Key takeaways

Extended Reality (XR)

• The Extended Reality (XR) industry experienced positive vibes on the product front despite the decline in funding during the quarter. Six key device launches (e.g., Sony PSVR 2, HTC VIVE XR Elite) and multiple software launches/updates to existing platforms were announced. The content segment recorded the highest number of software updates (10), which included the launch of generative AI-backed tools, followed by AR/VR platforms.

• 21 XR companies raised a total of USD 291 million in funding during the quarter—a steep drop of 48% YoY but a 36% QoQ increase. The largest funding rounds came from Light Field Labs and Envisics, which raised USD 50 million each, in early- and growth-stage funding, respectively.

• Despite the significant drop in funding value, Q1 2023 recorded the highest number of funding rounds (21) since Q2 2022, with early rounds being the most common. The average amount of funding per round dropped significantly YoY (48%) with a marginal QoQ improvement (3%). Headset/display manufacturers raised the majority of funding in Q1 2023 vs. AR/VR platforms having raised the highest across 2021 and 2022.

• Of the 17 XR partnerships observed during the quarter, incumbent partnerships were observed from Google, Microsoft, NVIDIA, Qualcomm, and Snap. Notable disruptor partnerships included those made by Varjo, Dispelix, and Talespin. Partnerships primarily focused on entertainment use cases, with a particular emphasis on XR content creation tools and platforms as well as collaborations with customers for the launch of branded AR experiences. 

• Three notable XR acquisitions were made with the aim of enhancing product development efforts. This included Meta’s acquisition of Gary Sharp Innovations and Within as well as Rendever’s acquisition of Alcove to bolster product development efforts. 

• The short- to medium-term outlook for the XR industry is neutral. Despite a significant decline in funding, the introduction of Metas' Quest 3 headset, the long-awaited release of Apple's MR headset, and the emergence of no-code-based generative AI tools have the potential to reignite investor interest and activity in the sector.

Metaverse Experience Platforms (MEP)

• Amidst a gloomy outlook, Meta sent ripples through the industry by announcing the shutdowns of its Crayta metaverse and VR gaming platform EchoVR, citing insufficient user retention. Adding to the subdued outlook, Microsoft shut down its social metaverse AltspaceVR, focusing on the development of Microsoft Mesh instead.

• Funding dropped 95% YoY but remained flat QoQ, continuing to be adversely impacted by the “Crypto Winter.” During the quarter, seven MEP companies raised a total of USD 48 million in disclosed funding with Avalon’s USD 13 million being the largest funding round recorded.

• The industry notably saw the launch of generative AI tools for the creation of digital assets on metaverses, although activity remained sparse, with only seven product updates recorded during the quarter. These included generative AI tools for content creation on the social gaming metaverse Roblox and the use of generative AI for digital avatar creation on Wolf3D's Ready Player Me platform.

• 48 brands launched experiences across eight metaverse platforms, with Media and Entertainment being the leading industry and Fortnite Creative emerging as the top platform despite the lack of funding interest. 

• There was one notable acquisition made—Animoca Brands' acquisition of Sviper to build on its metaverse platform capabilities.

• The short- to medium-term outlook for the MEP industry is somewhat negative. Funding has seen a significant slowdown, given a decline in cryptocurrency activity and the release of Covid-19 lockdowns. On the back of this, Big Tech’s prioritization of AI (given the high interest) over specific metaverse initiatives should likely keep activity in the sector subdued.