There are a lot of misconceptions about the Metaverse and Web3. Some see it as synonymous with Facebook/Meta. Others think that Metaverse is VR, crypto, or NFTs. In reality, the term Metaverse creates confusion as it’s a bit amorphous and is still being defined.
Generally speaking, when people talk about the Metaverse they’re talking about the building blocks to the Metaverse. Immersive tech, 3D content, virtual worlds/games that offer social interaction with other players, web3 (in some cases).
Can we agree on a definition for the Metaverse?
I covered various definitions previously on VC Cafe in “A very short peek into the Metaverse“. The term metaverse doesn’t describe one specific technology, but rather the way we interact with technology.
To make sure we’re all on the same page, below are a few definitions from leaders in the space:
A real-time 3D social medium where people can create and engage in shared experiences as equal participants in an economy with societal impact.
Tim Sweeney, CEO of Epic Games:
Everything which is a website now will become a “metaverse destination” before 2030. Fully digital worlds, not unlike what’s seen in video games, that feel like “places you could live and inhabit.”
John Riccitiello, CEO of Unity
Destinations that are “halfway” in the sense that they alter the real world “in a very powerful way.”
and experiences that “are just a little bit of a layer atop today’s world.”
A persistent, infinitely-scaling virtual space with its own economy and identity system.
Jonathan Lai, General Partner, A16Z Gaming fund
Let’s define the building blocks of the Metaverse
At Remagine Ventures, the venture capital fund I co-founded with my partner Kevin Baxpehler, we focus on gaming (studios and infransctucture) and Metaverse tech, and we define the Metaverse as layers of technology that enable the aforementioned ‘immersive, 3D, consumer experiences’. We shared our thoughts earlier in 2022 with the first landscape of the Israeli startups building the Metaverse.
A simplified view would look something like this:
Meta (fka Facebook), also presented a simplified view of 3 main Metaverse layers:
- Foundations — hardware, protocols and standards
- The foundations of the building include the hardware — phones, VR headsets, AR glasses, etc.— and the technical protocols and standards that ensure the various technologies can interact, or be ‘interoperable’ in the jargon.
- Ground floor — platforms and networks
- The ground floor of the metaverse will be built on top of these interoperable protocols and standards. This is the intermediary layer where platforms, institutions and other networks will create the universe of products that make up the 3D worlds of the metaverse.
- First floor — experiences
- The first floor of the metaverse is where you’ll access it as a user, and where the vast array of experiences will be available. Games, training, conference rooms, fashion, social immersive interactions.
There is no shortage of examples for the layers of the Metaverse. Below the 10 layers of the Metaverse according to McKinsey (more about their recent report below).
Another important distinction when defining the Metaverse is the OPEN (and often decentralised) metaverse, and CLOSED virtual worlds. The latter, today, consists mainly of games as an entry point, and there’s little interoperability. i.e. You can’t buy a virtual good on Fortnite or Decentraland and use it in a different game. The Open Metaverse is described as the New Internet, but it’s yet to be built yet. The Open Metaverse is not controlled by a single company like Meta or Epic. New initiatives like the Metaverse Standards Forum, which was announced last week, aim to foster cooperation and collaboration with the purpose of
Highlights from McKinsey’s report – How significant could the metaverse impact be?
Two weeks ago McKinsey released a report called ‘Value Creation in the Metaverse’.
A few highlights below:
- In 2021 VC/PE funding into the Metaverse reached ~$13bn
- By 2030 we estimate the value of the Metaverse could reach ~$5tn
- In 2022 already total investments in to the space are more than double of the 2021 figure at ~$120bn
- 59% of consumers are excited about transitioning their everyday activities in to the metaverse
- 57% of metaverse-aware companies say they are adopters
How do they justify such a large impact? according to McKinsey, there are a number of areas of opportunity across consumer and enterprise use cases. Of all the potential drivers of the economic impact of the metaverse, e-commerce is the largest.
We expect the economic value of the metaverse to rise exponentially, driven by several factors: its appeal spans genders, geographies, and generations; consumers are ready to spend on digital assets (and are doing so already); they are open to adopting new technologies; companies are investing heavily in the development of metaverse infrastructure; and brands experimenting in the metaverse are reporting positive consumer feedback. This adds up to substantial potential economic value for the metaverse. While estimates vary widely, we forecast it may generate up to $5 trillion by 2030
Value Creation in the Metaverse, McKinsey June 2022
What’s driving the growth of these technologies is not some futuristic prediction, but an observation of today’s user behaviour combined with tech advancements:
More than $120 billion has flowed into the metaverse space already in 2022—more than double the $57 million of 2021
As well as adoption beyond the gaming industry (including construction, education, health, ect)
McKinsey also published the results of a 1,000 person survey, consisting of people aged 13-70 and claims to have debunked several myths about the Metaverse. I recommend taking a look at “Probing reality and myth in the metaverse“. You can see some of the findings below.
Follow the money: what does A16Z’s new $600M gaming fund look for?
Last week, James Gwertzman, a GP in Andreessen Horowitz new $600M Games Fund I, broke down the areas of interest for the firm in “Unlocking the Metaverse: New Opportunities in Games Infrastructure”.
At the core of it, A16Z sees the biggest potential in creating ‘interoperability’ between games and virtual worlds, and ‘compostability’ – the idea that you could combine, recycle and recombine the basic building blocks.
To get a sense of the breadth of opportunities that can be attractive for gaming (content and infrastructure) entrepreneurs and metaverse startups, just take a look at the A16Z list below.
