The word “metaverse” has the world spinning as to it’s possible implications.
Firms across the globe are discussing the future of humans within this digital world. Facebook even changed its name to “Meta” to encompass this new future. More specifically, Meta as a company plans to build its own metaverse to be an online world where people can game, work and communicate in a virtual environment, often using virtual reality headsets. On Meta’s (previously Facebook) Q2 2021 earnings call, CEO Mark Zuckerberg and others mentioned the metaverse 20 different times. Facebook has staked the company’s fortune on the Metaverse’s future.
The investment world has taken notice as far as Korea. ETFs (Exchange Traded Funds) are already being launched in Korea to focus purely on the metaverse industry. Similar funds are being launched in the United States and across the developed world.
China for instance sees the metaverse as the next internet battleground, basically the internet’s natural evolution into the next generation of digitalization. China launched its first metaverse industry group earlier this month called the Metaverse Industry Committee, which will fall under the state-supervised China Mobile Communications Association (CMCA). China’s goal, of course, is to become the global epicenter of technological innovation and the metaverse is of keen interest to them both from a capitalism point of view and from a control standpoint.
The future of mankind, and how mankind lives their lives, is being debated and constructed as we speak as corporations and governments seek to embrace, as well as control, this new digital world.
The goal of this article is to explain what the metaverse is. From this perspective, we want the reader to understand the magnitude of the task at hand to build this futuristic digital world and concentrate on what this means from an investment perspective. We will focus on what areas of development an individual investor should be looking at, what themes they should be made aware of and will end with a few takeaways of how we believe investors can look to profit from this global movement.
What exactly is the metaverse?
In layman’s terms, the metaverse is generally accepted as being the next evolution of the internet. Within this evolution, the metaverse can be described as one that users are immersed and virtually present in; think today’s virtual reality on steroids. The metaverse will be constructed to create communities and digital ecosystems of its own. Within this ecosystem, individual participants can create societies, transact for goods and services and basically live a digital life outside of their “real” physical life.
While this may seem like a terrifying dystopia to some, there are trillions of dollars at play all that say that this is the future of the internet, specifically the future of humanity’s digital world. The construction of this future metaverse is expected to feature a decentralized, open architecture platform, largely accessed by virtual reality headsets and powered by blockchain technology. The use of cryptocurrencies as a payment gateway for goods and services seems to be readily accepted as the norm within this future digital world.
An excellent piece by Global X defines the Metaverse as having six unique characteristics:
- Identity: The metaverse will be a digital existence. Your actual body or appearance will of course not be necessary. Users will select who they want to be. While digitally present in the metaverse, users can express themselves as whoever or whatever they want to be with their own avatar.
- Multi-device: This future world of the metaverse is expected to have multiple sub-worlds in which participants can elect to enter, or leave, at their choosing. The path to enter will be muli-faceted. Users will be able to access the metaverse from anywhere, whether it’s a phone, PC, tablet or other devices. There will be a heavy focus on the implementation of immersive virtual reality (VR), which uses a head-mounted display to engulf users in a computer-generated environment where they can manipulate virtual objects. We at Legacy Group expect some interesting investment opportunities to appear around the hardware that will be created to access and experience the Metaverse.
- Immersive: Upon a successful implementation of the metaverse, the feeling derived by the participant should encompass all a human’s senses to truly draw them in: sight, hearing, touch, smell and taste should all be accounted for. In today’s world, with today’s technology, VR mostly involves sound and visual stimulation. The next generation of VR devices should fill the gaps to encompass the other three senses.
- Economy: A fully developed metaverse has a functioning economy where users can earn and spend in digital currencies, which seems to be the current focus of developers, or fiat currencies, which of course governments would like to see implemented. At Legacy Group, we also see incredible potential here as those who create the metaverse also become its taxing authorities and toll collectors.
- Community: There is expected to be a vast number of users within these multiple metaverses. Participants will be surrounded by others in real-time, sharing experiences and/or interacting with one another. Experts expect that humans will spend an increasingly greater percentage of their time in the digital world as technology progresses.
- Real-time Persistent: The metaverse is expected to be real-time persistent with no ability to pause it. It continues to exist and function even after users have left. This trait shifts away the commonality of the video game world as it currently exists.
What is the quantity of capital chasing the metaverse?
In any newspaper these days, you have gigantic capital figures being thrown around in relation to the metaverse and the quantification of the addressable market. The CEO of Epic Games recently told Bloomberg news that the metaverse is a multi-trillion dollar pie. Per Forbes, Morgan Stanley views the metaverse as an $8 trillion addressable market that is likely to become the next generation of social media, streaming and gaming. It is a completely untapped market at the moment as this future digital world literally does not yet exist. It’s basically a race to see which firm can reach it and achieve the spoils of victory for their own. Facebook, which of course changed its entire holding company name to “Meta”, has staked its reputation and the future of the company on the creation of the leading metaverse. That is a big bet for a company that has a current market cap of over $900 billion.
To put the quantity of capital and influence going into this metaverse concept into context, let’s use three companies that are seen as being top contenders for setting up, establishing and maintaining this future digital ecosystem. Those three top companies are Meta (formerly Facebook), Microsoft and Amazon. All three have expressed interest in deploying huge resources towards this initiative and are expected to be major global players in the industry’s future development, but of course not the only players. Many other companies will carve out a slice of the pie through hardware creation to greater experience the metaverse. We expect Apple, for example, to be a player here, perhaps adapting a similar strategy as it did building the hardware around the software in its App Store. All of these big players will almost surely be involved in the metaverse development and experience.
