The Oculus VR buyout by Facebook was unfair to early investors and shows why a equity-based of crowdfunding is needed.
Facebook’s buyout of Oculus VR brought a wave of mixed reactions. Some were excited about the potential Facebook would bring, with its seemingly ending supply of capital, to the virtual reality startup. Others were concerned that Facebook would take the gaming ethos out of the device and turn it into advertising delivery system. But what about those involved in the original crowdfunding campaign that pushed the device out the door?
As The New York Times’ reports, some are angry and feel alienated. The Times’ Bits blog cites a Oculus backer named Mike Cooper that posted on the company’s Kickstarter page: “What was the point of Kickstarter if you sell out to a giant company like Facebook?”
Another early backer took to his blog to denounce the deal.
“I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition,” blogged developer and early backer Markus Persson.
Backers of the Kickstarter project could fund it at a number of different levels and receive different tokens of appreciation from the company. At the very high end was early access to the SDK as well as a developer unit of the headset; at the low end a public thank you or a t-shirt.
But consider for a moment if some of these buy-ins also had company equity attached. Project backers that now have a sour taste in their mouths would likely be singing a different tune when cashing out their dividends. After all, project backers are effectively acting as private equity firms with incentives like public shout outs instead of company equity.
There’s a reason for this: in most jurisdictions peddling investments to the public without registering with regulators is often illegal. Even though the shares of the company wouldn’t be traded over a stock market, selling equity of a firm means you have to play by the rules of securities regulators. In addition, it also opens the company up to the potential for lawsuits from investors if they believe the company’s management didn’t do all they could to maximize the firm’s profit. In short: it gets complicated.
But as Oculus matured after its initial crowdfunding campaign and caught the attention of venture capitalists, these investors did what the Markus Perssons of the world could not: for investments in the range of $70 million they got some serious company equity and a big payday when Facebook outright bought the company.
However there is a solution. Crowdfunding sites like Kickstarter could work with regulators and prospective companies to develop a framework that would allow for the public to invest (but not to actively trade like a stock market), without the regulatory burden that publicly listed companies must face. There would certainly be more risk involved, but the reward would encourage more investment.
Until this solution presents itself, we’ll be stuck with the inherent unfair playing field that we saw with the Oculus Rift. Early backers were left with thank yous, shirts, and prototypes while venture capitalists got a big pay day.
Another early backer took to his blog to denounce the deal.
“I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition,” blogged developer and early backer Markus Persson.
Backers of the Kickstarter project could fund it at a number of different levels and receive different tokens of appreciation from the company. At the very high end was early access to the SDK as well as a developer unit of the headset; at the low end a public thank you or a t-shirt.
But consider for a moment if some of these buy-ins also had company equity attached. Project backers that now have a sour taste in their mouths would likely be singing a different tune when cashing out their dividends. After all, project backers are effectively acting as private equity firms with incentives like public shout outs instead of company equity.
There’s a reason for this: in most jurisdictions peddling investments to the public without registering with regulators is often illegal. Even though the shares of the company wouldn’t be traded over a stock market, selling equity of a firm means you have to play by the rules of securities regulators. In addition, it also opens the company up to the potential for lawsuits from investors if they believe the company’s management didn’t do all they could to maximize the firm’s profit. In short: it gets complicated.
But as Oculus matured after its initial crowdfunding campaign and caught the attention of venture capitalists, these investors did what the Markus Perssons of the world could not: for investments in the range of $70 million they got some serious company equity and a big payday when Facebook outright bought the company.
However there is a solution. Crowdfunding sites like Kickstarter could work with regulators and prospective companies to develop a framework that would allow for the public to invest (but not to actively trade like a stock market), without the regulatory burden that publicly listed companies must face. There would certainly be more risk involved, but the reward would encourage more investment.
Until this solution presents itself, we’ll be stuck with the inherent unfair playing field that we saw with the Oculus Rift. Early backers were left with thank yous, shirts, and prototypes while venture capitalists got a big pay day.
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