Key takeaways

• Product updates
  • XR: Q4 recorded 34 software updates, which primarily included the incorporation of GenAI features into existing products. Most notable were 1) Snap’s text-based lens generation alongside a 3D face mask generator and 2) Microsoft's integration of Copilot into its Dynamics 365 Guides platform, aimed at assisting frontline workers in mixed reality. The sector also had six hardware announcements, two from incumbents. Varjo’s XR-4 series Focal Edition launch was the most notable, which claimed to be the first headset to allow gaze-directed autofocus mixed reality pass-through features, which mimic the behavior of the human eye. 
  • MEP: The quarter recorded 19 product updates (18 in Q3), backed by multiple updates from 1) Animoca Brands to bolster user-generated content (UGC) on its “The Sandbox” metaverse and 2) quality-of-life improvements to Meta’s Horizon Worlds. Additionally, Rec Room launched Fractura, demonstrating the use of GenAI in creating virtual worlds. 

• Partnerships
  • XR: The sector recorded 27 partnerships in Q4, heavily skewed toward product development efforts (~81% of the total). Notable updates included Apple’s integration of ARKit into the Salesforce Field Service app and BMW’s partnership with Varjo to launch a mixed reality racing experience. 
  • MEP: We tracked 40 brand collaborations for the quarter (30 in Q3 2023). Similar to previous quarters, media and entertainment companies (14) were the most common in terms of experience launches. There was also a trend of automotive manufacturers launching virtual worlds, focused on their upcoming electric vehicles (BMW, Honda, Nissan, Lamborghini, and Škoda Auto).

• M&A
  • XR: Q4 included 1) gaming conglomerate Aonic’s acquisition of VR game development studio nDreams for USD 110 million and 2) VR-based mental health startup BehaVR’s merger with virtual chronic pain management company Fern Health to form RealizedCare.
  • MEP: The sector recorded no M&A; companies focused on organic growth opportunities instead.

• Funding 
  • XR: 19 startups raised USD 286 million, rebounding 28% from USD 223 million in Q3 but down 23% YoY. This brought 2023 total funding to USD 1,109 million, a 29% YoY decline. Notable rounds during the quarter included Rokid’s USD 112 million round (making the firm a tech unicorn), Mojo Vision’s USD 44 million round, and XPANCEO’s USD 40 million round.
  • MEP: Five companies raised USD 28 million (down 41% YoY and 39% QoQ), helped by Animoca Brands’ USD 11.9 million funding round. This was the lowest level of quarterly funding since we initiated coverage of the sector in Q4 2022. Funds raised in 2023 amounted to USD 169 million, a 91% drop compared with USD 1,829 million raised in 2022. 

• Outlook
  • XR: We maintain a neutral outlook for the industry. Although funding in 2023 slowed compared with last year, incumbents in the sector continued to launch flagship products (Meta’s Quest 3 and HTC’s Vive XR Elite) with noticeable mixed-reality-focused improvements compared with their predecessors. While Apple’s Vision Pro is leagues ahead of its competitors in terms of eye-tracking and headset resolution, affordability remains a key pain point. 
  • On a positive note, advancements in the GenAI space could bolster user immersion and lower development costs for startups in the sector. Use cases include streamlined content creation (developing virtual worlds for video games, training simulations, and AR objects), alongside virtual assistants, dynamic non-player-character interactions, and quest generation in video games. 
  • MEP: We maintain a negative outlook for the industry. The severe drop in funding for the industry has curtailed growth opportunities for many of the smaller players in the sector. Notable exceptions include Roblox and Fortnite Creative, which continue to see strong player bases and recurring revenue without the need for external funding. 
  • Similar to XR, while GenAI provides an opportunity for the sector to streamline virtual world creation, user immersion and retention will still be impeded by the lower graphical fidelity of most platforms. 

Product updates: GenAI improvements for XR and a UGC-driven approach for MEP

Analyst take 

XR: In terms of software updates, 2023 saw startups in the space augmenting their products with GenAI features. Content creation dominated use cases (virtual world and asset generation as well as AR game object creation). This comes as no surprise, given the sector's roots in entertainment applications. However, GenAI feature incorporation for the quarter included a more varied mix, such as enterprise-focused applications including the integration of AI assistants.

