VCs Will Spend Billions More To Make The Metaverse A Reality

Almost three decades since sci-fi author Neal Stephenson coined the phrase, the metaverse is moving closer to reality. But despite well over $10 billion in venture funding going toward the concept already this year and high-profile bets by Big Tech players, those in the industry say much more capital is poised to flow toward startups working to bring truly interactive virtual worlds to life.

What is the metaverse?

While still a fairly nebulous concept, the metaverse is, broadly speaking, viewed by many as the next phase of the internet, where online experiences will combine to form something of an immersive virtual experience. It combines virtual reality, augmented reality, gaming, and other digital social experiences into 3D virtual worlds.

That idea is so alluring that both Big Tech rivals—most notably, Facebook, which last month renamed itself Meta and said it was going all-in on the metaverse—and startups are betting their destinies on the concept.

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Meta CEO Mark Zuckerberg even said during the company’s recent conference that he believes the metaverse is “the next chapter for the Internet.”

The concept of the metaverse is that users will be able to interact with others, shop, play games, and attend events virtually.

At least, that’s what tech companies are betting on. With the increasing popularity of crypto, non-fungible tokens (NFTs), and online gaming, both startups and tech giants alike are preparing for a more immersive digital world.

Companies related to the metaverse (tagged under gaming, online games, virtual worlds, and augmented reality) have raised nearly $10.4 billion so far this year across 612 deals, Crunchbase data shows, with Epic Games’ $1 billion funding round in April 2021 leading the pack. 

That’s a significant jump from the $5.9 billion companies tagged in those categories raised last year, and by far the most amount raised for the broader “metaverse category” in a single year in the last decade. 

Funding this year broadly breaks down into four big categories:

• Gaming: about $7.5 billion (382 rounds)
• Online Games: about $2.5 billion (110 rounds)
• Augmented Reality: about $2.1 billion (176 rounds)
• Virtual world: $62.8 million (9 rounds)

Keep in mind when looking at this breakdown that some companies are tagged under multiple categories. The gaming category brought in the bulk of the funding, which makes sense given it’s the broadest category. And companies in the gaming sphere are already doing a lot of what the metaverse would encompass, such as virtual experiences and digital commerce.

Where will we see more funding?

Funding to metaverse-related categories so far is just the beginning. There will need to be investment in many other areas to build out the metaverse. 

The core categories poised for investment for the metaverse are hardware, networking, computing power, virtual platforms, payments, and content and assets, according to Jed Strong, CEO of gaming payments company Tiv. It’s also not something that will fully be here anytime soon, according to Strong. 

The metaverse when fully realized will be something like a massive-scale interoperable network of real-time 3D worlds, according to Strong. 

“It’s going to be a very, very gradual process,” he said. “And I think there is something, a little bit of tension, because the market is so hot.”

Crypto and blockchain technology have received the most attention from investors, according to Strong, with firms launching dedicated crypto funds. Crypto and blockchain technology enables all types of payments and commerce within the metaverse.

Blockchain technology could also help users be able to have a consistent identity throughout the metaverse. For example, a person could have a consistent identity as they travel from the Roblox universe into a Fortnite game.

New ways of conducting commerce will also likely be a big part of the metaverse, according to Brian Biggott, co-founder of social metaverse startup Octi. Companies can use AR technology to make buying and selling in the metaverse more of an immersive, social experience. For example, rather than tracking what websites a user visits to send targeted ads, companies could know users like something based on what they’re building in a virtual world.

“Rightfully so, there’s a lot of investment around crypto and blockchain,” Strong said. “I think what I’m interested to see, in what seems to have less attention, is how we improve those persistent real time connections and high-bandwidth, low-latency experiences. Because right now we’re very much … in the ‘crawl phase’ of universal scaled virtual experiences for an unlimited number of users.”

For that reason, there will also need to be significant investment in networking and computing power so that thousands of users can simultaneously experience a virtual world in real-time. 

Platforms could lead the way in that, Strong said.

​​Investor Matthew Ball, co-founder of Ball Metaverse Research Partners, also wrote in an essay that “at a foundational level, the technology simply does not yet exist for there to be hundreds, let alone millions of people participating in a shared synchronous experience.”

Funding to metaverse startups so far

Gaming has received the bulk of venture funding related to the metaverse. That makes sense given the already digital, interactive nature of gaming makes it a natural entry point into the virtual world. 

Among the companies that have received funding are video game engine Mythical Games, decentralized gaming platform The Sandbox, and NFT game Genopets. 

Companies are also playing up their focus on the metaverse in their own branding—150 companies in the Crunchbase database mention the metaverse in their company description, with 43 of them founded in 2021. 

Those companies within the Crunchbase database that mention “metaverse” in their description raised nearly $96 million this year, mostly from pre-seed, seed, and Series A funding rounds. 

Some recent startups that describe themselves as related to the metaverse that have raised funding include:

• Upland ($18 million Series A for a blockchain-based NFT metaverse)
• Inworld AI ($7 million seed round for virtual characters)
• GuildFi ($6 million seed round for a gaming platform)

While a full-on metaverse where users can jump from one universe to the next doesn’t exist yet, aspects of the metaverse have already become popular. 

Augmented reality has been around for years, non-fungible tokens became mainstream this year, and people are spending record amounts of time gaming. 

Roblox, the popular gaming platform that went public earlier this year is in a way an early metaverse, as users can create virtual worlds and build their own games that others can play in. Chipotle announced its first virtual restaurant within Roblox last month, and the rapper Lil Nas X even held a concert within Roblox last year. 

“That’s why there’s so much opportunity here because there are so many layers of the stack that need to be invested in to make the metaverse a reality,” Strong said.

Methodology

For the purposes of this story, we looked at funding for venture-backed startups that had at least one of the following industry tags in the Crunchbase database: virtual world, gaming, online games and augmented reality. 

For startups that explicitly mentioned metaverse in their description, we included both venture-backed and non-venture backed companies in our count. 

Illustration: Dom Guzman