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VirZOOM Fights to Find Sustainable Growth

VirZOOM Fights to Find Sustainable Growth
By Andy Gordon
Date March 31, 2022

In the article


Valuation $61,360,000
Total Raised $15,463

It must be possible to feel very good and very bad about a company at the same time. Because that’s how I feel about VirZOOM. To refresh your memory, VirZOOM offers an app that can be used with just the Oculus Quest headset or in conjunction with an exercise bike.

Eric Janszen, VirZOOM’s founder and CEO, has kept the company alive. That’s the good news.  It’s now doing well. Monthly revenue at the end of 2020 is double what it was at the end of 2019. Users have also doubled during this period to 5,600. Eric is in serious discussions with two venture capital (VC) firms, two major angel investor groups, and Meta for a potential development grant. All have expressed interest in writing Eric big checks. He’s also in acquisition discussions with a major publisher and a major player in the connected fitness space for a potential partnership or more. 

Oculus Quest headsets are flying off the shelves, which has contributed to VirZOOM’s jump in popularity. To keep up and sustain the company’s newfound growth, Eric has been busy adding to his team: developers, artists, a community manager and QA manager have all been added in recent months. 

Things are looking up. And VirZOOM is looking forward to further expanding operations and sales. But just a couple of years ago Eric almost lost VirZOOM through a combination of bad luck and the struggling VR  industry. It reached the point where the company was broke, and the only way to make some much-needed cash was to do a down round. Common shares and anybody who owned them took a major hit. If you participated in the equity round listed on Netcapital in 2017 — when I first recommended VirZOOM — you paid $0.98 per share. They now go for $0.09. Your investment went down more than 90%. 

But there is light at the end of the tunnel. And let me be very clear here. This is not grasping at straws. Preferred shares in VirZOOM’s current Wefunder round are going for $0.48 a share. If VirZOOM was sold today, you’d be making back half of what you invested. By no means is that a great outcome. But it’s better than nothing. 

Eric believes the company is finally on a sustainable growth path. His plans are not to sell until the company has grown far beyond the 2X Netcapital investors would need to make themselves whole again. VirZOOM has had more than its share of setbacks. It’s always been able to come back and live another day in the hope of eventually thriving. That day has come. This is not the time to give up on VirZOOM. Risk remains, to be sure. What happens, for example, when Oculus Quest sales slow down? But every startup encounters setbacks. And many of those startups aren’t around to explain what happened. 

Thankfully, that’s not the case with VirZOOM. On the company’s original raise page (on the Netcapital portal), Eric has provided a full explanation of VirZOOM’s dark days and how the company survived. I’m also sharing it with you below. I believe it’s useful for you to hear, in the founder’s own words, what happened and why. Because it’s a bit long, I’ve edited it down a bit here and there. Here is Eric’s story in his own words.

The current Common share price is $0.09. That said, when a company is sold, all shares convert to Common. If VirZOOM were sold today at the current $0.48 Series A preferred share price, your Common shares will also be worth $0.48, almost exactly half of what you paid. You’d lose around 50% of your original investment in such a transaction. Not a great outcome but not a total loss, either. We don’t plan to do that — we’re not done yet. Could VirZOOM double in enterprise value and then some before an exit, to bring your Common shares back to a positive return? We certainly hope to make that happen.

Here’s what happened.

When a startup is struggling, it may pursue the option of going bankrupt or raising more money in a “down round,” which means the value of the company decreased since the last capital raising stage. This is an adverse outcome for both the founders and past investors as dilution occurs much more dramatically in this instance. However, this result may be preferable to the startup going bankrupt and its investors losing everything.

The last paragraph describes exactly what happened to VirZOOM in early 2018. The entire virtual reality industry was struggling. Many VR app developers were unable to secure funding during that period, failed, and disappeared. By some estimates, 95% of VR companies that started in 2015 (when VirZOOM started) are no longer operating. Without our down round, this would almost surely have been our fate too.