On a hardware front, Varjo’s enterprise-focused XR-4 mixed reality headset series was at the forefront of device launches for the quarter. The XR-4 Focal Edition seeks to solve a key pain point in mixed/augmented reality—the vergence accommodation conflict. This results in an improper focus on mixed reality objects, given that object depth is improperly simulated. Notably, the base version of the XR-4 comes at half the price of its predecessor, the XR-3, likely to cater to firms with tighter budgets. 

MEP: Animoca Brands’ The Sandbox platform focused its efforts on building an environment conducive to the creation of UGC, a staple of what propelled Fortnite Creative and Roblox to the forefront of the sector.

XR

• XR device announcements in Q4 2023 dropped to their lowest across the year, with only six device launches in Q4 2023 (Q3 2023: 8; Q2 2023: 16; and Q1 2023: 9). The slowdown may be on account of manufacturers adopting a wait-and-see approach, hoping to integrate Qualcomm’s new XR chip (set to launch in early 2024) into their mixed reality headsets. The chip, aiming to compete with Apple’s M-series, promises to offer double the GPU performance of its predecessor, the Snapdragon XR2 Gen 1. 

• On the other hand, we tracked 34 software updates for the quarter—the highest across the year (Q3 2023: 27). This notably included the integration of GenAI features across a range of segments.

• Notable XR devices announced in Q4 2023 included the following:
  • HTC’s launch of the Vive Ultimate Tracker for full-body tracking in VR with gaming, motion capture, and industrial use cases. This is the company’s first inside-out tracking solution, requiring no additional sensors and eliminating the need for external base stations. 
  • Varjo’s launch of its enterprise-focused XR-4 mixed reality headset series. Notably, the XR-4 Focal Edition claims to be the first headset that allows gaze-directed autofocus mixed reality pass-through features that mimic the behavior of the human eye.
  • XReal’s launch of its Air 2 and Air 2 Pro AR glasses for immersive viewing experiences, providing spatial audio and 100 nits of additional brightness compared with its predecessor.

• Other XR devices announced included Fluid Reality’s untethered haptic VR gloves and Samsung’s motion-tracking sensors for XR and robotics applications.

Source: Compiled by SPEEDA EDGE

• Notable industry news included ByteDance subsidiary Pico Interactive laying off “thousands” of employees following the VR headset manufacturer’s failure to meet sales targets, as it reportedly lost money on each unit sold. The company is also rumored to have shut down the development of its Pico 5 headset, shifting focus to an updated version of its Pico 4 headset.

• In terms of upcoming headsets, Apple is rumored to launch the Apple Vision Pro by February 2024, with hopes of launching a more affordable version in 2025. In response to this, Meta is rumored to be developing a cheaper version of the Quest 3, set to launch in 2024. 

• A cheaper model could help uplift sales for Meta’s Reality Labs division, which posted its lowest quarterly revenue figures since it started reporting the segment's results separately in Q3 2021. Furthermore, ByteDance’s struggles could pave the way to Meta gaining a foothold in the Chinese market, as the company reportedly seeks to bring its Quest headsets to the country via a partnership with Tencent. 

• Similar to Q3 2023, the AR/VR platforms segment recorded the highest number of software updates (20), followed by headset/display manufacturers (7), content (5), and location-based AR/VR platforms (2). Notably, Q4 2023 saw the largest number of GenAI feature additions to platforms (6) across the year, focused on GenAI copilot integration to streamline work processes, alongside entertainment-related applications. 

