Oculus Rift – sell out or success story or both?
The story of Occulus Rift and how it raised its money
Oculus Rift as everyone knows sold to Facebook for a huge $2bn deal in March 2014. They’d already raised $2,437,429 from 9,522 on Kickstarter and $16m from a venture capitalist firm. Some of those original backers were not at all happy and were soon demanding their money back or stock options in Facebook. Some saying it had also killed their faith in Kickstarter.
Right or wrong? Technically, financially or morally?
So what is Oculus to a non-techie? It’s a game changing virtual reality heasdset that is still ahead of the game but has no commercial sales yet. It’s become the face of the future of VR. It doesn’t make you sick if you turn your head.
When they put the project on Kickstarter for £250k people loved the idea. They became emotionally invested in the idea of VR. Oculus was termed “beloved”.
The term “emotional investment” is key here – crowdfunding is special as it plays to our emotions. We back things we’d live to see happen – not because we are going to get a return on our investment. 1009 backers pledges only $10 – not enough for a headset but to be part of the movement.
Oculus delivered what its Kickstarter project promised: a development kit for people Backing $300+ and other rewards for different pledge levels. But people became emotionally invested in the prospect of a new, independent technology company coming out of nowhere and changing the world.
The 9,522 pledged $2,437,429 by 1st September 2012. In 2013 Oculus raised $16 and then a further $75m in venture capital. They stated that the plan was to stay as an independent company and not sell to a big company. People loved the idea of the guy in the garage disrupting the industry.
On March 25, 2014, Facebook announced that it had agreed to buy Oculus VR for $400 million in cash, $1.6 billion in Facebook stock, and an additional $300 million subject to Oculus meeting certain financial.
There was an immediate backlash on the comments section of the Kickstarter campaign page which were picked up in the press.
Some felt betrayed with the sellout – the loss of an independent company
“I cannot put into words how betrayed I feel by this. I feel cheated. I backed a vision of what I wanted gaming to be in the future. Now all I want is my money back.”
“I’m disappointed. You had the potential to become bigger than Facebook on your own.”.
Some were more outraged because the buyer was Facebook
“Facebook doesn’t exactly have the greatest of track records when it comes to buying companies and keeping them open”.
“That’s why backers feel so betrayed, they invested time and money in the team and in the idea, now the team has turned their back on the idea and sold it of to some huge “creepy” corporation that is known for it’s unethical practices and disregard for their customers”.
And one who is very famous, rich and very angry is the creator of Minecraft Markus Persson who wrote on his blog that he will no longer release a version of the game for the platform simply because he doesn’t like the social network citing in particular Facebook’s constantly changing platform, which has proved a challenge for game developers . “I just cancelled that deal,” Persson tweeted. “Facebook creeps me out.”
Some wanted a slice of the $2bn
“I would have rather bought a few shares of Oculus rather than my now-worthless $300 obsolete VR headset,” said one backer If his donation had been an equity investment, he could have earned around $43,500, (Greg Belote, the co-founder of equity crowdfunding platform Wefunder)— a 145x return.
“Give all 9,522 of your original backers a free official Oculus when it releases. That will shut us all up. We’ll let you keep your $2b with no complaints. Think about it. Facebook could front the cost and that would be no sweat off their back”.
“Besides that great and huge publicity, we were the ones willing to spend $300 of our money to develop on this thing, the passionate independent ones are the ones you want building up a nice library of games and code”.
Not everyone was angry and some changed their minds over time
Some recognised that the Kickstarter campaign was to get the Oculus developer kit into the hands of early adopters, developers who would work to integrate the device into their games. In their view Oculus could only develop its products with major backing.
“The money would help Oculus build virtual reality headsets cheaper and better, while Facebook would have a chance to lead the next big computing platform”.
“With the new “backer” I hope you’re able to push this technology at hyper speed. I’m excited to be 1 of the 9,522 people that get to say they “backed” a project that will change the way humans see the world”.
“So much drama for such GOOD news. Better, cheaper hardware – that’s what this means. Plain and simple”.
Technically they were not wrong
Kickstarter says “Backing a project is more than just giving someone money. It’s supporting their dream to create something that they want to see exist in the world.” and “Backers are supporting projects to help them come to life, not to profit financially. Instead, project creators offer rewards to thank backers for their support.”
Kickstarter is a rewards based platform. CEO Yancey Strickler told Popular Science supporting things because they like them, rather than finding things that produce a good return on investment.”
The campaign did what it promised – delivered its goods on time and kept people updated.
It was not financially wrong
Oculus raised money on Kickstarter for the developer’s kit. They were not offering equity and the popularity made the campaign overreach its target. The funds raised enabled further development captured the VC money and ultimately Facebook.
Let’s get this right. Until the US regulations change if you want to invest in a startup that is crowdfunding you need to be high net worth individuals with $1m net assets or an income of $200 py. How many of the 9,522 have this sort of wealth? So if they’d gone for equity backers would have neither the rewards nor a slice of the $2bn.
Let’s say the US goes for the UK rules for crowdfunding equity. To invest in startups you have to have net assets of £250k, income £100k or a restricted investor not more than 10% realisable net worth. Again, how many of the 9,522 have that sort of wealth?
Some UK platforms and campaigns have a minimum investment of £1k. Around 660 backed the Kickstarter campaign at that level.
Some other campaigns only give voting rights (Class A shareholders) to those who make a significant investment of £5k and above. Only 7 pledged $5k and those 7 would have been able to vote on whether to accept the VC money and the sale to Facebook.
But were they morally wrong to sell to Facebook? Should they give something back out of the £2bn?
Some say that they just lost the goodwill of a lot of their original backers – by selling at all, or selling to Facebook or not giving any of the $2bn to their early backers. Many are asking for a slice of the $2bn in shares or other payoffs. Would this be for everyone including the 1009 who pledged $10?
Some kind of action might indeed buy back any goodwill lost and be very good publicity.
Is it the same though for the film you back that wins an Oscar and eventually makes the filmmaker rich? Or backing an early work by the author who becomes the next J.K. Rowling?
A recent survey by CCA found that within three months of successful crowdfunding (rewards, loans or equity) 28% had completed rounds of traditional investment with angels or venture capitalists. An additional 43% were in talks with institutional investors. That’s the aim of business – to grow.
Is it just the large numbers here and the speed of the sale – so backers think it was really only their pledges that made this sale?
We’ll see more of this as crowdfunding grows. Some businesses will crowdfund for pre-sales, without offering equity. Some will crowdfund equity and some will do both — running a rewards-based campaign and an equity one as well. Most won’t have the success of Oculus – ask yourself each time – do you want to back something you believe in. Or do you want a return on your investment.