How startup founders looking for funding should approach the metaverse

But, as Sir Winston Churchill famously said, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

And that’s precisely what successful entrepreneurs are good at: Seeing the opportunity through the chaos. So, when pitching your metaverse startup to a room full of pragmatic VCs, it’s important to show them exactly what the business opportunity is. However, when dealing with fledgling markets, that’s often easier said than done. 

To help startup founders looking for funding better understand how to approach this unique market, I recently sat down with Dmitry Volkov, Ph.D., founder and general partner of Social Discovery Group. The global technology company, investment fund and venture studio is investing heavily in the metaverse and constantly evaluating who the winners in the race to metaverse greatness might be.

The company recently committed an initial $20 million to metaverse-related ventures focused on social life 3.0 applications. However, as Volkov explained, the company is also evaluating broader opportunities within the market.

As startup founders prepare to approach VCs, Volkov offers these important tips and insights.

Tip #1: Follow the industry’s standards as they develop

“One of the biggest challenges the metaverse faces is a lack of cohesion,” said Volkov. “Even though the space is exploding, in terms of hype and the number of new projects being launched, the market remains extremely fragmented. Unlike Web 2.0, no gateways lead to a broader metaverse. There are some great worlds like Decentraland, Sandbox, Roblox and others to explore and monetize within, but none of them are interconnected in any practical manner.”

But the good news, he says, is that headway is being made. Organizations like Microsoft, Epic Games, Adobe, Nvidia, the Khronos Group and others have joined the new Metaverse Standards Forum to address the lack of interoperability that currently plagues the space.

According to its website, the organization is focusing in on interactive 3D assets and photorealistic rendering; human interface and interaction paradigms (including AR, VR and XR); user-created content; avatars; identity management; privacy; financial transactions; IoT and digital twins; and geospatial systems. Not only is this list a nice breadcrumb trail for entrepreneurs to follow, it highlights the industry’s top priorities.  

“Anyone looking to innovate within the metaverse should consider joining the Metaverse Standards Forum and other industry alliances,” said Volkov. “It’s always better to know which way the current flows before jumping in. It’s also good to know who all the players are, and where your venture fits in.”

Tip #2: Focus on a minimum value product

“There’s no doubt that startup founders need to be visionary leaders,” said Volkov. “However, they must also be pragmatic. It’s great for founders to share their vision of how their company will become the next Roblox.”

Volkov also noted that it’s important for startups and investors to remember that there is already a Roblox. And, it took the company nearly 15 years to become a success. 

The point is: Before challenging the industry heavyweights, a founder’s primary focus needs to be on identifying an untapped market opportunity and quickly developing a minimum viable product that the market will respond positively to.

Once revenue is coming in, it’s all about scaling and growing the business. And, this is exactly where startups need to be to attract early-stage VCs. It’s much easier to sell a VC a small reality than a giant dream.

Tip #3: It’s better to sell picks and shovels than mine for gold

If the California Gold Rush has taught entrepreneurs anything, it’s that when you chase gold, the chances of a big payoff are slim to none. Most prospectors headed west in 1848 believed mining gold would be easy money.

But the reality was that many endured extreme hardships and returned home broke. However, if those same miners had instead sold picks and shovels, they would have made money off of every prospector that came through town. 

“In metaverse terms, let’s say you’ve created a technology that can automatically generate personalized NPCs (non-player characters),” said Volkov. “Would the better short-term market opportunity be to create your own metaverse? Or, would it be better to license the technology as a service to metaverse platforms that need an easy way to populate new worlds?”

Inworld AI went for the latter and it paid off significantly. The company recently announced the closing of a $50 million Series A backed by some of the biggest names in VC. They understood that selling picks and shovels was a much better path than mining for gold.

Tip #4: Keep an eye on government regulation

“All the right signs are saying that the metaverse is indeed the next big frontier for entrepreneurs,” said Volkov. “But as with all big markets, the metaverse comes with some potential downsides. Experts are warning consumers about privacy issues, mental health concerns, addiction and more.”

Last year, whistleblower Frances Haugen told Congress that the metaverse would be highly addictive and rob people of even more personal information. This has many questioning how involved the government will be in regulating the metaverse.  

Adding more fear, the Federal Trade Commission is working to block Facebook’s recent VR acquisition. But, the U.S. government has its sights on more than just Facebook. Congress is currently pushing to pass its first major effort to regulate big tech since the inception of the internet. 

Whether you like Big Tech or not, this is something to keep an eye on, as it could make it harder to make an exit down the road.

Tip #5: Beware of the philosophical arguments

The metaverse has much momentum in its favor. And, it offers many benefits for entrepreneurs and businesses alike. But is it good for customers and society?

“The thought of life in the metaverse brings many questions,” said Volkov. “Will we be more connected but feel lonelier? Will we live an illusionary life? Will we create an extended reality only to become an extension of vast, complex and intelligent machines? For many, The Matrix sounds like an argument against the metaverse.” 

Another pessimistic argument was proposed by American philosopher Robert Nozik. In his thought experiment, Nozik introduced an experience machine where people could live out fantasies like marrying their favorite Hollywood star or winning the lottery. Nozik believed this way of fulfilling desires would not be fulfilling and would prevent us from grasping a deeper reality. Will the metaverse fail because of this?

Closing thoughts

In Volkov’s view, life in the metaverse can be as real as it gets. Unlike Nozik’s experience machine, there will be real interaction between real people in the metaverse. And unlike The Matrix, visitors can make informed choices and exercise free will. They will have the ability to join and leave the virtual world at their discretion. 

“If we as entrepreneurs and creators build the metaverse right, users will have a positive and fulfilling experience,” said Volkov. “And that should be our goal. I’m confident the industry can work through its growing pains and make the metaverse a safe and profitable place for all who venture within it.”

Jay T. Ripton is a business consultant and freelance writer.