• Updates that incorporated GenAI features included the following:
  • Snap’s launch of Lens Studio 5.0 Beta, which introduced a ChatGPT Remote API for generating text-based content for lenses and a GenAI-backed 3D face mask generator.
  • The integration of Microsoft Copilot into its Dynamics 365 Guides platform, providing GenAI features for mixed reality, aimed at assisting frontline workers in industrial settings.
  • Niantic’s use of Meta’s LLama-2 large language model (LLM) for its Peridot AR game to power realistic virtual pet interaction with the environment.
  • Nanome’s launch of MARA, a GenAI copilot designed for biopharma R&D assistance.
  • JigSpace’s launch of Spark, a tool that uses GenAI to create 3D product presentations for AR devices.
  • Brilliant Labs’ integration of Stability AI’s GenAI capabilities into its AR monocle. This allowed users to create AI-generated images by prompting it to edit images captured from its camera via voice commands.
• Other key updates by incumbents included the following:
  • 1) Meta’s launch of the Haptics Studio and Haptics SDK, allowing developers to integrate haptic experiences into Quest applications, and 2) its v60 update for Quest headsets, which provided mixed reality boundary recognition improvements and Quest Pro performance improvements in mixed reality.
  • Google’s launch of AR Beauty ads, enabling users to virtually try on beauty products showcased on Google search results and Google images before making a purchase.
  • Valve’s launch of 1) SteamVR Theater Screen, allowing players to use a large virtual screen to play non-VR games via the SteamVR platform, and 2) a Steam Link software update, enabling wireless XR streaming to Meta Quest headsets.
  • Vodafone’s launch of XR Stream, a cloud-based platform for XR live streaming, backed by motion capture technology.

• Other key updates by disruptors included the following:
  • Niantic’s launch of its AR developer toolkit, Lightship ARDK 3.0, allowing virtual objects to interact with the real world and users, using location-based technology for object tracking and placement.
  • FitXR’s launch of Slam, a mixed reality gaming studio that features proprietary algorithms that transform a room into a 3D game, using floors, walls, and ceilings for interactive fitness.

• In December 2023, Microsoft announced the discontinuation of Windows Mixed Reality, a platform for games, apps, and other VR experiences. The move was likely due to the company being unable to compete with Steam’s leading market position for PCVR content and its split in focus toward its HoloLens 2 mixed reality headset.  

MEP

• Animoca Brands came out with a slew of updates to The Sandbox metaverse, which most notably included fully opening up its platform to UGC by removing the initial application process for publishing experiences. 

• The company’s goal of adding 2,000+ UGC experiences on its platform is further supported by 1) the launch of a new Game Maker Fund, backed by 100 million of the platform’s native SAND tokens; 2) improvements to its asset creation platforms VoxEdit and Game Maker; 3) the introduction of the CATALYST token, allowing creators to mint assets; and 4) the launch of The Sandbox Marketplace on Polygon to aid creator monetization efforts.

• Epic Games introduced age ratings for experiences created on Fortnite Creative in October 2023, providing a safer environment for younger audiences. The move contrasts that of Roblox, which added 17-and-above experiences to its platform earlier this year, as both companies sought to venture past their standard age demographics. 

• The sector recorded 19 software updates/launches for the quarter—a slight improvement compared with 18 updates in Q3 2023. Activity levels were supported by multiple updates from Animoca Brands (5) and Meta (4) to their respective MEPs, leading to the social gaming platforms segment recording 13 updates in total. 

• Other key software updates included the following:
  • Wolf3D’s addition of 1) geometry-aware AI texturing tools for avatars on its Ready Player Me platform and 2) its Premium Skins Catalog, which allows developers to offer premium avatar skins based on different brands for their metaverse platforms.
  • VRChat’s launch of Paid Subscriptions, a feature allowing developers to monetize their creations on the platform via monthly subscriptions.
  • Rec Room’s launch of Fractura, an experience created by the company's in-house creative team using GenAI tools, empowering other Rec Room creators to follow suit.

Partnerships: Focus on XR customer collaborations and Roblox brand collaborations

Analyst take

XR: Product development-related partnerships rebounded from last quarter, focused on improving headset quality, as some manufacturers aim to compete with Apple’s upcoming Vision Pro headset in 2024. Notably, BMW’s partnership with Varjo to create a mixed reality racing track using the latter’s M4 vehicle showcased the premise for XR applications in the auto tech sector. 

MEP: The sector’s sharp YoY decline in funding had not diminished interest by brands in launching experiences on certain metaverse platforms. Specifically, Roblox and Fortnite Creative collectively accounted for more branded virtual world launches (86) than all other popular MEPs combined (accounted for 67 brand launches) across the year. The strong preference for Roblox and Fortnite Creative is showcased in their high player count numbers and platform updates to incentivize the creation of UGC. 

