💸 the only virtual reality bet I'm making

Welcome to this week’s edition of CROWDSCALE, where we bring Shark Tank to your inbox. In today’s newsletter:

• 🤮 Metaworse: Virtual Reality is in big trouble, as consumer demand falters

• 👓 HeadSet Go! The one VR company I’m betting on

• 💸 Virtual Profits: Is this startup still a buy at 2.6x its previous valuation?

But first, a word from our friends at Early Bird:

Facebook acquired Oculus Rift back in 2012 for a whopping $2B. In doing so, they kickstarted one of the largest technological hype cycles in modern history. As you can see from the headlines above, every publication was forecasting virtual reality to completely reshape industries and transform daily life.

What has actually happened, is anything but. Virtual Reality met its fanfare with lagging consumer demand and abysmal usage stats:

• Sales of VR headsets actually declined by 2% in 2022

• In 2021, 77% of virtual reality headset owners did not use their devices on a weekly basis

And most recently, Meta laid off 21,000 employees earlier in 2023 as its bet on virtual reality hasn’t panned out the way it imagined.

While the outlook for VR is gloomy, I’m not yet claiming the death of the technology.

I’m not overly optimistic about VR’s prospects, but there is one company in the space I have decided to take a chance on…

Virtuix is a startup that makes omni-directional ‘treadmills’ where people can walk/run while playing VR. Named ‘Omni’, these treadmills allow you to move in place, all while replicating you movement in the game.

Virtuix has built up a strong network of commercial VR rigs at over 70 locations across the US. These ‘Omni Arenas’ are mainly stationed at arcade-like venues as a premium experience for visitors to play.

Virtuix has provided case studies that illustrate the strong consumer demand & prove that Omni Arenas lead to an increase in foot traffic at commercial spaces. Over 3 million sessions have been completed with Omni, and the company has scraped together an extensive database of over 300,000 players.

Virtuix is aiming to parlay that strong commercial foundation into a consumer product, inside the homes of its customers. It’s spent months redesigning the product to be more sleek and lightweight than its rugged commercial units.

The company has over 35,000 people signed up on the waitlist to purchase once it’s available. While not every person here will end up buying, a meager 15% conversion rate would still result in $13.7M in immediate revenue for Virtuix. This figure also doesn’t account for all the subsequent subscription & game sales that would take place.

I invested in Virtuix back in 2021 when they raised at a $65M valuation. They’re currently raising a new round at a $171M valuation (2.6x). I took a chance on this company in 2021 for the following reasons:

• Strong commercial operations that will provide cash flow to support operations

• Omni Arenas essentially provide free marketing for the consumer product and allow people to ‘try before they buy’

• Extensive waitlist, elements of virality, proven demand through repeated use at the commercial locations

• Win-Win for kids & parents - kids love playing video games and parents are actually supportive because Omni makes them exercise

Lastly, I’ve had the chance to play on the Omni myself. It was incredibly fun - I can’t understate how much I wanted to keep playing. I was also exhausted after playing, it really is a solid cardio workout.

It wasn’t a 10/10 experience though, due to one small aspect. The smell.

VR headsets and rigs typically use foam to make the equipment more comfortable on your body. This is fine for regular use, but presents a problem when the user is running around and working up a sweat. Foam absorbs sweat and clings on to the unappealing smell.

It could be that the arcade I was at didn’t clean the equipment properly, but it smelled awful inside the Omni Arena. I really hope Omni incorporated detachable foam elements into the design that users can either replace/wash, because I could see that being a major prohibitor to customers wanting it in their home.

Coming into 2023, Virtuix had a lot of momentum - a strong cash balance of $5.8M, shipment of its consumer product to several beta testers, and sustained interest via signups on its waitlist (they average 300 new signups a week organically).

Regarding Virtuix’s most recent raise at a $171M valuation, here’s how I’m thinking about the opportunity.

The company is not worth this amount with the commercial operation alone. It just isn’t - the company is already at 70+ locations and only generating $3.7M in revenue from these operations. This figure is growing and represents a 76% jump from the previous year, but is a far cry from the sales needed to support the $171M valuation

So to be a successful investment, the consumer wing of Virtuix needs to take off. And if it does - this could really be a home run.

I think Peloton is a reasonable comparison for Virtuix. Their bikes are priced about the same (at least they used to be), and they take up roughly the same size. I think Virtuix’s business model is better (they don’t have to pay cycling instructors crazy salaries), but they’re worse off on price elasticity. Peloton purchases are often rationalized by counting the savings from cancelling a gym membership - Omni’s high price tag doesn’t come with the same rationalizations.

In terms of potential, Peloton probably has a slight edge but can still give us a rough idea for how big this could get. Peloton is down 42% this year and still worth $2.8B. So there’s plenty of upside for investors here should the consumer version of Omni pan out.

Time will tell if Omni strikes gold or becomes another statistic for how virtual reality has stumbled. And who knows - Apple has plans to release its headset in 2023, so the VR hype cycle could come roaring back!

Thanks for reading, tap the ❤️ button if you enjoyed this one :)

Please note that this is not financial advice, nor a recommendation to invest in any of the startups mentioned. Readers should conduct their own due diligence and understand that startup investing is a risky asset class.