Prior to the arrival of the Oculus Quest in early 2019, the business-to-consumer (B2C) VR fitness market was too small to be viable. We pursued a business-to-business (B2B) model, selling to gyms, colleges, and corporations. Our VR hardware partner in the commercial fitness space was Acer, an OEM of the WindowsMR specification. Our commercial business started off strongly. Margins were great and [with] no churn to speak of, the future looked promising.

Unfortunately the consumer side of Acer’s VR business was not doing well enough for them and near the end of 2018 Acer decided to exit the down VR market entirely and focus on PC gaming. Coincidentally Life Fitness, which was our sales partner for commercial fitness, was having its own major challenges. [It] encountered serious operational problems. Its IPO was delayed and later canceled. Life Fitness [was] sold to private equity fund KPS Capital Partners in May 2019 for $490,000 after generating more than $1 billion in sales in 2018.

These unforeseeable developments effectively cut our commercial business off at the knees. This was a dark time for the company. The B2B business was dead in the water, the B2C business had not been sustaining, and interest in VR among the dozens of potential new investors we approached was negative to say the least. None of them could see past the downturn of that time to the current period of enthusiasm and promise of the Metaverse.

We saw things differently. We received an Oculus Quest development kit in late 2018. After evaluating it, we decided that it was the VR headset that met all of the key product requirements for broad adoption, combining low cost, simplicity, and high quality. We decided to go all-in on B2C sales on the Oculus Quest as our sole VR platform for the next stage. We were convinced that the Oculus Quest was going to take the VR market by storm. Focus wins the day, as they say. We discontinued work on all other VR platforms — WinMR, Oculus Rift, HTC Vive, and Sony PlayStation — to focus 100% on the Oculus Quest.

After exhausting all other alternatives, VirZOOM turned to its then-current Note holder investors and asked them to convert their Notes into Series Seed Preferred shares and also to make an additional investment in an inside round. Aware of the dire situation and therefore the very high risk of that moment, they understandably cut a hard deal for additional investment to compensate themselves for the risk. This was a “down round.”

In that transaction the employees’ ownership in the company was cut by more than 80%, and the founders’ share of the company, including mine, was cut proportionately, as were Common shares purchased on Netcapital.

We could see our long-term prospects and we had to stay alive somehow to have any hope of reaching them. The down round was literally our only way forward.

The decision to focus entirely on the Oculus Quest proved to be the right one. By Q2 2021 Oculus Quest installs made up 75% of the total market, and the platform’s dominance has only increased since then. The decision to exit the B2B commercial health club market to focus on the B2C in-home fitness consumer market in early 2019 turned out to be fortuitous when the global pandemic arrived a year later. The pandemic shut down health clubs worldwide. Our commercial installations all over the world went quiet. Meanwhile, the market for in-home fitness products like our VZfit for the Oculus Quest boomed.

To make it happen, after the Series Seed round we raised funds through sales of Convertible Notes and two RegCF rounds on Wefunder. We sold SAFE securities in each of two Wefunder rounds. A SAFE (Simple Agreement for Future Equity – an SEC investment class) is similar to a Convertible Note except that it does not earn interest. The first SAFE had a conversion cap of $8 million and the second $20 million.

Today, thanks to popular interest in the Metaverse that VR makes possible, there is a very bright light on our industry. Our business is now growing rapidly, and the interest in investing, from both individuals and institutions, is stronger than it has ever been since the company was founded in 2015.

We are currently running a Series A Preferred shares round on Wefunder at a pre-money valuation cap of $30 million. The SAFEs that we’ve sold on Wefunder previously are converting into Series A shares at a multiple of principal invested, 3.75x for the $8 million cap SAFE and 1.5x for the $20 million cap SAFE. This is a good outcome for these SAFE investors.

[But] Netcapital investors — you — unfortunately are not benefiting from this round. [But] I cannot think of anything I and the team would do differently if we had to do it over again. We made it through a rough time that killed off an estimated 95% of VR companies. If we had not taken the down round back in 2018, VirZOOM would be no more.

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