Virtual reality isn't new, but it's certainly hot: $5.3 billion has been invested in VR and augmented reality startups since the start of 2010, and $1.1 billion of that came in the first few months of 2016 alone. While much of that money ($800 million) went to the secretive Google-backed company Magic Leap, it's clear that investors are betting on a future filled with oversized goggles.

At the Virtual Reality Summit in New York Monday, Nizar Tarhuni, senior analyst at market forecasting firm PitchBook, discussed what investors look for before deciding whether to invest in VR and AR companies. If you're in the VR space or looking to get involved, here are three things Tarhuni suggests you keep in mind when trying to secure funding.

1. No more new headsets, people. Tarhuni says that the biggest need in the VR industry isn't the hardware itself. "It's interesting," he says. "Look at VR--what's going to drive it? We've got the headsets, we've got the technology, but the content is what's going to push it forward." Because of that, many of the entrepreneurs entering the industry aren't those with tech backgrounds, but people from the worlds of gaming, film, and media, who are already capable storytellers and know how to entertain. For them, Tarhuni says, virtual reality is the logical next medium--a frontier that can take their content to the next level.

2. Create a product that will always be needed. "A lot of the VCs that we talk to," Tarhuni says, "want to make sure they're investing in something that's agnostic to which part of VR wins. They need VR as a whole to succeed." A services startup, for example, could become obsolete if companies figure out how to be self-sufficient; a hardware company might tank if its technology turns out to be a fad. Instead, Tarhuni says, VCs look toward companies like Pixvana, a Seattle startup that scored $6 million in funding in December. The company stitches together video to be used by virtual reality platforms--the kind of service that will always be needed, so long as VR exists.

3. Be prepared to pivot. Investors want to know that you have a backup plan if your main vision doesn't materialize. Tarhuni mentions a startup focused on creating a psychedelic VR experience to play along with music. Should people get bored of trippy colors and dancing cartoons, though, the team had build 70 percent of the infrastructure needed to spin off into a different sphere, like gaming--and that caught VCs' attention. "While you always want to be an entrepreneur who's focused on nailing what your mission is and what your passion is," Tarhuni says, "making sure you can move in different ways helps investors in today's environment."

Published on: Apr 12, 2016