Portals into digital worlds have been an area of exploration since the early decades of the twentieth century. Lawrence Manning’s 1933 story "The Man Who Awoke," envisions a future where individuals can program their dreams to create a virtual life of their choosing. Similarly, Stanley G. Weinbaum’s 1935 story "Pygmalion's Spectacles" imagines goggles that immerse users in a story where they interact directly with the narrative, becoming part of it rather than merely observing it. Whether they function as idyllic escapes from reality or as independent realms existing within technology itself, technology-created worlds have been a staple of sci-fi imagination for almost 100 years.
Perhaps leaning into these narratives, modern technology companies throughout the 20th century experimented with bringing immersive virtual worlds into reality to capture the public interest. Early attempts were largely limited by the technology of the time and had to make concessions to be brought to the mass market, either by being attached to theme parks and other stationary experiences where compute wasn’t limited, or by making significant concessions to be brought to the living room (for example, Nintendo’s Virtual Boy had an infamously all-red display). It wasn’t until 2012 that VR leapt into the mainstream—with the launch of the Oculus VR headset. Founded by Palmer Luckey (current founder of Anduril), Oculus offered one of the first consumer-facing VR headsets without major limitations. By initially plugging into a users’ PC system, Oculus solved the compute problem and offered good visuals despite the higher compute cost of rendering in VR, and they secured early software like VRChat for their ecosystem to increase consumer interest.
By 2014, the company had raised $2.4M in crowdfunding, over $90M in VC funding, and had been acquired by Facebook for $2B. In that same year, Sony and Samsung announced their own VR headsets, and Google announced their AR Google Glasses. By 2014, it was clear the ecosystem was here to stay.
Today, as we see it, the extended reality (XR) ecosystem is incredibly diverse. Beyond VR headsets, games like Pokemon Go have also found use-cases for Augmented reality (AR), which puts a digital overlay over real-world video input. While we think virtual reality headsets are still a core element, these headsets, like the recently released Meta Quest 3 and Apple Vision Pro, increasingly incorporate mixed reality (MR) features like video pass-through into the real world to allow virtual elements to interact with real world elements. Meta just unveiled Orion AR glasses that have a lightweight design and transparent lenses, allowing the user to be more present in the physical world and setting a new standard for human-oriented computing.
Why we believe in the XR ecosystem
Today, we see consistent new entrants in hardware and a constantly-emerging user base in the XR ecosystem. We believe that this ecosystem will continue to grow and nurture businesses for several key reasons:
Large and growing ecosystem: By 2023, Meta had sold over 20 million units, with over 6 million monthly active users. While Oculus sales decreased in 2023, they’re up 30% YoY in Q1 2024. With new entrants like the Vision Pro entering the space, we believe in the potential for continued growth.
Gen Z and Alpha growing up on VR: VR grew in popularity/grew when Gen Z and Gen Alpha were growing up, especially during the pandemic, which coincided with greater adoption among this demographic as they were seeking ways to socialize with friends while at home. VR became one of the places where Gen Z and Alpha learned to have fun and socialize, and to escape to another, virtual reality. This is reflected in the demographics: almost half (45%) of VR users are Gen Z; 35% of Rec Room’s traffic is from those 18 to 24 years old, and a staggering 60% of VR chat’s traffic is in that range as well.
Huge gaming experiences already in the XR ecosystem: We have already seen several games in XR reach significant venture scale. Of course, in AR Pokemon Go has seen immense scale, grossing $8B in 8 years, and still grossing over $800M in 2023. In VR, we have seen several nascent games reach significant scale. Rhythm game Beat Saber, for example, has reportedly grossed over $250M over 6 years. Competitive shooter Guerilla Tag has earned over $100M since 2021. Social playroom and user-generated content (UGC) platform Rec Room has raised over $250M and was last valued at $3.5B with over 23M MAU. VR Chat, which has raised over $95M, has consistently grown since 2017 to over 40K CCU on steam alone. Superhot, which was released in VR in 2019, sold over 1M units in 2 years, and has remained a bestseller since then. We feel that there will continue to be large outcomes like these in XR, as there is also a significantly longer tail of VR games making millions in revenue annually.
Unique experiences leveraging XR technology: Today, consumer XR has a large gaming population. Gaming has adopted new technologies for net- new experiences. We think that this tends to lead to not only widely adopted technology but huge outcomes in gaming. Wii, Playstation, and their native games are good examples of this. We feel that this is still relatively untapped in the XR ecosystem.
Moving the XR Ecosystem Forward
As the XR ecosystem continues to expand, both in terms of new hardware and the games that are created with it, we continue to see opportunities for the technology to captivate audiences.
