Metaverse startups fizzling out as funding winter threatens future

On May 27, former Twitter India managing director Manish Maheshwari, left his less than six-month-old metaverse-themed startup. Maheshwari, who launched the company, called Invact Metaversity, in February this year, had differences with his co-founder and investors about the path the startup would take.

But while the Invact’s story has been widely publicized, the funding winter in the startup space is catching up with metaverse startups faster than most others. Mint spoke to another Delhi-based founder who left his metaverse-themed firm last month after differences of opinion with his co-founder and chief investor. In that case, the metaverse firm was made part of a bigger events platform, according to the founder.

Metaverse firms, which have been looking to capitalize on the web3 craze since October last year, have started losing investors’ mindspace. According to founders, venture capital firms and analysts, the industry is starting to look at these startups as risky investments, and don’t want to invest in them given the current funding squeeze, which is driven by global inflation and an impending recession.

Another founder, who runs a funded startup focusing on non-fungible tokens (NFTs), and is planning to build a virtual platform around it, said that investors are reluctant to agree to the idea of a metaverse product, even as they’re willing to find crypto and NFT ventures. “It’s more difficult to sell that idea to them,” he said.

Industry insiders said that social media giant Facebook’s rebrand to Meta in October last year gave a lot of augmented reality (AR) and virtual reality (VR) startups a second chance, but most of these firms were languishing much before that.

“We’ve looked at the metaverse (space) closely in the last 10-12 months. Our view is that as much as the technology backing it is relevant and here to stay, the business models in this space are not robust enough yet,” said Rajesh Sehgal, managing partner at Equanimity Investments. As a consequence, Equanimity has no investments in this space. “Being what it is, metaverse is a high risk high return kind of play. Therefore, people would have allocated a very small sliver of what they have to this space,” he added.

Further, Sehgal said that with the risk appetite going down in the market in general, the appetite for such investments are likely to go down as well.

Another investor, who has invested in some of the largest startups in the country, said that to get distribution, these startups first need a platform, which doesn’t exist yet. “Companies tend to pivot based on what is the buzzword. So, we also saw a bunch of AR/VR companies from the last two years just become metaverse companies in the last two years,” he said. “It’s just a nice rebranding.”

Further, the investor said that distribution aside, the total addressable market (TAM) for these startups is in the millions right now, and not enough to really put money on them. In March 2022, research firm the International Data Corporation (IDC), said in a report, that only 11.2 million AR/VR headsets had been sold worldwide in 2021, which itself was a 92.1% growth year-on-year.

“How much capital investment can you do to get all those customers, right? You can’t spend $100 million to build a product that will be used by 8 million customers,” the investor said, adding that this has forced most VCs out of the space. “You can always argue that 8 billion VR headsets will be sold in the next five years, but sure, we’ll see in the next five years. Today, data doesn’t support that,” he added.

“For Facebook or Microsoft to back a certain technology and business model which is new, is a fractional amount of financial or operational exposure. I see those companies more as evangelists who are trying to do something for the ecosystem,” said Sehgal, noting that $100 million doesn’t mean as much to them as a smaller firm, for which it’s a question of life and death.

It’s not just investors though. A survey by research firm Gartner from earlier this month, noted that while chief executive officers remain interested in technologies like artificial intelligence (AI), 63% of them didn’t see metaverse as an applicable technology for their businesses.

That said, not everyone is giving up on these startups just yet and the ones with the best products may still have hope. Some said that Facebook, Microsoft etc. will eventually look to acquire smaller firms too, and resilient ones might see returns there.

For instance, investment platform LetsVenture, which invested in industrial metaverse platform Fabrik last month, said it will continue to invest in startups in this space. 

“While we see the Indian market shaping up several products & features in the past and even in the current scenario as well, India will definitely help in shaping the metaverse concept,” said Nakul Saxena, head of fund strategy and investor relations at LetsVenture.