’re a young guy! I’m a little jealous.
But as you pointed out, we’re talking VR and Virtual Reality today. So can you start us off by talking through your first experience with VR?

Adam: Yeah. It wasn’t anything like crazy or eventful actually. I tried a Samsung Gear. And it was, it was about a year ago now. We realized what we do at #Boost VC is we build these communities around future technology. So we build one for blockchain and so we were looking around and we were trying to figure out is there another technology that’s really ready for our platform, our market. And, you know, we’d been hearing a little bit about Virtual Reality, and all it was, I put on the Samsung Gear. And the experience was I was watching Transformers, the movie Transformers, on the Moon. So it’s like the theatre is the Moon. And so like I’m watching this big screen TV on the Moon and I’m looking up and I was looking at earth, and I was like yeah this is going to be a thing. And so, you know, our team talked about it a lot and we tried to figure out how to get into it. We made it our, you know, it’s a huge focus, the last two tribes at #Boost VC, 75% of the companies have been Virtual Reality.

Nick: So cool. Yeah I’m doing some, some strategy consulting for a space travel company, and the had an Oculus on site that simulated being up, you know, above the earth. Sort of look at the moon and look at the earth from a distance. And it just blew my mind.

Adam: Oh yeah. What was your first experience? Is that your first experience or was that just

Nick: That, the first experience I ever had was at a startup conference. They had an Oculus, which was really cool. But I didn’t get the full effect of something that was more transformational.

Adam: Yeah. Basically, you get the experience and it can be a simple thing and you’re just, all of a sudden you’re like yeah this is the next big platform. So we’ve since made 34 investments in that space. And we’re really excited about all of them. So it’s going to be fun.

Nick: Cool. So, some seem to confuse Virtual Reality with Augmented Reality. Can you start us off by describing some of the similarities and differences between VR and AR?

Adam: Virtual Reality is creating an entirely new environment that you get to interact with. You know, you could be on the moon, you could be on Mars, you could be underneath the sea. Augmented Reality is more about augmenting the real world with digital data. So you could have a ray gun if you’re looking down at your hand. And there’s a great video that magically puts on stuff. First up, I think they’re very similar. I think they end up almost as the exact same technology. I don’t think we’re going to have Augmented Reality glasses and then Virtual Reality glasses. I think they’re just going to be glasses in like 10 years. But right now, for Virtual Reality the platform’s set. So we know what the platform is. We know it’s going to be HTC, we know it’s going to be Oculus Rift, we know it’s going to be Sony Playstation VR. And we know it’s Samsung, for mobile it’s Samsung Gear. For Augmented Reality I believe we’re still 3 years out before it’s hitting the consumer market. So it’s still good for enterprise stuff. There’s a company called Augment X that does, it’s great for doctors to transcribe their patients documents. And that, they actually use Google Glass, they’re like one of the only, that they’re one of the use cases of Google Glass. And there are a couple other enterprise based services that Augmented Reality is serving as a function for. But I believe that we’re three years out from the consumers stand point because we still don’t know what the platform is. And Microsoft just released the HoloLens dev kits, and are just starting to release them. And so we’re sort of where the DK1 for the Oculus Rift was 3 years ago. So my feeling is until the platform’s really established, it’s difficult to be really playing in that space.

Nick: Right

Adam: Unless you’re going to be the platform play.

Nick: Can you talk a little bit about the sub categories within VR? In other words, as an investor how do you think about the VR stack and which segments they’re in you actively pursue as an investor?

