The secret behind one VR startup’s success in raising total funds of ¥260 million ($2.6 million).

2016 was called the first year of Virtual Reality (VR). It was the year head-mounted displays such as Oculus Rift, HTC VIVE, PlayStation VR hit the market successively. The core characteristic of VR is in its intense immersion, widely used in games and entertainment, and it is now even spreading to the architecture and medical field.

Cluster, Inc. is gaining attention world-wide for creating a VR social app “cluster.” with its revolutionary concept, “Stay Perfect Inside”. Cluster. Inc. has succeeded in raising ¥260 million ($2.6 million) in funds from top Japanese companies, Avex Ventures Inc., United, DeNA, Skyland Ventures, as well as individual investors.

We interviewed Naoto Kato, CEO and founder of Cluster, Inc., to hear about his startup story, and his focus on VR’s “experience value”.

In part 2 we talk about how he overcame obstacles he faced along the way, and the difference between VR and AR and its range of application.

What kind of service does cluster. provide?

cluster. is a platform in which users can participate in online events using an avatar without compromising on the exhilaration of attending an actual live event. It is a VR event room where participants can easily access from their smartphones or computers, and not just limited to VR devices like head-mounted displays. Once a room is created and the URL link is shared online, several hundred to several thousands of users can all participate in the event at the same time. The host can select the users that can speak in the room, display slides on a screen, and participants can add actions such as “handclap” or write comments to make the experience exciting and interactive.

Since its official release in May 2017, several events have been hosted. In August, a virtual idol company, Iwamotocho Geinosha, hosted an event to promote the ultimate dream come true VR idol experience in Japan.  

What an interesting event. I heard you were already creating VR technology as a hobby, even a few years prior to when VR startup was a thing in Japan. So with that in mind, could you please tell me how you came about creating cluster.?

I got interested in VR because I saw an incredible potential in its aspect in delivering “experience”. The main function of the internet is information exchange, which means a significant amount of data is gathered at high speed, and shared. This brought a revolution and computers and smartphones are the interfaces that allows for sharing this information.

Now with social media and messenger apps, it is even easier to get connected to people anywhere around the world. With Amazon and UberEATS delivery services, we can buy the things we want easily. Before starting the company, I was living a hermit lifestyle for about 3 years surviving on remote work, but I never felt any inconvenience [laughter].

The only set back I felt was that, the internet couldn’t fulfill my desires to “join this event” or “go to my favorite idol’s live event”. Already accustomed to my hermit lifestyle, even getting to the venue felt daunting to me. No matter how much the technology improved for live stream forecasts and google street view, I was frustrated that I couldn’t fully experience that high and exhilaration I would feel at an actual live performance.

It was during that time I had the opportunity to try out a head-mounted display. The world in front of me was vivid, as if I were at an actual live performance venue—I was immediately blown away. That experience got me thinking “I want to create a service that will deliver ‘experiences’ through VR”. Those were the times when commercial versions of VR devices weren’t even out yet, but I had a conviction that “the time will come”.  

So you were already focused on the experience value VR provides even during the dawn of the era of VR!

Actually, we are already seeing a shift in trends and market size in the music industry; CD sales are stagnating while the live performance market such as music festivals and concert sales are continuing to grow. In 2013, live performances and concert ticket sales surpassed CD and record sales in Japan. What I interpret from this is that people are placing more value in “rich experiences”. Of course, there are already communication tools that allow people to communicate in real time no matter where they are like Skype and ZOOM, but when it comes to experiencing that sense of unity from a live event or recreating that sense of closeness people experience in real life, VR is the clear winner.  

You raised ¥200 million($2 million) through a Series A round from individual investors and companies, Avex Ventures, United, DeNA, and Skyland Ventures. In summer 2017, your total reached ¥260 million ($2.6 million). What is your reason for success in fundraising?

I think one of the reasons behind this had to do with the smartphone market reaching maturity. I believe investors had a growing desire to invest in areas other than smartphones that had large potential.

In addition to that, I believe the key to large funding is the question, “Is this service exciting?” It is already a given that there is a market and a promising market size, so even with a high failure rate, what the VCs focus on is the startup’s potential for big success.

We had three fundraisers but we did not succeed immediately from the get-go. The first round happened before we started the company, it was even before concrete details for the service were established, somebody from a VC reached out to me after having seen my previous products I had created. As we discussed future plans and ideas, the following words loomed over me: “how about starting a company?” and this helped me take the first step.

After that, I presented to several VCs and I brushed up on my skills in communicating my ideas. Each time I presented, I continued to elaborate on my strategy pitch, execution plan in raising funds, and the use of the funds.I also believe the entrepreneur’s “passion” speaks for itself. An entrepreneur must be confident enough in their vision and be able to share their ideas and answer questions such as “what sort of value will our service provide to society?” and “how will that change the future?” This is crucial not only for fundraising but also with gathering support and people to work with.  

So the entrepreneur’s “passion” is a key factor in moving people’s hearts. With your partnership with Avex and DeNA what sort of business synergy are you aiming for?

When we thought about what sort of VR content will be good to add to cluster., we had three genres in mind: sports games, conferences, and live concerts. Of that, live music concerts are said to be worth about ¥300~¥350 billion ($3~$3.5 billion) in the Japanese market since the younger generations are more interested in new technology and are more keen on attending live concerts. Actual live events will always be in demand, however; by the next 5 years or 10 years I imagine 5~10% of the live concerts will be on VR. I see cluster being the platform that will provide such infrastructure.

With our partnerships with Avex, which holds various content such as artists, anime, 2.5 dimension idols, and DeNA that holds a subsidiary company called “SHOWROOM”, a net idol live streaming service company, we feel we could really venture out and challenge ourselves to create a service where users truly feel a strong sense of unity and empathy. 

(Continue to Part 2 here)