XR

• We tracked 27 XR-related partnerships during the quarter—the highest number across the year (Q3 2023: 25). Product developments accounted for the majority of partnerships (~81% of the total). 

• Product development efforts centered around the headset/display manufacturers segment (9). This mainly consisted of headset manufacturers augmenting headset performance, immersion, and convenience with hardware from third parties. The content segment (6), on the other hand, focused on the creation of AR assets and filters. 

• Key product development partnerships involving tech incumbents included the following:
  • HTC’s partnership with NASA to send a modified version of the Vive Focus 3 VR headset to the International Space Station.
  • Meta’s partnership with NBA to expand the number of 180-degree immersive match recordings available to NBA League Pass subscribers on Meta's Horizon Worlds.
  • Snap’s partnership with L'Oreal to launch Beauty Bestie for its NYX subsidiary, which offers an AR makeup filter that links to products that users can buy to recreate their looks in the real world.
  • Apple’s integration of its ARKit platform with the Salesforce Field Service mobile app, enabling technicians to create 3D renderings of large areas and map objects via image capture.

• Key product development partnerships by disruptors included the following:
  • Varjo’s partnership with BMW to launch a mixed reality racing simulator taking place on a real-world racing track, using BMW’s M4 vehicle.
  • Dispelix’s partnerships with Foxconn and Pegatron to create reference designs for AR glasses, based on Dispelix's Selvä waveguide display.
  • Perfect Corp’s creation of an AR makeup try-on experience for Walmart’s iOS app. 

MEP

• A total of 40 brands launched experiences across seven metaverse platforms—an increase beyond Q3 2023’s 30 brand launches across eight platforms. This could be attributable to increased marketing efforts by firms during the holiday season, given more consumer leisure time.

• Roblox and Fortnite Creative continued to dominate brand launches (12 each) for Q4 2024. This is in line with Roblox recording the highest number of brand launches on its platform (47) across the year, followed by Fortnite Creative (39). This is unsurprising, given the two platforms’ relatively large player bases. 

• There was a trend in terms of vehicle manufacturers launching experiences focused on their upcoming electric cars (BMW’s iX2, Honda’s Prologue, Lamborghini’s Ultra GT, Nissan’s Hyper Punk, and Škoda Auto’s Enyaq Coupé RS) as companies pushed to transition into a zero-carbon economy. Other prominent companies that launched metaverse experiences included the following: 
  • Adidas (to launch a number of virtual retail hubs for Adidas' Three-Stripes brand in Roblox)
  • LEGO (to launch Lego Fortnite, a Lego-themed survival crafting game) 
  • Hasbro (to launch a free DLC, allowing players to use Hasbro's NERF blasters to target mobs in Minecraft)
  • NBA (to launch a redux of the arcade-style basketball game NBA Playgrounds, where players can play basketball and earn in-game rewards in Roblox)

• Other notable brands that launched experiences included Marriott, Crocs (Fortnite Creative), Mattel, Universal Music Group (Roblox), Warner Music Group (The Sandbox), and Burberry (Minecraft).

Source: Compiled by SPEEDA EDGE

• Across the year, media and entertainment companies within the communication services industry launched the highest number of experiences (63). 

• In terms of specific platforms, Roblox, Fortnite Creative, The Sandbox, and Minecraft saw QoQ increases in the number of experiences launched on their respective platforms. 

• Notably, Fortnite changed its game lobby UI to more heavily focus on creator-made maps, which follows the company’s other efforts across the year to bolster UGC. This included an updated creator revenue split and updates to the Unreal Editor for Fortnite.

• Despite the sector's funding seeing a steep decline, brands have not shied away from experience launches on Roblox and Fortnite Creative. This is evidenced by GameFam noting that experience launches on Roblox doubled to 240 in 2023 compared with last year, with some virtual world launches receiving millions of visitors.  

• This also corresponds with Fortnite’s record-high player count in November 2023 (100 million users) and Roblox seeing a 23% rise in daily active users (DAUs) across Q1 2023–Q3 2023 compared with the same quarters last year. 