Adam: Yeah. So we’ve broken it down into a couple different categories. We are very strong believers in if content is king on any new platform, you need to make content easier to build. But right now the only tools for creating content are really Unity and Unreal. There are a couple others but basically you have to be a developer and an artist to be able to use any of these. So I think that there will be a much easier to use product system for building content in Virtual Reality. And so we’re backing a lot of tools for creating content, a lot of really exciting stuff there. And then on top of that in that tools for creating content there’s also Capture. So there are 3 types of Capture right now. One is 360 video. That’s the one that most people are really familiar with, where it’s from one viewpoint and then you’re looking outwards and you can move your head but you can’t move around the space. Then there is 3D volumetric scanning, which is basically you can move your perspective. So you can move around the space but it’s scans from the outward end. So you have, there’s a specific amount of space that you have scanned. So it’s more like it would be good for a room for conference calls. Like if you’re scanning you and then someone else could be in that space with you, you know, augmenting it or in VR. And then the third one is actually photogrammetry, which is taking high resolution 2D pictures around a big object like a castle or a building or a couch. And with algorithms and math, they can put it together into a 3D object in Virtual Reality. That’s one category. That one category is tools for creating content, and underneath that are those sub categories of Capture is underneath tools for creating content. The other things that you can, that we’re really really excited about is infrastructure software. So like Compression technology is really important. We made a small investment into a company called AI that’s doing a lot of compression technology. And then also I’ve come up with this concept I call cloud graphics. I think there’s going to be a lot of rendering software that’s built in the new term. Because the reason that in a VR headset, you have the goggles and those are like, you know, seven/eight hundred dollars. And then you also have a $2500 computer is because a high graphics rendering system. And so I think that a lot of graphics in the future are actually going to be rendered in the cloud. So I think computation as a service is going to be a really big deal. So we’re constantly looking for new rendering based approaches. Then on top of that, education. I think education is actually going to be a transformative business inside of Virtual Reality. If you think about the internet as a place that made it easier to index all the information around the world, and allowed you to consume it faster. What Virtual Reality does is it indexes all the experiences and allows you to consume more experiences faster. And I think that humans learn from experiences and so I think we’re going to be entering an era of skill based knowledge that will be unparalleled. What I would use it for is, how do, how do I do plumbing, how do I, you know, change a tyre?

Nick: Sure

Adam: And it’s a difference between watching a video, it’s a difference from reading the content on a piece of paper. You can actually understand exactly the environment and what pieces you need and all those things within the environment of Virtual Reality.

Nick: Yeah. We had #Mamood Hamid on, of a social capital. And he talked about this revolution in education and movement towards skills based educational models.

Adam: Oh, that’s cool! Well, hey, you know, we’re all coming up with brilliant ideas. The, you know, I am very bullish on education and I don’t think people will be thinking of it as education. That’s the thing. When you say education, everyone gets bored, and immediately is like oh man I’m going to have to learn something. But if you’re like hey I don’t know how to do this, how do I do this? And then you jump into Virtual Reality and like learn it, you’ll stop calling it education just because education has like a negative connotation.

Nick: So back on that first category, the content side.

Adam: Yeah, tools for creating content

Nick: Do you see parallels in the app development world for mobile that will have similar approaches within the VR context?

Adam: Yeah. I mean, I would say the similar approaches are like, the biggest things in mobile ended up being user generated platforms. Facebook is still a huge thing on mobile. It’s all about people taking pictures and expressing their opinions. I believe that that is going to be a big deal. A big trend will be people using tools to create their own content and building their own things. And using this as a distribution mechanism for that. So I , yeah I mean my answer is I think it will follow a lot of those same steps.

Nick: So we’ve touched on this a bit, but what are some of the primary applications for VR that have significant market opportunity?

Adam: Well, right now nothing is a significant market opportunity. So like we’re making a bet on Virtual Reality assuming the market is going to be there, and it will. End of this month, Oculus is delivering their first shipment.

Nick: Yep

Adam: HTC is delivering early next month. They’ll be delivering throughout the year. And I think people are going to be making a big push for Christmas. That’s what I think is going to be the big move. It’s going to be a lot of Samsung Gears, a lot of Sony Playstation VR. I think it’s going to be right before Christmas. And I’ve been to saying that the sleeping giant of virtual reality is really Sony. Because they’re not talking very much, they’re not really necessarily doing too much but they have 35 million playstation 4s that are out the world that, all a playstation 4 is is something it’s a computer that runs graphics. And that’s what’s necessary for Virtual Reality is to be a thing. Okay, what are the market opportunities? If you’re looking to start a business in the space, the things that you should be really looking at are the foundational things for this technology to make this adoptable. So it will be really good content, really high end quality content will do pretty well in the early days. Because there won’t be a crazy number of users, but everyone will download everything, and there will be that much high quality content. Games will probably do pretty well in the early days because games are always how, you know, iPhone was no different. Another trend that can be likened to the mobile phone. Where a lot of people bought iPhones because they were suddenly able to play these high end games on the iPhone. Angry birds was the reason that I think I got my iPhone. And so games are a definitely going to play a big role. Long term I’m thinking education and social is going to be a big deal.

Nick: So what are some of the industries in your estimation that will be most disrupted by VR?