We believe that the principal use case of XR, gaming, will continue to see strong adoption among consumers and will evolve as the users of this tech evolve too. As XR begins to break out of this niche, we also believe in emerging new use cases based on the lifestyle and needs of these users.
At General Catalyst, we believe that, much as in other areas of the consumer internet, XR will be transformed to suit better the needs of the Gen-Z audience, which will be these platforms’ primary users and influencers. We believe that the next generation of XR platforms will be fundamentally shaped by the digitally native generation inhabiting it today.
Continued evolution of game studios
Today, one of the principal use cases of XR for consumers is gaming. From the beginning, Oculus was pitched as a gaming device to consumers, with their original tagline for their Kickstarter being ‘Step into the game.’ Over the last decade, players have done just that. At General Catalyst, we believe that gaming will continue to be a core use case and continue to evolve as the audience and platforms of XR evolve in a few key ways:
Complex, competitive games for core gamers. Because the audience of the more mature VR and AR ecosystems is fairly young, the games that have historically been popular with VR ecosystems have been relatively simple. Rec Room and VR chat cater to their young audience’s focus on socializing with friends, while BeatSaber offers a single, repeatable core gameplay loop, in which users slash at obstacles to a song’s beat.
As this audience ages, we believe they will seek out increasingly ‘core’ gaming experiences characterized by more complex systems and competitive mechanics. Even today, we already see some emergent games in this space. Gorilla Tag, a competitive shooter where players take on the role of gorillas, for example, has earned over $100M in the 3 years since its launch. Similarly, Trass Games’s Yeeps focuses on complex teamwork mechanics and gadgets for teams to get ahead. We believe that we will continue to see more complex gaming experiences emerge in the VR ecosystem.
This also extends to other portions of the XR ecosystem. For example, we also believe the AR ecosystem, which saw increased popularity with Pokemon Go, will also see such developments. At GC, we’re investors in Jadu.ar, a competitive AR fighting game, and we believe that other AR-native in-depth games will emerge as well. As Asad Malik, CEO and cofounder at Jadu states, “Our work at Jadu is based on the hypothesis that there’s a potential new category of mobile games that is spatial and immersive. AR lets us bring characters into players’ rooms, allowing for interactions with their physical environments and creating a fresh feeling of attachment to in-game items & beings.”
At GC, we’re excited for people bringing traditionally core genres, such as the MOBA or the fighting game, into these new dimensions.
Mixed-reality native games. We think one of the core value propositions of MR compared to any other medium, is the ability for the digital to interact with the physical. In many ways, this is an extension of the promise of AR, which only overlays the digital on top of real-world imagery. However, much of the narrative appeal centered on interaction between the two; Pokemon Go’s launch marketing, for example, focused on interacting with Pokemon in the real world. With MR, this possibility can actually be fulfilled.
This opens up new gameplay possibilities: for example, rearranging a room to have virtual beings interact differently, playing competitive games with the environment as an obstacle course, etc. Studios like Anima and Windup Minds are already working towards this goal, creating virtual pets that can interact with the real world. We believe that there will be net new experiences that are possible through MR.
This can expand beyond a simple living room setting. As the Vision Pro becomes more mobile, and with MR applications on phones, we believe that it will be possible for an entire digital overlay to exist on the physical world, leading to next-generation MR experiences that not only depend on where you are in the world (e.g., Pokemon Go) but also what elements are in that particular location.
These games also have the potential to be cross-compatible with phone-based AR. Today, phones are still the predominant way people experience XR. Given that the phone XR ecosystem grew up on games that gathered input from the real world, like Pokemon Go, increasing MR adoption has the benefit of potentially meeting people where they are.
MR-native user-generated content
UGC has historically been a strong way to attract developers and players to a new ecosystem, as it enables and incentivizes millions of players to create content, share with their friends, and potentially monetize this content. Platforms like Roblox, Unreal Editor for Fortnite, a UGC platform built off of Epic Games’ popular Fortnite game, and others, enable millions of creators to build and share their content. Even within VR, this has been the case, as games like VRChat and Rec Room allowed users to create their own social games, creating an early, retentive ecosystem for these platforms.
We believe that an MR-native UGC platform will emerge, similar to early emergent VR UGC platforms. We think there is significant enough difference in the MR environment to justify this kind of tooling. Notably, MR environments let users interact with the real world. As such, a UGC tool for this type of technology may allow developers to create games that take into account relative positioning, environmental hazards, etc, leading to a new experience.