M&As: Aonic acquires VR game developer nDreams; BehaVR merges with FernVR to broaden company strategy

Analyst take

XR: Aonic acquired nDreams in November 2023; it previously held a minority stake in nDreams worth USD 35 million in March 2022. This corresponds with positive sentiment observed for VR game development prospects, with multiple companies raising funds during the quarter. 

BehaVR’s merger with FernVR broadened the company's strategy to VR-based chronic pain management solutions from cognitive-behavioral VR therapy. The latter was previously a focus for BehaVR with its OxfordVR merger in December 2022. 

MEP: Despite the relatively cheap valuations for many MEPs following a downturn of funding in 2023, M&A activity for the sector during the quarter was absent. Companies instead focused on organic growth via platform updates in a bid to regain consumer interest. 

XR

• The sector recorded two M&A activities in November 2023. This included 1) gaming conglomerate Aonic’s acquisition of VR game development studio nDreams for USD 110 million and 2) VR-based mental health startup BehaVR’s merger with virtual chronic pain management company Fern Health to form RealizedCare.

Funding: XR surges while MEP hits rock bottom

Analyst take

XR: The sector's funding levels saw a rebound, backed by AR smart glass manufacturer Rokid’s USD 112 million funding round. While the round was the largest for the year, it pales in comparison to mixed reality headset manufacturer Magic Leap’s USD 500 million round in October 2021, indicating a tempering of investor expectations for the sector. 

MEP: Funding levels dropped to their lowest since we initiated coverage of the sector in Q4 2022. The sector faced numerous headwinds over the year, such as the recent knock-on effects of the former CEO of Binance pleading guilty to violating US anti-money laundering laws. Despite this, native tokens on popular MEPs such as The Sandbox and Decentraland surged over the quarter. This is attributable to reported upcoming regulatory approval for major investment firms in offering spot bitcoin exchange-traded funds, democratizing investor access to cryptocurrency. 

• 19 XR companies raised USD 286 million in funding—a 28% QoQ increase and a 23% YoY decrease. In terms of MEPs, five companies raised USD 28 million in funding—down 39% QoQ and 41% YoY.

• The QoQ rise in XR funding parallels increased headset sales during the holiday season. Notably, Meta’s Quest 2 sales were estimated to outstrip those of Quest 3 in a nearly 3:1 ratio, indicating consumer prioritization of affordability. However, funding across the year remained subdued (USD 1,109 million) compared with 2022 (USD 1,556 million), given the impact of Covid-19 on the sector. 

• Overall levels of MEP funding for 2023 (USD 169 million) remained dismal compared with 2022 (USD 1,829 million). This also coincides with a record number of delistings for cryptocurrencies that year—a staple of many MEPs as a medium of exchange for their virtual economies.

• Despite the lack of funding, data from Coinmarketcap shows that The Sandbox’s native token, SAND, surged 84% over the quarter, with Decentraland’s MANA token also surging 64%. The increase in token prices reflects broader trends in the cryptocurrency market, given a steep rise in Bitcoin and Ethereum market cap over the quarter. While the surge in token value for the MEPs seemed impressive at face value, the tokens were still down 92% and 90%, respectively, from their peaks.

XR

• Funding was heavily concentrated in the headset/display manufacturers segment (~71% of total or USD 204 million) led by AR glass manufacturer Rokid's USD 112 million funding round—the largest individual round recorded for the sector in 2023. 

• Additionally, Rokid, XPANCEO (smart contact lens manufacturer), and Mojo Vision (micro-LED manufacturer for AR glasses) accounted for the majority of funding within the segment. The large funding rounds for these companies signal investor confidence in AR glasses (which are more compact) as opposed to larger, more obtrusive mixed reality headsets.

• Funding for the AR/VR platforms segment dropped 20% QoQ and 41% YoY. Specifically, VR game developers (Thirdverse, MyDearest, Fast Travel Games, AstroBeam, and Squido Studio) contributed ~49% of funding within the segment. This was a notable achievement, given the absence of funding for VR game developers in Q3 2023. 