Adam: That is a really great question. It’s almost like every industry gets disrupted in some way. Suddenly like it will probably be retail gets disrupted the most. Because suddenly I don’t need to walk downtown to get the same in-house experience of going into a store. I’d say retail almost becomes non-existent. So you just end up with warehouses on the street. Media has a huge shot at getting disrupted. Media will probably change a lot in order to adapt and accommodate for Virtual Reality. The movie industry, there’s a lot of stale things that have been happening in the movie industry on the business side for a long time. And all these story tellers are suddenly really excited about a new medium that they can use to tell stories. And they can sort of disrupt the old way that movies and things were being created. Off the top of my head, those are sort of the ones that I would think of as early low hanging fruit disruption accessible. But I, what I will also say is when a new platform comes out, a lot of people make a lot of great assumptions about how that platform will be used. Like when the internet came out, everyone thought that was just going to be e-commerce. And really the internet disrupted everything. You, you can’t live without the internet anymore. Well, and education, the one I think is most highly going to be disrupted. Talk about low hanging fruit like everyone talks about education, like it’s not being done correctly. It was a model that was created hundreds of years ago. It doesn’t apply to a world that has all this data readily accessible, the internet, the video. And suddenly we have this way in which we can learn skills faster, more things faster, and get a more peer to peer experience. I think education is the one that I would make my long term bet on.

Nick: Yeah. We recently had #William Mougayar on to talk about the blockchain. And he actually likened the block chain technology to the internet, as just this fundamental foundational technology that enables so much more beyond just one killer app.

Adam: Oh yeah. Well, blockchain, yeah definitely. We can get into the blockchain definitely. That’s, you know, the other thing I like geeking out about. So, but I believe that he is correct. It’s, first it’s going to be a fundamental shift for all of finance. And then it’s just anywhere trust is necessary in a transaction, blockchain is it will replace it. Identity, identity is going to be a huge piece of it. So it’s going to be really exciting.

Nick: Is gaming also going to be sort of reinvented by VR?

Adam: Yeah. Well, you know, I’m picturing all these gamers and all these gamers will suddenly have to be in really good shape because they, they’re physically having to play the games. Not that gamers aren’t necessarily, well gamers aren’t necessarily in good shape. And like, you know, it’s going to require real skills. It’s going to require real strategy. And not that current games don’t. I definitely get sucked into Super Smash Brothers and, you know, everything else that anyone’s ever played. And I believe, you know, games are a huge part of what we do nowadays. You know, Twitch was a huge acquisition last year and, but I don’t think these get replaced. It’s sort of like, you know, I still play board games. Probably more board games are being played every night than before. But suddenly, you know, with the computer, you’re able to play more high velocity games than just on a board. It was much more interactive. The stories became more compelling, like all that stuff. I think this is the same level of disruption that normal computer games had to a board game. So virtual reality will disrupt the computer games in the same way.

Nick: You know I saw a startup pitch the other day that was pitching Virtual travel experiences. So

Adam: Awesome

Nick: So they didn’t have VR but essentially they had contractors in all these various locations that you can sort of direct around. So you can engage a contractor that uses an iPad or some sort of camera. And you can instruct them that hike the mountain or go check out the beach or whatever it is, right. Are there going to be big applications in travel for VR as well, or is that, is that crazy?

Adam: Oh, it’s, yeah it’s going to be great. We have backed a company that’s trying to make tourism accessible in virtual reality. It’s called # realities.io . It’s fantastic. They allow you to sort of visit real places that are around the world but they’re captured in high res, and you’re able to just explore like these interiors or exteriors actually. So I think it’s going to be a big deal and I actually think it will cause you to want to do tourism more. I don’t know if it actually replaces tourism. I think it ends up being like the best marketing for tourism. Like you actually get to sort of experience it in the digital world. Come experience it in the real world. So I , yeah I think it’s pretty interesting.

Nick: Awesome episode there with #Adam. Look out for Part 2 of the interview, scheduled to be released in the next couple days. In Part 2 we will cover how VR has been in various phases of maturity for decades, and why now is the right time for it to gain traction and mass market adoption. How #Adam thinks about capital intensive areas of investment, and how he approaches investing in VR versus some segments that may require very little capital to achieve product market fit. We also talk about the economics in business models for VR, some of the biggest challenges to VR, both technological and otherwise. The exciting things to look out for in VR in the coming years. And finally, #Adam’s thoughts on virtual reality that can be integrated into human biology and if that’s science fiction or science fact. Hope you get a chance to join us for Part 2 of the interview. Until then, remember to over-prepare, choose carefully and invest confidently.