At first, the coronavirus was another kick in the teeth for Immersive VR Education (VRE:LN), the Waterford-based virtual reality company. 

VRE had floated on Aim, London’s mini stock market for fledgeling companies, in March 2018. The stock got off to a good start. But revenue was slow coming in, and Aim’s notoriously flighty investors lost interest. In the 20 months following May 2018, the stock fell by more than 80 per cent. By the beginning of February this year, its market cap had shrunk to just £12m. It was sliding into the danger zone from which many Aim companies struggle to escape. 

When coronavirus came, it smashed VRE along with the rest of the market. The stock fell a further 27 per cent in the first month of the meltdown to 4.5p. 

Then something surprising happened. On March 19, VRE announced a strategic partnership with the Taiwanese electronics giant HTC. The stock immediately perked up. Within three months, it was up more than five-fold to 23p. 

Why does HTC want VRE? Coronavirus is part of it. HTC sees that VRE’s software could be used as a remote communication tool — like a better Zoom. And HTC, having left the mobile phone market, is making an all-in bet that virtual reality is ready for the big time.

Building a Zoom-beater

VR Education was founded by David Whelan and his wife Sandra Whelan. David Whelan is a software developer who’s been interested in VR since he came across the original Oculus Rift VR headset on Kickstarter, crowdfunding platform, in 2012 (Facebook later bought Oculus Rift for $2 billion). Whelan got his hands on the Oculus Rift development kit and set to work building VR environments.

Most of the early VR applications were games. Whelan noticed there wasn’t much by way of education software. So that’s where he decided to focus his efforts. He founded Immersive VR Education in October 2014 with Sandra, who serves as COO. 

The educational product they came up with is called Engage. Engage is a tool for creating virtual spaces in which people can meet, collaborate or listen to a lecture. They can recreate anything from an office meeting around a table to the wood-panelled library of an ancient college, to the surface of Mars. The sky is the limit. 

The spaces feel like real life. Users have realistic avatars and recognisable faces. Their avatars seem to occupy physical space. They can walk around, sit, whisper to the person sitting beside them, or get up and work at the whiteboard. 

A still from an immersive Oxford University Lecture, created using Engage.

Before the official tie-up with HTC, VRE helped the company host its annual conference in virtual reality using the Engage system. The conference was attended by 1,600 people in virtual reality, while 1.1 million watched it on live stream. VRE created a spectacular environment for the keynote speakers — an amphitheatre at the base of the Golden Gate Bridge. At one point, fighter jets boomed over the attendees’ heads.

VRE has had some success with Engage. It has partnered up with Oxford University, Stanford University, and the US Air Force. But progress has been slow. In the last three years, revenue has grown from €600,000 to €1 million. For a loss-making startup, that’s not quick enough.

HTC have their own reasons to want to do the deal, which we’ll see later. But Covid-19 will have accelerated things. Covid-19 boosted demand for communications tools. David Whelan says the company was quick to pivot from education to remote working: “Because of Covid-19, we had so many companies contacting us saying ‘Hey, we have all these remote teams. Now we need ways of communicating. And can you get us to headsets and we will license the software.’ And then we had a lot of people wanting to host events as well. It’s the same platform — it’s just that it’s now been marketed in a different way.”

The Engage platform has been repurposed for meetings and events. It’s being used to host virtual conferences, complete with mingling in hallways between sessions. And it’s being used for richer, more interactive meetings — ones where participants don’t choose to mute their microphones and tune out. Zoom calls don’t work well for big groups, says David Whelan: “If you take a school setting where you might have 30 or 40 kids on the scene, it just doesn’t work. Whereas in a virtual setting, even though you’re only on your phone or tablet on a VR headset, it’s a lot more natural and a lot more inclusive. You really feel like you’re part of a structured meeting or class.”

To drum up excitement for the technology as well as credibility for the company, VRE also produces VR experiences, which it sells directly to customers on the Playstation Network, Valve, and Oculus. The experiences – which recreate the space shuttle, World War 2 bombing missions and the Titanic – are intended to show off VR’s capabilities. David Whelan even picked up a nomination for best director at the Venice Film Festival for one of them, 1943: Berlin Blitz.

The long wait for VR

For decades, virtual reality has been the coming thing. As far back as 1995, Nintendo released the Virtual Boy virtual reality gaming machine. But the Virtual Boy made users disoriented and sick. It flopped commercially. Not for the first time, excitement about the potential of VR ran ahead of the technology.

Virtual reality technology has taken a long time to catch up to the promise – 25 years after Virtual Boy, VR is still nowhere near mass adoption. 

VR an exciting technology in theory. But a hit VR product needs the right technology and the right applications at a good price. And that’s proven difficult. Immersive VR requires a lot of computing power, for a start, and chip design only caught up in the last five to ten years. 

Then there’s the hardware itself. The Oculus Rift was the first mass-market VR headset, released in 2012, and a few others have followed on. But they haven’t seen mass adoption. The first tablet computer was released in 2010, for example, and in 2019 161 million tablets were sold. The first VR headset came out two years later, and last year 7.6 million VR headsets were sold. 

Thanks to big investments by Facebook, Samsung and others, VR hardware is nearly ready for the mass market. Whereas two years ago, the kit cost €2,000 or so, the latest standalone headsets cost €400. €400 is better than €2,000, but it’s still out of reach for most people. VR won’t hit the mass market until the price drops a bit further. 

