Facebook’s founder, Mark Zuckerberg, today announced their acquisition of Oculus VR for $2 billion. In a sense, this is just good business. Facebook gets what they want— an exciting virtual reality product. Oculus and their investors get what they want— loads of cash. It’s all good. Except for one thing.
Their earliest and most crucial round of investors were left unheeded and unreimbursed. The nearly 10,000 people on Kickstarter who made this entire deal possible were left with nothing but t-shirts and hardware. This is no coincidence.
It’s too easy to argue that nothing is owed to those who funded the Oculus Rift. Too easy because it’s technically true. Legally, Oculus fulfilled the terms of the agreement for their backers. In most cases, only a VR headset and a development kit was ever offered or expected.
However, law doesn’t tell the whole story. Ethically, many of the backers have good reason to be upset. Kickstarter backers put large sums of money into this business startup at the most risky time possible, before venture capitalists had expressed solid interest in the company.
It is very likely many of the backers were indie developers who believed they were investing into an insurgent competitor to liven up the depressing VR technology space. They then had no say in the future of the company they made happen. Many are now understandably upset at the marriage with Facebook, which may harm their interest in the product.
Every one of those early investors should have had an opportunity to invest into Oculus VR as a company, to have some say as equity investors, and to see the same return on investment or better as the venture capital backers on that investment. It’s still likely many would have given a thumbs up to the Facebook deal for the profits it generates, but we don’t know. Why wasn’t equity offered at the time of the Kickstarter campaign?
First and foremost, it wasn’t legal at the time. The campaign kicked off prior to the JOBS Act taking effect, which only began the process to legalize crowdfunding for shares in a company. The SEC rules weren’t written yet.
Secondly, venture capital firms don’t want more competition. They are already being outbid by smaller angel investors in many cases. The last thing they want is more dumb money to join what they believe is their dumb competition. So they argue against financing by crowdfunding, based on the premise that ordinary people are too easily manipulated. This is all true, but irrelevant.
Consider the practice of trading penny stocks or options. Anyone can virtually walk into a online brokerage arguing “Trust me, I know what I’m doing” and purchase risky penny stocks or naked call and put options. In fact, many people do. This is why we all see a considerable amount of spam e-mail propping up a particular penny stock for inevitable pump and dump schemes. Limiting penny stocks to an enlightened few does nothing to resolve this. Banning the practice only leads to a new class of spam scams and the remaining investors still share unreliable tips and make poor decisions. Even among the Ivy League educated, investors still do not hold a great cache of hidden knowledge that insulates them from ever being burned.
Here’s a little secret: most venture capitalists also don’t know what they’re doing. The industry habitually loses money compared to Wall Street indexes and bets on overcrowded sectors, like record companies signing boy bands. In fact, it’s extremely hard to value early stage companies before they have a well-proven product. Even among the most vaunted establishments of investment capital, a lot of investors still follow their most respected investors like sheep drinking from the same trough.
As YCombinator founder Paul Graham pointed out in a essay last year, this behavior is too common. “When an investor tells you ‘I want to invest in you, but I don’t lead,’ translate that in your mind to ‘No, except yes if you turn out to be a hot deal.’ And since that’s the default opinion of any investor about any startup, they’ve essentially just told you nothing.”
We today have a finance industry that too often doesn’t go where the puck will be, but instead where the puck was last year. I’m not saying there aren’t smart VCs. Only that they are already betting against long trends set by more ignorant investors.
The reason Oculus went to Kickstarter was simple. Legally qualified investors refused to fund a costly hardware startup because they believed the easy money was in funding cheaper mobile and cloud software instead. It’s understandable why they felt this, but there is no good reason why regulations should decide a risk taker on Kickstarter cannot also be a legal “qualified investor” in early companies.
It seems clear that the earliest investors in Oculus deserved a shot to own more than mere beta hardware and promises. They took the risk so they deserve more reward.
