Tech Industry Insights: What Does Facebook’s Acquisition of Oculus Tell Us About The Future of Startup Funding?

A couple of days ago, Facebook announced that they were buying a virtual reality hardware company named Oculus for $2 billion.

News of the acquisition set off a torrent of outrage on the internet.

Today’s article will be about what Occulus does, why there’s been so much outrage about its acquisition, and what this means for the future of startup funding.

What Does Occulus Do?

Oculus sells virtual reality goggles. As of now, they’re working on releasing the second iteration of their developer’s kits (they’re trying to get the product in the hands of game developers before they release it to the mass market).

On the funding side, the founders managed to raise $2 million in a Kickstarter campaign in mid 2012. They raised another $100 million in 2013 from Venture capitalists, and announced they were selling the company to Facebook ~5 days ago.

There was a significant amount of outrage after the Facebook acquisition was announced. Minecraft creator Markus Perrson canceled his company’s development of Minecraft for the Oculus – citing Facebook’s poor record on privacy.

Many of the early investors in the Kickstarter campaign have also expressed unhappiness – partly because of the money they missed out on, and partially because they believed that Oculus would be the newest tech giant / pioneer a totally new way to connect people. And instead it ended up being a small division of Facebook.

Why Has There Been So Much Outrage?

Oculus ROI

(credit: Greg Belote)

Part of the outrage comes from the money people missed out on. A $1 investment in the original Kickstarter campaign that backed Oculus would be worth $145 now.

Legally Oculus couldn’t sell equity to non-accredited (anyone who makes less than $200k/yr) investors anyway, but it still made people realize how there’s very little upside in backing a product on Kickstarter (other then helping artists make their visions into reality).

Now originally I thought it was all about the money. But from doing further research I’ve realized that many, many people are actually more outraged that Oculus sold out, and to Facebook of all people.

Here’s just one example, from the user AFatDarthVader on Reddit:

“A small tech startup, Oculus sets out to develop a consumer virtual reality device because it’s finally possible. The tech is fast enough, small enough. Palmer Luckey has always wanted VR to be possible. The things you could do in a VR game…he could only dream. Finally, with Kickstarter, he can finally realize those dreams. Other people like him start to support the project. It gains traction. It gains fame. It gains millions of dollars in support. People begin to realize the far-reaching consequences it might have. It becomes the centerpiece of every electronics convention. News outlets that otherwise ignore gaming and its developments pay attention. The Oculus Rift comes to be seen as the next great thing in not only gaming, but maybe movies and even storytelling in general. The Oculus Rift, a crowd funded project made by just a guy with a dream, is set to redefine the way modern society functions in major ways.

And they sell it Facebook.

The spearhead of the VR revolution in gaming and in general is no longer independent. What was once a rallying point for people who wanted to see something as amazing as virtual reality — a thing until recently considered science fiction — become actual reality is now the property of a profit-hungry, ad-driven stereotype of a corporation.

Never have I been so thoroughly misled. I hope I have it all wrong. I hope Facebook is just injecting cash, or that details that are not yet public entirely vindicate the sale. But I have a hard time believing that’s the case. I have a hard time believing that a company whose business platform is selling the data of its users is going to acquire Oculus untouched and unblemished.”

Where did this reaction come from? Well, you have to understand that many people had high hopes that VR could become the sort of unblemished, uncontrolled, free environment that the internet once promised to become.

The acquisition of Oculus by Facebook showed that VR is likely going to become just as commercialized as the internet has become. Possibly even more.

And why did Oculus sell out to Facebook? As Patrick Klepek pointed out, they probably wanted to win the competition over the future of VR. They probably felt like they needed the additional investment and the marketing machine to popularize it.

I have no idea if the $100 million they raised from VCs would be enough to bring the Oculus to the mass market. Hard to say.

And even if they had the resources, the acquisition was a huge potential payday for their investors. I don’t know how much of the company they sold, but it’s possible they didn’t have control and were forced to sell to Facebook.

What Does This Mean For the Future of Startup Funding?

Last April President Obama signed the JOBS act into law, which allows unaccredited investors (read: you and me) to buy equity in startups up to $100,000. Startups would be able to raise $1 million from unaccredited investors annually. Legislators are still ironing out the details of the law, but it sounds like everything should be ready to go later this year.

Over 100 sites offering equity based crowdfunding have been started in preparation for the JOBS act coming on line. Some of the more well known ones are SeedInvest, EarlyShares, FundRazr, Zequs, Wefunder, and Indiegogo.

In the UK, where equity based crowdfunding is already legal, a startup called Escape the City raised almost $900,000 on the crowdfunding site Crowdcube.

Venture Capitalist Fred Wilson thinks that equity based crowdfunding has the potential to put him out of a job. I sincerely doubt it. Based on what we saw with Oculus, these crowdfunding sites will probably just serve as another way for VCs to source companies to invest in.

The problem is that the $1 million limit is way too low to actually fund a fast growing company – the sort of companies that VCs invest in will always need more money. So the VCs will be the ones to capture most of the value that comes from crowdfunding (not to mention many of the major crowdfunding sites are themselves VC owned).

But, it’s better than nothing.

Conclusion

The Oculus story gives us a hint about the future of equity based crowdfunding. If the pattern holds, crowdfunding will end up being another way entrepreneurs can fund their companies. However, the VCs will still probably skim most of the profit from the most successful companies because of the limits on funding raised from unaccredited investors.

Time will tell.

 

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