The Dark Side of Facebook’s Latest Power Grab
Another week… another tech sector bombshell.
As you know by now, Facebook (FB) has agreed to a $2-billion deal to buy Oculus VR – the company behind the highly anticipated Oculus Rift virtual reality headset.
So you can imagine the backflips that Oculus’ backers are doing, can’t you?
Yep… they’re overjoyed. Here’s a taste of their delight, as they lit up Oculus’ message boards…
“You selling out to Facebook is a disgrace!”
“I cannot put into words how betrayed I feel by this.”
“I NEVER would’ve given you a single cent of my money had I known you were going to sell out to Facebook. You sold all of us out!”
What gives? Well, it’s simple…
The Devil’s in the Details
In 2012, before Oculus Rift was the marquee name it is today, it was merely a startup venture on the crowdfunding platform, Kickstarter.
The campaign’s initial funding goal was $250,000, but it ended up raising $2.4 million from 9,522 rabid backers.
So why would they denounce such a massive payday?
Three little words: terms and conditions.
“Project creators keep 100% ownership of their work, and Kickstarter cannot be used to offer equity, financial returns, or to solicit loans.”
In other words, every backer who helped fund Oculus Rift through Kickstarter has zero percent ownership in the company – and won’t see a dime from the Facebook buyout.
Shocked? Don’t be.
Kickstarter lays out its terms explicitly. There’s no deception or misguidance.
And the majority of investors – the ones who read the terms first – understood this before funding.
They understood that it was a non-equity crowdfunded project.
What’s Your Equity?
You see, there are two forms of crowdfunding: non-equity based and equity based.
~ Non-Equity: Here, backers are emotionally invested in a project – be it a band, film, artist, or, in this case, the Oculus Rift – and get a simple reward for their support. That could be exclusive access to the product in the works.
As Oculus backers piled in, the funding ignited publicity and drew the attention of deep-pocketed venture capitalists.
After $16 million in Series A funding and $75 million in Series B funding, Oculus VR made a big move and had takeover interest from several major tech firms.
~ Equity: With equity crowdfunding, backers receive ownership of the company in return for their funding. But it’s only available to “accredited investors” who meet the following criteria:
- Has an individual or joint net worth through marriage exceeding $1 million.
- Has an annual individual income exceeding $250,000, or a joint income with spouse exceeding $300,000 for the last two years.
Essentially, you have to be rich.
Just like with pre-IPO investments, ground-floor equity crowdsourced companies are out of reach for everyday investors.
All I Got Was This Lousy Development Kit
Ultimately, the Facebook buyout has left small-time Oculus investors with nothing much to show for their support.
The contributions ranged in amount – anything from $1, all the way up to $10,000. Kickstarter campaigns have different reward levels for backers, based on how much they donate.
For example, a $300 outlay would get a supporter the Oculus Rift development kit – i.e., the actual hardware prototype and tools for the gaming unit.
According to crowdfunding site, Seedrs, had that $300 investment been equity ownership in Oculus VR, those investors would be cashing in $20,000 each, after taking the venture capital rounds into account.
Instead, the winners are…
- Facebook – for snagging the most talked-about virtual reality device on the market.
- Oculus VR – for turning an innovative idea into a multi-million-dollar windfall.
- Venture capital firms like Matrix Partners, Spark Capital, Founders Fund, and Andreessen Horowitz.
As for the losers… well, forget virtual reality… Oculus backers just got a dose of cold, hard reality.
One backer said, “Your decision not only damages your reputation, it damages crowdfunding as a whole.”
But does it? With a $2-billion offer from Facebook, Oculus VR merely made the same business decision that many of us would have.
It does, however, beg the question: Why would anyone invest in non-equity projects? Oculus supporters don’t even get to use their investment as a tax write-off!
And where the heck is the equity crowdfunding platform that President Obama promised in the April 2012 Jumpstart Our Business Startups (JOBS) Act? A measure that promised to address the prohibitive “accredited investor” part of equity-based crowdfunding?
Coming Soon: A New Class of Investors (Including You)
Under the proposed rules, Title III of the JOBS Act will give non-accredited investors the ability to participate in equity crowdfunding. It will also let startups raise up to $1 million through regulated crowdfunding ventures.
Obama passed the law to the SEC and basically said, “Make it work.” He gave ex-SEC chief, Mary Schapiro, an end-of-2012 deadline. She missed it and resigned shortly afterward.
With Mary Jo White now heading the SEC, she drafted proposals in October 2013 that destroy the benefits of Title III by adding layer upon layer of regulation and compliance costs, which make the law too expensive and complicated for small businesses to implement.
The good news? The lawmaking phase should finally be over by the third quarter. And it’s expected that rules will be enacted that open up equity-based crowdfunding for non-accredited investors.
Meantime, a crowdfunding IPO is in the works. CircleUp just raised $14 million in a financing round – another promising move, following previous investments from Google Ventures and Union Square Ventures.
I’ll keep you posted on developments here. Once equity crowdfunding is properly regulated and opened to the masses, it’ll create a new class of investors.
Your eyes in the Pipeline,