The framework of any new industry will be derived of course by innovation, greenfield investment, human capital levels, etc. (many would call this a research & development unit). It seems clear that despite their wealth of talent Meta, Microsoft and Amazon still do not yet currently have the talent necessary to build all of these new universes from scratch. Logically, there is no consolidated business model today among a major U.S. corporate entity that has been structured from day one to be a builder of a metaverse industry. Amazon has been structured as an online retailer and cloud computing provider, Meta as a social media company and Microsoft as a software company. Those are the “core” businesses of each.
Metaverse construction will require new skills, human talent and precise capital deployment to be successful. There have been numerous criticisms that these companies lack the talent to engage in these lofty aspirations. One such criticism of Meta was recently posted in INC. where the writer determined that Meta will ultimately fail, specifically citing that they lack the talent and know-how to do what they say they are going to do.
I would counter in support of these tech giants with the same arguments I believe their CEOs would make: they may not have the talent now, but that talent can be bought and these companies have the wealth of nations at their fingertips to deploy to get what they want.
These giant companies ultimately have two options: buy the talent (via employee acquisition/recruitment) or buy operating companies that have the talent. We think that there will be a race to engage in both these strategies.
The first concept of employee acquisition is simple: the cost of the best talent related to video game design, advanced computer software development, digital art and cybersecurity should all skyrocket in the coming years as human talent becomes highly sought after. Compensation for the best talent is going to go up tremendously, period.
The second concept of development through acquisitions is more relevant to our investment-focused readers. Not all of the best human talent will be able to be acquired via a large salary package. Many of the best will already have their own companies, their own teams and their own intellectual property that they will be actively constructing. For the best-of-the-best, these big three tech companies are going to be looking at acquisition activity. For these newly-found acquisition targets, they will be striking gold. Their company valuations are going to go through the roof.
Let’s take the methodology of acquiring a company and use two simple ways to engage in a corporate acquisition: one is via a cash acquisition and the other is via an equity acquisition. For the three top players we are discussing here today, let’s lay out some simple metrics of the gunpowder currently at hand to acquire the top technology companies who can provide the key attributes necessary to develop this future, Metarverse-focused digital world.
Market Cap: $1.8 trillion
Cash: $84.4 billion
Meta Platforms, Inc. (FB) – (formerly Facebook):
Market Cap: $915.5 billion
Cash: $62.0 billion
Market Cap: $2.5 trillion
Cash: $130.3 billion
Let’s sum up these totals that we have here. Among only these three companies (note that there will be hundreds of companies competing in this space), we have a combined total of $5.2 trillion of equity and $276.7 billion of cash in-play. These companies are massive and they have balance sheets the size of countries to bargain with. They will not have the time nor the inclination to do everything from scratch. Acquisitions will become prevalent in this space and necessary to move forward quickly. Expect that these companies will be acquiring both IP (intellectual property) and human capital teams by the dozens.
Author’s Final Words:
The impact on the world of the metaverse could be life changing for mankind if it succeeds to a degree anywhere near the expectations of top tech CEOs. Whether readers welcome this future digital world or not is obviously still to be decided as the outcome is far from certain. What is certain though is that there will be a mountain of capital and human effort thrown at the endeavour.
The real value is in the intellectual property: The winners of this quest to the end of the metaverse will be the ones who control the ecosystems in which digital communities and economies are built. Think of the history of the British or Spanish empires in the New World. The value of colonization was taxation, whether that be by resource extraction or otherwise. The same will be true of the new digital world being created. The ability to tax, control markets, and set pricing will be the key to extracting resources, the only difference this time is that the winners may be looking for Ethereum instead of gold or silver. The only way to get this IP built is with the best human talent. With valuations in public markets at sky highs, individual investors should look to companies that these tech giants may try to acquire in the next 3-5 years.
Large U.S.-based tech companies realize that IP is the end goal, and will use whatever resources necessary to capture that value in the coming years. Expect acquisition volumes to increase, especially in the smaller private company space where companies specialize in one of the key, niche aspects of building out this future metaverse world. Tech hubs outside of the U.S. will be key as the cost of labor will be lower and much of the technology that creates this digital world changes on a day-to-day basis. It is impossible to be an expert on a given technology because in two months the technology will have evolved or a superior technology will take its place. Human capital flexibility will be key. Investing in successful management teams in the technology and digital arts space at early stages could yield enormous profits in the long-term.
The value of digital technology education is increasing at a rapid rate: The biggest problem at our portfolio company, Polygonus, is that we can’t find enough human capital to join the team and undertake all the projects that are currently requested. We are turning down profitable projects and focusing only on projects that we view as the most key to the future value of the business. The ability to code advanced programming is in hot demand. Even within emerging markets such as Colombia where we are, the best coders are making six-figure annual salaries in U.S. dollars.
We have offset this challenge by creating a technology and digital arts Academy of our own, through which we teach thousands of students annually how to build careers in the digital arts and entertainment industry. The best-of-the-best come and work for the company after they complete their tenure in the Academy. Even with this learning program in place, there is sufficient project demand to hire at least twice the inflow we currently have. While we typically focus primarily on capital investments with our writings, I would give this investment advice to the younger generation, specifically the children of much of our readership: Learn to code. Think of it as a foreign language that will pay off in spades over the future of your lifetime. Companies like our own will look to recruit you as you develop your skills and the payoff will be enormous in the coming years.
Prepare for this investment trend toward the metaverse with your capital and education. We will continue to monitor developments here and open opportunities for our investors.
About Legacy Group
Legacy Group is distinguished by a singular tradition of service to our portfolio partners; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable financial and legal talent across multiple disciplines and jurisdictions; and shared professional values that focus on client needs.
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*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.