- The technical layer:
- Interoperability and compostability
- Single-user identity, in which a player can move between virtual worlds or games with a single consistent identity
- Universal content formats, so content can be shared between engines
- Cloud-based content storage, so that the content needed for one game can be located and accessed by others
- Shared payment mechanisms, so metaverse owners have financial incentives to allow assets to pass between metaverses
- Standardized functionality, so a metaverse can know how a given item is meant to be used
- Negotiated look and feel, so content assets can transform their look-and-feel to match the universe they are entering
- Improved multiplayer game systems
- Serverless multiplayer
- Advanced matchmaking, to help players quickly find other players of similar level to play against, including AI tools to help determine player skill and ranking
- Anti-toxicity and anti-harassment tools, to make play safe for all players, especially children
- Guilds or clans, to help players band together with other players, either to compete against other groups
- Interoperability and compostability
- The creative layer:
- AI assisted content creation:
- A new wave of AI-assisted tools are coming, however, which will be able to help artists and non-artists alike create content more quickly, and at a higher quality, driving down the cost of content production, and democratizing the task of game production.
- I previously covered on VC Cafe the state of ‘Creative Automation’
- Cloud-based asset management, build, and release systems –
- Most of the 3D content used in these games/experiences is hard coded and locked. To make changes, often means releasing a patch or new version. Why can’t the assets be centrally managed in the cloud? (shout out to our portfolio company Echo3D who’s working on this)
- Improved collaboration tools
- By default, both the Unity and Unreal level editors only support a single designer editing a level at a time. This slows down the creative process, since teams cannot work together in parallel on a single world. Solving the collaboration layer in real time will unlock many opportunities for Metaverse developers.
- AI assisted content creation:
- The experience layer: the tools and services to actually operate a Metaverse, focusing on two key areas:
- LiveOps services
- This includes: live events calendar, personalization, messaging, notification authoring tools, testing
- In-game commerce – aka Shopify for the metaverse
- This includes: item catalogs, app store interfaces, offers and promotions management, user generated virtual goods (i.e. skins) that can be sold to other players, advanced economy systems and integration with blockchain and web3.
- LiveOps services
A growing ecosystem is forming to tackle these opportunities
It’s not just the involvement of large companies like Meta, Google, Microsoft, Nvidia, etc that is advancing the vision of the Metaverse. There is also a growing ecosystem of startups.
A trend report published by Newzoo on June 28 2022, features the startup landscape of metaverse, NFTs, pay-to-earn, and blockchain gaming. I love landscapes as they help organise the categories needed to define the vertical.
(Source: Newzoo)
You may also find interesting this list of 40 startups and corporates shaping the Metaverse space in 2022.
For example, Japanese startup 2HL uses a wearable device to enable users to create a virtual ‘body clone’ and feel pain with touch.
Tail winds for Metaverse and Web3
The crypto crash, the lack of transparency in some of the token sales/promotion and the asset bubbles that existed everywhere, including in digital collectibles and NFTs have recently put a negative spin on the space as a whole. Not suprisingly perhaps, sales volume in OpenSea has fallen 75% since May, and looks set to scrape the lowest levels since July 2021, according to Bloomberg.
Tyler Cowen’s interview of Marc Andreessen, who’s firm recently raised a $4.5 billion crypto fund, went particularly viral as Marc struggled to articulate the use case for Web3. As a firm that prides itself in being a media company, the backlash/gloating was particularly bad.
The positive aspect of this, is that it’s generating a debate and forcing the industry to mature. It forces the founders and investors to understand where the technology can play a pivotal role in shifting control from the big tech companies to the user, and where it needs to improve, such as the negative environmental impact of mining etc.
A more optimistic view comes form Chris Dixon in “Toys, Secrets and Cycles“, claiming that each economic downturn resulted in a new tech trend.
From my vantage point, today’s negative financial sentiment most closely resembles 2008. If we are headed for a prolonged downturn, there are some tactical lessons from the 2008 era, namely preserving capital and staying focused on your long-term vision. The strategic lesson is to keep your eyes squarely focused on the product cycle. Things that look interesting to smart people usually do so because they are rich with product possibilities. These possibilities eventually become reality. Toys become must-have tools. Weekend hobbies become mainstream activities. Cynics sound smart but optimists build the future.
Chris Dixon
Where do we go from here in Metaverse and Web3 investing
It’s going to take time for the technology to reach a stage that is 1) widely distributed 2) ready for prime time. Before celebrating the Metaverse as the next big thing or discard it as a fad, we need to give it time to develop.
As investors, we’re looking at the increasing time we’re spending being online, and the implications it has on our habits: how we consume, learn, socialise, date, work out, collaborate, etc. We’re excited to partner with early stage founders who see the future in the same way, and are working on the technologies that will help bring this vision forward.
James Gwertzman ended his post with “There has truly never been a better time to be a creator”, and I couldn’t agree more. The creator economy, a topic I’ve covered extensively on VC Cafe, will be a key part of this new Internet. From tools for content creation, distribution and monetisation, to the ability to transact directly with their community, we’re just getting started.
I’ll finish with a quote from Fred Wilson, on the importance of positivity:
“There are people out there declaring tech is dead, web3 is over, and cheering on the fall from grace. It is best to ignore all of that, focus on what you are building, and find some wins for the team, and for yourself.”
Fred Wilson, Union Square Ventures – “Staying Positive“
The current downturn can represent a challenge for companies that are already in the market. But it can also present an opportunity for new founders entering the space. In many ways, now is the best time to invest in this space. At Remagine Ventures, we are open for business, so don’t hesitate to get in touch if we can help.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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