The Oculus Rift - The Argument in Favor of Equity Crowdfunding

Last week Facebook acquired virtual reality headset startup Oculus Rift for $2 Billion. Oculus Rift had received its initial funding through crowdfunding website Kickstarter. The company raised almost $2.5 Million from nearly 10,000 backers. These backers contributed an average of $250 each in exchange for “rewards” that ranged from T-shirts and posters to a beta version of the headset itself. The company’s decision to sell out to Facebook just 18 months after the Kickstarted campaign has lead to a firestorm of complaints about Oculus and the Kickstarter funding process, and possibly for good reason. Had the initial Kickstarter funding been in the form of a Seed/Series A equity raise the $2.5 Million would have probably represented about a 25% stake in the company. Given this assumption, at a takeout of $2 Billion the value of the 25% ownership would have grown from $2.5 Million to $500 Million. That means each contributor’s average $250 “investment” would now be worth $50,000, a 200x ROI. Understandably, contributors are not happy that the Oculus founders sold out to the Man (in the case Mark Zuckerberg) and are equally displeased at the realization that they don’t get to participate in the financial windfall. Of course, Kickstarter makes it very clear that the site is not intended as a funding mechanism for startups but rather a means for getting money to worthy pursuits in music, the arts and other creative thinking. Recently, many concerns have been raised about the possible constraints and restrictions that may accompany the soon-to-be-released Phase III of the JOBS Act that will finally bring equity crowdfunding to the masses but the Oculus example has brought renewed optimism to the small but rapidly growing community of firms looking to capitalize on the equity crowdfunding concept.

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