Facebook's $2 Billion Oculus Deal Is Proof Crowdfunders Should Get Stock
Kickstarters shouldered all the risk, so why should executives and venture capitalists get all the cash?
Image: Creative Commons
Facebook and Oculus Rift jointly announced yesterday that the social media giant would buy the virtual reality startup and Kickstarter sensation for $2 billion. Shortly after, Oculus Rift creator Palmer Luckey posted a message on /r/Oculus. A critical meltdown ensued, with many redditors promising that they would be canceling pre-orders.
Not long after, a thread titled "How to CANCEL your Oculus Rift Pre-Order" surfaced, as did one called "Now that Facebook owns Oculus, I bow down to you Sony. Make VR happen for the greater good" on the PS4 subreddit. The collective hissy fit was legendary. But, do these redditors, many of them early investors in the Oculus Rift, have very legitimate concerns after the Facebook deal?
Beyond Oculus Rift, it's worth thinking about what Kickstarter project creators owe their early backers—the very people that help put them on the map in the first place. Do these creators merely owe their early backers pre-order products and other goodies, or something more substantial? With Oculus Rift, specifically, are prototypes and developer kits a fair trade for a less risk-averse form of capital investment? Or maybe it's further evidence that early Kickstarter backers should be given the option to own stock, which is currently illegal under crowd-funding rules provided by the Securities and Exchange Commission.
If the Kickstarter funders are shouldering the real risk, it seems fair and equitable that they should be rewarded. No backer is risking $1 million, but it's a risk nonetheless—a collective one. This is a form of venture capitalism in its own right, albeit a more modest one. In doing so, the early backers are removing the risk for the venture capitalists, who are traveling in the slipstream of grassroots momentum.
Take a look at Oculus's Kickstarter page. With funding completed on September 1, 2012, Oculus managed to round up 9,522 backers, who collectively pledged $2,437,429—a figure far beyond the company's initial $250,000 goal. On the back of this popular momentum, Oculus VR Inc. reported in June 2013 that it had closed a $16 million Series A round of funding from Spark Capital, Matrix Partners, Founders Fund, and Formation 8. Six months later, venture capital firm Andreesen Horowitz dropped $75 million on Oculus.
I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition.
Obviously, venture capitalists are looking for a return on investment. And that return on investment will be considerable if the Rift is as revolutionary as some people believe it to be. And the early Kickstarter backers won't see one cent of that $2 billion. Most of the blowback has come from Redditors who feel that Oculus getting snapped up by an ethics-challenged corporation like Facebook will compromise the product—not unlike fans of a punk band groaning when it gets signed to a major label. The criticism is ideological: indie vs. corporate. Fans worry that the product will get diluted with cheap hardware and other components to maximize profit. Put another way, redditors don't seem to be asking for a financial piece of that $2 billion pie. But maybe they should be demanding it.
"I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition," wrote Markus "Notch" Persson, the brains behind Minecraft, in a blog post announcing that he would stop developing for Oculus. The post went viral on Reddit, and helped spur the online backlash.
So, expect the deal to reignite the debate about whether Kickstarter crowdfunding is an abusive investment model, at least in some cases. Is this caveat emptor in the truest sense of the phrase? And if 'buyer beware' is Kickstarter's operating principle, how does Oculus's $2 billion sale impact Kickstarter's technology projects going forward? Perhaps people will be less likely to fund cool tech projects. Maybe they'll demand a clearer framework, or even regulations, that guide any prospective sale to major corporations, which could feasibly distort the project before they even receive it.
These are important questions that the Kickstarter community needs to consider. Sure, only a small percentage of Kickstarter projects will ever ascend to billion dollar valuations. But more and more people are launching their creative ideas on Kickstarter instead of taking the more difficult path of pitching to investors. And, indeed, venture capitalists are looking to Kickstarter as a way of measuring product viability, which is precisely what Andreesen Horowitz and Spark Capital did with Oculus Rift. They piggy-backed on the real early investment.
The one big truth here is that without the early backers—the ones who threw their chips in because they loved Luckey's indie path—Oculus would probably be nothing right now. Many Redditors believe that should count for something. They wanted Luckey to be loyal to the original vision, but instead they feel stiffed. Luckey's thinking might just be, "Well, I can make it even better and get this to you faster now," which is its own type of loyalty. But, his aims are now as difficult to judge as Facebook's.
The other truth is that when the venture capital began flowing in, the Kickstarter backers should have seen the writing on the wall. And that writing screamed, loudly, that Oculus ceased being truly independent a long time ago. When this happens, it's often only a matter of time before the high flying investors start demanding more input on the product's design and manufacture. This potential, more so than being able to cash out, pisses off those early Kickstarter backers, and it's a legitimate concern.
If Kickstarter and its creators want to maintain a healthy, vibrant crowdfunding community, they would do well to learn from the Oculus-Facebook deal. Is it ethical or decent to use early backers as mere stepping stones in the path to a big pay day? Maybe it's time that Congress allows Kickstarter backers to be given some stock. It will better reward the early Kickstarter backers, not just the opportunistic venture capitalists, but also make these backers feel that their faith in the project idea, not to mention their collective input, is respected. And, who knows, this arrangement might just prevent the next promising startup from being eaten up by the social media borg.