Further lifestyle use cases
As the XR ecosystem continues to mature and its user base ages, both from newer users adopting the technology and from its young existing user base growing up, we feel the technology’s use cases will expand beyond its traditional gaming roots into various lifestyle areas.
Fitness. We think one of the most promising XR applications is fitness. Indeed, given VR’s inherent motion-based control scheme and immersive design, fitness was one of the earlier lifestyle applications seeking to make a daily task more engaging for users. Existing efforts in this space range from explicit workout simulators such as the Meta-acquired Supernatural and Les Mills’s series of fitness games, which focus on explicit workout experiences. Additionally, sports-specific VR games such as NFL Pro Era, Tennis Esports, Win Reality Baseball, and Gym Class’s Basketball showcase the potential for VR to enhance physical training in specific sports.
At GC, we feel the fitness potential of VR can be further expanded by focusing on creating engaging gaming experiences that are not explicitly workout-themed. For instance, just as 'Just Dance,' a series of dancing games on traditional gaming platforms, is not marketed solely as a fitness game but still offers substantial physical activity, we feel that VR games that feature intense action elements like swordplay or combat could also incorporate fitness tracking in order to create a more engaging experience for the predominantly gaming audience. Popular VR titles such as Creed for boxing and Beat Saber, which simulates sword combat to a beat, have already demonstrated the VR audience’s readiness for fitness-oriented experiences.
Additionally, with the adoption of mixed reality (MR) technology, which allows for better integration with real-world surroundings, we believe can address space limitations and enhance the range of motion during workouts. This technology makes it feasible to perform exercises like running or using weights more effectively in a VR environment.
Additional lifestyle use cases. We feel that as the XR ecosystem continues to progress, and as MR technology advances, more opportunities will emerge for applications beyond exercise, such as learning new skills, making mundane tasks more engaging, or facilitating unique social interactions. We feel that as audiences mature and their lifestyle necessitates more of these tasks, or they develop hobbies beyond gaming, they will naturally take their technology with them.
For instance, TribeXR is leveraging VR to offer affordable virtual equipment and lessons for learning to DJ and make music, fostering a global community of music enthusiasts, and leveraging the immersive VR experience to create a fully expansive, realistic experience for those looking to learn DJing.
TribeXR's founder and CEO Tom Impallomeni, notes, “Tribe provides access to virtual equipment and lessons at a fraction of the cost of real-world equipment. We enable customers to start learning to DJ and make music, without the upfront cost and frictions. We believe that VR unlocks the ability to learn real-life skills - better, faster, cheaper, accessible from anywhere, join from any device.”
As MR technology continues to be adopted, and the barriers between digital and real-world interactions decreases due to MR’s ability to take real-world input, we feel that the range of teachable tasks within XR will only increase. At GC, we are excited for those looking to make the mundane extraordinary through the integration of XR elements.
Incorporating AI into the XR ecosystem
At General Catalyst, we’re laser-focused on Applied AI and not surprisingly we feel that this overlaps well with our excitement around the future of XR. The application of AI in this ecosystem has significant potential, both in terms of the experiences themselves and in the production of these experiences.
Today, social gaming experiences are incredibly popular in VR. New studios like Throwback Studios and Sail are taking this gameplay style and focusing on more niche starting points. We feel that AI can enhance social gaming experiences by animating non-playable characters (NPCs) and personalizing user interactions within these environments. Startups like Astrobeam are already working on this, utilizing AI systems to have characters in-game interact with players using a level of depth that was previously impossible. As these AI systems improve, we feel that it will only further increase the quality of one of VR’s most popular gameplay styles today.
In terms of production, reduced costs and improved efficiency through AI has the potential to drive advancements in XR game development. As 3D generation technology evolves, companies like Kaedim, Luma, and Common Sense Machines have the capacity to drastically reduce the production cost of 3D assets, the principal asset type in VR’s 3D environments. Meta’s recent research on 3D model generation highlights the potential for these technologies to simplify and accelerate the development process. We believe these tools can be further extended to consumers, supercharging the already popular UGC genre in XR.
Additionally, innovations in AI models, such as the "diffusion-transformer" used by Sora for text-to-video conversion, promise to make complex video production more accessible for immersive XR experiences. Ryan Damm of Ainia Tech emphasizes, “When we have enough training data and some compute to burn, we're going to implement [the diffusion transformer] in the holographic video space to drastically reduce the input requirements.”
As these technologies continue to evolve, XR applications are poised to offer increasingly immersive and integrated experiences that enhance both gaming and lifestyle activities.
At General Catalyst, we’re excited to support the XR ecosystem. If you’re a founder building something exciting in the space, no matter where you are in the journey, we’d love to hear from you!