• Despite the overall decline in funding for the AR/VR platforms segment, the surge in investor interest in VR game developers is attributable to the launch of Quest 3 in October, which provided hardware for higher-fidelity, more immersive gameplay experiences. 

• Funding raised by Atlas (a GenAI platform for the creation of game assets) also signals investor interest in streamlining the VR game development process, with overall game creation costs having ballooned over the past five years.

• Given Quest 3’s full-color passthrough mixed reality capabilities, certain game developers augmented their games with a mixed reality mode (Squingle, Espire 2, GOLF+). These types of experiences could serve to alleviate motion sickness for individuals when using the headset, broadening the consumer base. However, the immersiveness of mixed reality add-ons by game developers is limited to room-scale experiences, which could see their novelty quickly wear off. 

• Funding raised was spread across disruptors focused on the manufacturing of AR glasses, VR game development, and AR work assistance, among other use cases. 

• Total funding rounds for Q4 2023 stood at 19 (18 in Q3 2023 and 25 in Q4 2022). AR/VR platforms recorded nine rounds, followed by five rounds each for the headset/display manufacturers and content segments. 

• Average funding per round was USD 15 million, remaining flat on a YoY basis and increasing 21% QoQ. Meanwhile, overall funding per round for 2023 was slightly lower than that of 2022 (USD 12.1 million vs. USD 13.2 million).

• Early rounds were the most common (7) during the quarter, raising a total of USD 96 million (~34% of total quarterly funding). This contrasted with Q3 2023, where seed rounds were the most prevalent, raising USD 16 million. Similar to 2022, seed rounds were the most common type of round across the year (29 in 2023 vs. 41 in 2022). 

• The quarter also recorded a QoQ increase in the contribution of seed and early funding rounds to total funding (increased to 19% from 6% and 33% from 18%, respectively). Across the year, contribution to total funding from early- and growth-stage funding rose. 

MEP

• MEP funding continued to decline to its lowest level (USD 28.4 million) since our coverage of the sector in Q4 2022. The fall in MEP funding (39% QoQ, 41% YoY) was backed by a fall in the number of funding rounds (6 vs. 9 in Q3 2023) and a drop in funding per round (USD 4.7 million vs. USD 5.1 million).

• Social gaming platforms dominated MEP funding (~79% of total), supported by Animoca Brands’ USD 11.9 million funding round. The round is notable given its focus on building the Mocaverse, a digital identity and point system for Web3 gaming, representing product diversification from its “The Sandbox” MEP. 

• The round also contributed to the “other” funding category, making up ~43% of total funding, given the company’s secondary market raise. 

Notable funding rounds and investors 

XR

• The sector’s largest funding round for the quarter and across the year was Rokid’s USD 112 million round, propelling the company to the heralded unicorn status. Mojo Vision’s USD 44 million funding round was its second round this year—a turnaround for the company, following a halt in smart contact lens development and 75% of its employees being laid off in January 2023.

• Other disruptors that raised more than USD 10 million in funding included smart contact lens developer XPANCEO (USD 40 million), AR work instruction platform Squint and VR collaboration platform Hololight (USD 13 million each), and AR asset creation platform Threedium (USD 11 million). 

• Notable investor participation included Sequoia and Menlo Ventures (participated in Squint’s funding round), Khosla Ventures, and New Enterprise Associates (participated in Mojo Vision’s funding round). 

MEP

• Notable investors for the sector’s handful of funding rounds included Animoca Brands (invested in Upland’s funding round) and 1kx, Shima Capital, and Hashed (invested in Yee-Haw Monster Trucks’ funding round). 

• The investment in Upland highlights Animoca Brand’s unique positioning in the sector, given its management of The Sandbox MEP while investing in a plethora of portfolio companies (400+ Web3 investments made to date). 

Summary of highest-funded startups added in Q4 2023

• 21 new XR startups and two MEP startups were added to our coverage during the quarter. Given below are five of the highest funded XR startups added during the quarter:

Appendices

Appendix 1

Summary of XR product updates in Q4 2023

Summary of MEP product updates in Q4 2023

Appendix 2

Summary of XR partnerships in Q4 2023

Summary of MEP experiences launched in Q4 2023

Appendix 3

Summary of XR funding rounds in Q4 2023