Dan Holden's Blog

Screenwriting, Film-Making and Web TV

The NEW Name of the Game: Kickstarter AND Venture Capital

oculusvr logoWhen Facebook announced last week that it intended to purchase the Kickstarter-launched Oculus VR  virtual reality headset maker for some $2 billion, the social media giant thought the most controversial aspect of the deal was that the headset had nothing to do with Facebook.

But the real controversy surfaced after the news, and it comes from what should have been an expected source: the people who donated to get Oculus VR going through Kickstarter.

As it turns out, many of these people are reportedly upset that their project has sold out to the social media platform, and more are probably upset that there’s seemingly no way for them to recoup their investment even though everyone at Oculus clearly stands to gain.

The backlash has been so severe, says one report, that Oculus employees are now getting death threats.

The backlash caught Oculus Rift by surprise, as noted by founder Palmer Luckey in a Reddit post.

“We expected a negative reaction from people in the short term, we did not expect to be getting so many death threats and harassing phone calls that extended to our families,” he wrote. “We know we will prove ourselves with actions and not words, but that kind of sh– is unwarranted, especially since it is impacting people who have nothing to do with Oculus.”

This isn’t the first time the issue of financial gain from the sale of a startup has created controversy, of course, but it is one of the most remarkable cases of a company going from a small, crowdfunded startup to a multi-billion venture in a single transaction.

Clearly, being purchased by another company is one of the favorite exit strategies of today’s tech babies. Some start-up CEOs have played this game multiple times, with outstanding results for their personal portfolio. But until recently, most of the funding for these startups has come from the venture capital community or from individual ‘angel’ investors. In both cases, firm contracts clearly delineate ownership of a stake in the emerging venture. So when an acquisition comes along, the determination as to what share goes to the venture firm is a simple mathematical equation.

Not so with many crowdfunding campaigns. There’s no contractual obligation to provide early crowdfunding investors with any returns from the later sale (in this case, about $400 million in cash and 23.1 million Facebook shares valued at $1.6 billion on March 21, plus an estimated $300 million in bonus cash based on Oculus’s performance post-deal).

In fact, Oculus Rift’s $2.4 million in funding from Kickstarter represents a small fraction of its venture capital support, which includes $16 million in Series A funding led by Sparks Capital and Matrix Partners last July and $75 million Series B round led by Andreessen Horowitz in December.

Nevertheless, the concern expressed by early Kickstarter investors is palpable. While the site creates no expectation of return other than a token T-shirt here or IMDB credit there, the potential for serious financial gain is very real.

Other notable start-ups that moved from highly successful Kickstarter campaigns to serious VC investments include Pebble, which gained $10 million on Kickstarter and then raised a $15M Series A a year later. Similarly, Ouya got $8M on Kickstarter and then raised $15 million from Kleiner Perkins.

For the entertainment industry, there are two clear messages: One, get your concept funded on Kickstarter, develop a good prototype and then go to the VC community for more; and Two,  start thinking about how to add the virtual reality experience into your next venture, because the platform is rapidly nearing its time.


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This entry was posted on April 1, 2014 by in Best practices, Finance.
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