Oculus VR and crowdfunding: what’s the difference between an investor and a backer?

A number of stories have begun to circulate that after Facebook purchase, Oculus VR has treated the 9,522 people who put money in the company through Kickstarter poorly.

Back in mid-2012, Oculus used crowdfunding to try to raise money for its developer kit, garnering $2,447,429, a clear reflection of the expectations this had generated.

Some people who took part in that fundraising are saying that given their support for the company they are due some of the profits generated by Facebook’s acquisition. This has even generated what some are calling a crisis in the crowdfunding model, whereby early backers are being shunted out of the way by bigger investors.

Well, we’d all like to think that by backing a project in its early stages we were somehow buying a lottery ticket… The problem is that this isn’t how crowdfunding works, and was never meant to work, and anybody who thought otherwise was deluding themselves. The most popular crowdfunding model so far, such as that used by Kickstarter, Indiegogo and other, is based on prizes: the incentive for helping finance a project is based on being identified with said project, whether through some kind of merchandising (t-shirts, mugs, etc.), or early access to the first models the company produces.

If this doesn’t happen, then the backer has the right to protest. This is what happened during one phase of the Pebble crowdfunding project, the most successful of its kind so far, after some backers saw that the watch was on sale in retail outlets on the high street before they had been offered theirs. This was a reasonable objection to raise, given that in effect, these backers had already paid up front for a watch that might never have made it off the drawing board.

Within the crowdfunding model, backers are simply getting early access to a product; they are not committing themselves to the company’s future. There is such a model, and it is called equity crowdfunding, and it is a very different animal. Assuming that by having pre-bought a product you are buying into the company is quite simply mistaken.

The death threats that have been issue toward the founders of the company for selling to Facebook by some hardcore gamers, are quite simply unacceptable. Let’s say this again: pre-buying a product does not earn you a place on the board of directors.

In the case of Oculus VR, we should also bear in mind the following: the project’s creators resorted to crowdfunding mainly to demonstrate that their product existed and was viable, so viable that people were prepared to pre-buy it in their thousands via Kickstarter. These two objectives, to raise awareness and to carry out a market survey, are perfectly legitimate, and a fundamental part of how crowdfunding works.

And once a company has fulfilled its obligations to its backers, it has nor further commitments toward them: like it or not, buying a product does not make you a shareholder. After the Kickstarter initiative, Oculus raised $91 million of risk capital, put up by real shareholders, who are looking for a return, not exclusive access to the product before it goes on sale in the shops. And these people did make money out of the sale to Facebook. At this stage in the game there is no point in saying that if, after putting up $300 for a visor, that money was caculated on the basis of the sale, and so would be worth $43,500. That might have been the case, had you invested $300 in the company, rather than buying a product ahead of the pack. We are talking about two very different incentives and risks.

Anybody who thinks that Facebook’s purchase of Oculus VR somehow represents a threat to the future of crowdfunding doesn’t understand what crowdfunding is about. If buying a product, regardless of which phase of design, production, or manufacture is involved, automatically made you a shareholder, then we’d all be millionaires.

(En español, aquí)