Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: The potential of virtual reality (or ‘VR’) is almost limitless, with its application likely to impact almost all industries over time. Improving technology and falling costs have now made the product commercially viable. When applied practically, VR can increase efficiency (as well as pleasure) for its users and also for those delivering it. Around 3m VR headset units are likely to be sold in 2016, but this figure could rise to an annual rate of 50m within a decade. By this time, the industry may be worth at least $80bn. Venture capital is committing large sums of money to VR (over $3.5bn in the last two years, on some estimates), but the lowest risk way of currently playing the theme may be through established consumer technology businesses and well-positioned software providers. Beneficiaries could include Facebook, Google, Microsoft, NVIDIA and ARM.

When the Oculus Rift virtual reality headset went on sale on 28 March, it sold out within two hours. Try and buy a headset now and you will be waiting until August, unless you would prefer to purchase one on eBay for around $1000, about $400 more than its current list price. Similar levels of excitement characterise the current launch of HTC’s Vive headset. The author of your piece does not own such a headset, but has been lucky enough to trial both versions on several occasions in the last few months – and has been generally impressed. Virtual reality is becoming real. Product launches help legitimise the concept and while not without its challenges, virtual reality has a revolutionary potential, which could disrupt many established business models. From games to therapeutic medicine and from teaching to architecture, almost no industry will remain untouched.

Virtual reality can, in many ways, be thought of as the next era of computing. After the PC and the smartphone, next comes VR. The user is placed at the intersection of the analogue and digital worlds. Equipped with a special headset and potentially other feedback devices such as gloves, users are able directly to interact with digital information. Thought of another way, VR provides a life-like, immersive experience in a digital world.

The technology that enables VR to work has been around for many years and the term for even longer. Indeed, it was first used by French critic Antonin Artaud in 1938 with regard to avant-garde theatre. A Harvard University project called ‘Swords Of Damocles’ initially trailed what we now consider to be VR in 1960 and variations of the technology have been used to train fighter pilots for over three decades. VR first gained more mainstream prominence in the early 1990s with the launch of various products by Sega (VR-1) and Nintendo (Virtual Boy) as well as trials by Apple, although its success was constrained by the high cost of the technology, the lack of computational power and emerging interest in the Internet. Two main related factors, however, are now making the virtual real, and hence VR commercially viable. Technology has markedly improved and the cost of the underlying components used has fallen to commercially viable levels.

Three elements are required in order for VR to work: a PC, game console or smartphone to run applications; a headset with a display (or a smartphone screen); and a set of input sensors. Users look into VR goggle displays at close range as if looking into a kaleidoscopic tube. Displays used in the left- and right-eye goggle sockets tend to be very high resolution with high refresh rates and, critically, need to be perfectly synchronised. The main sensors mounted on VR goggles include an acceleration sensor, an angular velocity sensor, and a geomagnetic sensor. Others include proximity sensors, ambient light sensors, image sensors, and inertial sensors. The acceleration sensor supplies information about orientation and movement; the angular velocity sensor detects inclination and rotation; and the geomagnetic sensor determines compass direction and detects changes in the direction the user faces. Combined, the key characteristics of VR are that users truly feel as if they have placed themselves in a virtual space. Viewing high-resolution computer graphics in 3D, users are enveloped in a sense of reality generally known as immersion or absorption.

The combination of such technologies is powerful and their application is potentially limitless. The infrastructure and devices that underlie VR permit for a market in content and software for virtual spaces and information. Against this background, it is easy to conceive of a scenario of creative destruction in which merchandise and experiences in existing and inconvenient reality are swiftly replaced.

Early content is likely to be heavily tilted towards games and then media. 30 games were available when the Oculus headset launched (and another 11 have already been announced), while HTC says it has around 50 available for the Vive headset, a figure it expects to grow to at least 100. These games typically retail for between $5 and $60. Already, first-class customers travelling on Qantas can don VR headsets to play games and ‘experience virtually’ their destinations before they arrive. Soon, they may be able to watch films too. Businesses including Disney, Comcast, Time Warner and ProSieben have all made public commitments to developing in-house content for VR. Elsewhere, a variety of businesses have talked about the potential of VR to broaden their audience for witnessing sports events, attending concerts or visiting amusement parks. With regard to the latter, US theme park operator Six Flags has already launched some VR rollercoasters. Your author trialled a variation of this experience and felt as scared as he did last time he sat on a real one!

The above applications of VR are, however, just the tip of the iceberg. Unsurprisingly, the adult entertainment industry has been vocal about the opportunity. However, the revolutionary potential may well be felt most commercially and practically. VR promises (at least) three things: increased efficiency (and/or pleasure); lower costs; and fewer externalities (for example, less pollution). With regard to retail, we are currently forced to make passive decisions based on limited information. Imagine if you could know what your hotel room would feel like before you arrived there, or which table you could get in a restaurant, how much legroom you might have on a plane and so on. Alternatively, there may be less need to attend conferences if you could virtually be there. How architects conceive of buildings may be markedly different. First-aid workers and firemen could receive markedly better and more realistic training. VR can also help overcome phobias and anxieties in some circumstances and variants have been used by the US Navy for more than 20 years. The list goes on.

