The Metaverse Investment Drivers (I)

Introduction

Although the definition remains undefined – and will probably remain so for some time – the conventional wisdom is that the metaverse is the next iteration of the Internet, where it becomes something we are immersed in, rather than something we just see. But let’s face it, the purest metaverse doesn’t exist, and it’s not the first neither the last time I’ll repeat that.

What is clear, is that interest in the metaverse has increased exponentially since mid-2021, despite it not being a new concept. Sorry Mark, you didn’t invent it… Global searches for “metaverse” on Google skyrocketed last year, as you can see in the above Google Trends graph.

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Online gaming platform, “considered” a metaverse, Roblox brushed 55 million daily active users (DAUs) in Q1 2022, according to its February 2022 financials report.

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Roblox’s Daily active users (DAU) . Source : Statista

Meta invested more than $10B in its Reality Labs division, and despite reporting losses of almost $3B in the first Q1 of 2022, it continues to bet on this sector and manufactures hardware related to the metaverse, the Quest 2 VR virtual reality goggles. Microsoft announced in early 2022 the purchase of Activision-Blizzard, worth $69 billion, it could materialize by the end of the year as it is under scrutiny for possible monopolistic practices, it would be one of the bases to lead the “construction” of the metaverse.

Major fashion brands such as Nike and Gucci have allied with Roblox as advertisers and partners. Fortnite has over 20 million daily active users (DAU), has hosted concerts (over 27 million unique players attended a Travis Scott performance last April 2021).

Virtual real estate has also been in the spotlight: an anonymous user reportedly paid $450,000 to buy a parcel of virtual land in The Sandbox, next to Snoop Dogg’s virtual residence, “Snoopverse”. Institutional investors cover a wide range, including brands such as Adidas, Samsung, HSBC, are looking for their headquarters in the metaverse. On the other hand, more common services in the real estate sector are being virtualized, such as virtual real estate companies (Republic Realm and Metaverse Group) or support services such as virtual architecture and consulting firms.

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Monthly revenue of land sales. Source : Statista

However, the current non-existent interoperability between metaverse platforms, such as Decentraland or The Sandbox, leads to the fact that this race is not only for the mass adoption of the metaverse in the coming years, but also the adoption of the specific platform on which the virtual terrain is purchased.

Another point not to forget is that this growing interest has also made it difficult to separate from reality. This has always been true around any differentiating technological innovation. We go through periods of great excitement about what is possible and its disruptive potential, and through others of denial and disappointment, but in turn stabilization and rationalization. It is hard not to see similarities with the early, tumultuous days of the Internet; while the collapse of the first dotcom boom led to the demise of dozens of companies, the Internet only went mainstream. Meanwhile, while there may be consolidation in the future, the list of platforms in the metaverse continues to grow and diversify.

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Metaverse Market Map – By Jon Radoff – Source : Flickr

Investments in figures

This year, companies ranging from large technology organizations, start-ups, venture capital and private equity firms have already earmarked more than $120 billion to tap into the metaverse, more than double the $57 billion invested in 2021, according to consulting firm McKinsey & Company. And even though investment in new technologies does not necessarily guarantee its ultimate success, it highlights the interest of companies and institutions in being part of this new opportunity, and after studying it they see it as interesting. For example, in June 2022, venture capital giant Andreessen Horowitz (a16z) has launched its inaugural gaming fund with plans to invest $600 million in gaming studios, gaming-related consumer applications and infrastructure. Andreessen, clearly sees that, in the long term, “gaming infrastructure and technologies will be the key elements of the Metaverse, an opportunity that dwarfs the current $300 billion gaming industry itself.”

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Value of Metaverse-Related invetments – Source: McKinsey

Total Venture Capitals and Private Equity investment in the metaverse is $6 billion to $8 billion so far this year, and especially noteworthy is the M&A activity among companies, driven to the fact that the metaverse has emerged, for the most part, as a pure digital play for many companies, exemplified by Microsoft’s planned purchase of Activision-Blizzard for some $69 billion.

Meanwhile, according to McKinsey report, moving away from the world of video games, the sectors leading the way in metaverse adoption also plan to devote a significant portion of their digital investment budgets to the metaverse, with energy (18%), automotive, machinery and assembly (17%), high-tech (17%), tourism (15%), and media and entertainment (15%) among those leading the way in allocating a portion of digital budget to metaverse-related activity over the next three to five years.

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Sectors leading Metaverse Adoption – Source: McKinsey

The overall investment landscape is dominated by three categories of investors:

  • Large technology companies such as Meta, Microsoft, Nvidia, Apple and Alphabet, among others, are taking deliberate steps to shape the metaverse. The main cases are the mega-mediatic name change of Facebook to Meta, Microsoft’s purchase moves, Nvidia’s Omniverse in the industrial sector or Apple’s plans to develop AR glasses by 2023. But it is worth noting that these large companies not only invest in their internal development, but also collaborate to create an open and interoperable Metaverse standard. To this end, they have created the Metaverse Standards Forum, whose membership is free and open to any company or university. The forum’s activities began in July 2022. Founding members also include Sweden’s IKEA, Huawei and Epic Games. 
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  • Venture Capital (Venture Capital and Private Equity) is investing heavily in this space. For example, NFT marketplace OpenSea has raised $300 million at a $13.3 billion valuation in a Series C funding round led by Paradigm and Coatue, metaverse technology company Improbable raised $150 million led by Andreessen Horowitz and SoftBank, Yuga Labs (creators of NFTs Bored Ape Yacht Club project) raised $450 million at a valuation of $4. billion to build its Otherside virtual world alongside Improbable, The Sandbox received $93 million from SoftBank, and Niantic received $300 million from Coatue.
  • Companies and brands outside of technology are committing resources to efforts to get ahead. Disney CEO Bob Chapek appointed executive Mike White to lead the company’s metaverse strategy. While LEGO, the mythical building block manufacturer, teamed up with Epic Games (creators of Fortnite) with the purpose of creating a virtual themed world, or what amounts to the same, a metaverse focused on children and that will seek to be respectful of the age group it is targeting. Epic Games also collaborated with luxury brand Balenciaga, which has created a division dedicated to the metaverse and launched its latest collection within a virtual space. There is a view that certain newer trends and technological advances, such as e-commerce, smart devices, and social media, are beginning to reach their tipping point and require change to remain competitive. In response, brands are looking to the metaverse as an innovative way to deliver value and differentiation through the growing number of use cases.

Conclusion

What does this mean on a social level? That the idea of connecting virtually has been decades in the “oven” and now becoming more real:

  • by October 2021, Facebook had nearly three billion users,
  •  video games and eSports attracted a quarter of a billion users
  • the crypto market currently has 220 million users. DeFi 3.45 million, Blockchain games 2.36 million, more than 500,000 users of NFT platforms and approximately 50,000 users participating in virtual worlds of the Web3.

Many of the most well-known “reality” companies are creating a presence in the metaverse to service those potential hundreds of billions of users.

Like the current version of the Internet, the metaverse is expected to exhibit significant network and synergy effects, meaning that the value of each individual feature of the metaverse (such as ownership of digital assets thanks to NFTs) will increase with the number of use cases and offerings to consumers. This means that a fully integrated, end-to-end ecosystem must be built for the metaverse to achieve its full value proposition.

What is undeniable is that the potential it has is enormous and it is becoming increasingly clear, otherwise large companies and investment funds, as we do in Belobaba Fund, would not see this sector as a pillar of a promising future. I will continue in a future article on this subject.

Of course, and as I warned before, this is very premature, the real metaverse is yet to come!

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