Two new technologies hint at where VR could go in the next few years. The first is cloud-based gaming. Last year Google released Stadia, its first video games console. What makes Stadia interesting is that the user doesn’t get a physical machine to plug into their television, like a Playstation or Xbox. All the user gets is a controller. The console itself lives in Google’s cloud. The games are streamed instantaneously from the cloud to the television, and controlled via the controller. The user can’t tell the difference. 

We’re used to cloud-based software like Gmail or Microsoft Office. Google Stadia represents the next step — cloud-based hardware. With cloud-based hardware, the heavy lifting happens remotely. The user gets a simple bit of stripped-down hardware whose only function is to control and interact with the cloud. The next generation of VR, designed along these lines, could be neater and cheaper than the headsets we see today. 

Of course, Google Stadia requires a fast internet connection. The hardware in your hand (or on your head as the case may be) needs to talk to the cloud so quickly that the user doesn’t notice any lag. 

“You’re going to see a lot of telecoms companies very soon announcing their own VR headsets.”

VR Education co-founder David Whelan

And as it happens, the world’s telecoms companies are ploughing tens of billions into 5G, a new ultra-fast telecoms network. 5G promises wireless speeds that are as fast as fibre. 

Tens of billions are being invested in 5G, but it’s still not clear what benefits it’ll actually deliver. For most people, 4G is fast enough to stream videos and make Zoom calls — which are the most bandwidth-hungry applications on today’s phones. 

What 4G can’t handle is virtual reality. Streaming 360 degree, high resolution virtual reality takes up a lot of bandwidth. So the new 5G networks could enable a Google Stadia type model, whereby the hard work gets done elsewhere and gets displayed on a simple, cheap piece of hardware. 

Another point is that, having invested so heavily in 5G, telecoms companies have a vested interest in making it a success. The networks which have 5G up and running will want to use it to differentiate themselves from the competition. “You’re going to see a lot of telecoms companies very soon announcing their own VR headsets,”, says David Whelan. “So when you go into a phone shop, you’ll sign up for 5G account, and they’ll give you a new phone and a 5G headset to go with it.”

In the next two years we could have cheap, high-quality VR headsets, live-streaming over 5G. At that point, the long-awaited VR dream would be close to reality.

HTC is all-in on VR

The HTC partnership has been transformational for VRE’s share price. The share is up 235 per cent since the announcement on March 19. After the strategic partnership, VRE announced that HTC would be investing in the company too. For €3 million in cash, HTC was handed 20 per cent ownership.

The deal gives HTC exclusive rights to sell VRE’s products in mainland China, which is HTC’s strongest market. That exclusivity doesn’t extend to other regions. 

HTC has a market cap of €690 million — which means at the time of the strategic deal, it was more than 100 times bigger than VRE. That sounds like a lot, but VRE was tiny at the time of the deal. And by technology industry standards, HTC is not big. It’s one fifth of a percent the size of Samsung and less than one twentieth of a per cent the size of Apple. 

It’s a great deal for Waterford-based VRE, giving it access to a market it wouldn’t have gotten a sniff at on its own. But HTC isn’t the company it once was. Its share price is down 96 per cent from its peak in 2012. And its revenue fell by 57 per cent last year. 

At its biggest, in 2012, HTC was one of the world’s biggest mobile phone makers. But the tough economics of selling Android hardware caught up with it. Now it’s getting out of the mobile phone business and betting big on VR. It has launched its own VR headset for enterprises. 

Now for more deals

The HTC deal came at a perfect time for VRE. It was running out of cash, and Aim investors weren’t likely to offer good terms. Davy had been factoring in a €3 million equity raise at some point in the year. Thanks to the €3 million HTC investment it’s cashed up for the medium term. And the tie-up has transformed investors’ perceptions of the company. It’s worth more than three times what it was in mid-March. 

A big reason investors are excited about the deal is that it gives VRE access to HTC’s salespeople. HTC is a big company with enterprise customers and a big sales force. It is now incentivised to sell VRE’s products to its customers. Every time HTC sells a VRE product, VRE will get a cut.

For small software companies, a tie-up with a big third-party vendor is the dream. Small technology companies don’t have the size or culture to build a big sales team. Some of the biggest Aim success stories in recent years have followed this partnership formula. Blue Prism, for example, hit the big time when it signed deals with IBM and Accenture. The sales generated by those partnerships pushed the stock up more than 10 fold. Wandisco, similarly, has benefited from deals with third-party vendors like Amazon and Microsoft. Wandisco stock was up 6x at its most recent peak in 2018. For Blue Prism and Wandisco, the partnerships snowballed. Success with one vendor proved to the next vendor that a partnership made sense.

The HTC deal is a great start for tiny VRE. Now it needs more deals. It needs to partner up with big American and European vendors to push Engage out to their clients.

The deals with vendors, and HTC, will make or break VRE. As we’ve seen, it’s grown revenue very slowly in the last three years. And it’s losing money. It burned €2.1 million last year. 

The good news is that its product is built, so there isn’t a big chunk of R&D spending coming down the track. It doesn’t need to invest a lot in a sales team. And it’s debt-free. So it should be able to hang in there for a few years while it finds new vendors to partner with. If sales from HTC come through, it might even turn cash flow-positive this year. 

Like virtual reality technology itself, VRE’s commercial success seems tantalisingly close. But it’s not here yet.