Against this background, estimates for the size of the VR market tend to point to a large market with significant growth potential. Goldman Sachs puts the value of the market at $80bn on its base case scenario by 2025 and $180bn on its upside case, while Citi is more optimistic, suggesting the market could reach $700bn in value within a decade. By this stage, annual VR headset unit sales may be around 50m, compared to an estimated 3m unit opportunity in 2016. In our view, the above calculations need to be treated with a degree of caution since not all distinguish between hardware and software, while others also include a variant of VR called Artificial Reality (or AR – which is best thought of as a representation of the real world with some virtual/ digital elements). Nonetheless, the potential is significant.

However, there are some significant limitations to how quickly the market for VR develops, both practical and ethical. In the near-term, price may be the biggest restrictive factor. For VR, the cost of the headset is currently around $500, but it is also necessary to connect this to a modern top-of-the-range PC. This is because a high-performance graphics card is necessary to process the computer graphics projected onto the VR headset display. Chip-manufacturer NVIDIA estimates that less than 1% of installed PCs are currently powerful enough. Upgrading a graphics card could cost up to $1000. The danger of using inferior technology is either that the experience is not sufficiently immersive and users are hence deterred from further use and/or they suffer from some form of ‘VR sicknesses’ (similar to motion sickness) owing to the poor latency of images. Even assuming consumers have a powerful enough PC, current headsets weigh in at around 450g and some have complained of neck fatigue and other discomfort after use.

Other issues may also need to be addressed. VR should not be thought of as being able to solve all ‘real world’ problems. Whether (too) regular users become addicted or desensitised remains to be seen. The impact of VR on interpersonal relationships is also unclear. It is hard, for example, to imagine families sitting together on a sofa all effectively siloed in their own virtual worlds. Importantly though, VR needs to be kept in context. Some of these concerns were also voiced at the advent of television and today, the average person in the western world spends around 30 hours a week watching TV with no major negative societal impact. Moreover, whereas the medium of film has existed for around 130 years, TV for over 90 and video console games for more than 40, the lifespan of VR (in its current format) is still less than five years. In other words, VR remains a very immature industry, which will continue to evolve significantly in the coming years.

Such an evolution will inevitably create a series of winners and losers. The economic effects of VR will likely extend into two separate markets, one for hardware and software, and the other for content and services. Some $3.5bn has been committed to over 200 VR/AR venture capital investments in the last two years (according to Goldman Sachs), but the lowest risk way of gaining exposure may be via the major established consumer technology companies.

On the hardware side, Facebook (which purchased Oculus for $2bn in 2014), seems to have established a current lead, although a number of other players are highly active and visible including HTC (with its Vive device), Microsoft (with Hololens), Google (Cardboard), Samsung (Gear) and Sony (Morpheus). Hardware, of course, is no good without the effective functioning of underlying software. In this sphere, NVIDIA, as the market leader in graphics processing units (with an estimated 80% market share) looks well-positioned. Its share price, however, has increased by over 100% in the last year. An alternative means of gaining exposure may be via ARM, as the leading provider of semi-conductor IP. Anecdotally, the company has been increasing notably its R&D efforts in VR. Elsewhere, it behoves nearly all content providers and general retailers to be considering both the opportunity and threat posed by VR. It won’t be tomorrow, but soon, your next holiday may be experienced from the comfort of your own sofa and from behind a VR headset…

Alexander Gunz, Fund Manager, Heptagon Capital


The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

The document is protected by copyright. The use of any trademarks and logos displayed in the document without Heptagon Capital LLP’s prior written consent is strictly prohibited. Information in the document must not be published or redistributed without Heptagon Capital LLP’s prior written consent. 

Heptagon Capital LLP, 63 Brook Street, Mayfair, London W1K 4HS
tel +44 20 7070 1800
email [email protected] 

Partnership No: OC307355 Registered in England and Wales Authorised & Regulated by the Financial Conduct Authority 

Heptagon Capital Limited is licenced to conduct investment services by the Malta Financial Services Authority.

Related Insights

Winds of change: offshore edition
  • Heptagon Theme Pieces

Winds of change: offshore edition

Quantum computing: on the edge of the quantum age
  • Heptagon Theme Pieces

Quantum computing: on the edge of the quantum age

Your questions on AI (answered by a human)
  • Heptagon Theme Pieces

Your questions on AI (answered by a human)


Sign up to our monthly email newsletter for the latest fund updates, webcasts and insights.