Aug. 1, 2012: When Oculus Asked for Donations

http://blogs.wsj.com/digits/2014/03/25/aug-1-2012-when-oculus-asked-for-donations/

by amitkumar01 • 12 years ago

160 117 12 years ago

blogs.wsj.com

modeless2• 12 years ago

This is the real shame in the Oculus acquisition. If Oculus had been able to give away just 10% equity, every single Kickstarter backer would be $20,000 richer today. The sentiment would be completely different. The SEC needs to get in gear and start allowing equity crowdfunding pronto.

The SEC's classification of millionaires as "accredited investors" who get first crack at all the best investment opportunities is exactly the kind of "rich get richer" policy that people ought to be furious about. I think not enough people understand it.

Phlarp• 12 years ago

Yea, all those early BFL investors are really rolling in their unregulated equity crowd funding cash these days.

general_failure• 12 years ago

Kickstarter needs a no-acquisition clause

martinald• 12 years ago

I don't think that would work. It would seriously diminish the possibility of kickstarter-based companies ever raising crowd funded funding.

sparkzilla• 12 years ago

I think you mean it needs a "No acquisition by Facebook" clause.

gojomo3• 12 years ago

Indeed, I don't see anywhere else that Americans accept a "wealth test" to exercise a basic economic right (ownership of production).

Note, the accredited-investor rules are not an "ability-to-pay" test. That would be fair: if you can write the check, you're in.

The rules also are not a creditworthiness test: they don't evaluate reliability, and investors want to give money, not take it from others.

And they're not a competence test: you can be credentialed to professionally handle others' investments and businesses (through things like passing the bar or "Series 7" or CPA exams), or otherwise have degrees in law, technology, and business... and still not pass the same "accredited investor" wealth standard that any dolt who inherits a million dollars does, automatically.

The distinction ought to be abolished as a matter of basic fairness.

refurb5• 12 years ago

The reason for the accredited-investor regulation was to prevent people from putting all of their wealth into risky investments they know nothing about and being left destitute.

People on HN are pretty smart, but it's not representative of the entire population.

People get scammed by ridiculously obvious scams. Do you really think they have the ability to invest in a start-up in an intelligent way?

gbelote• 12 years ago

The rules are indeed a little ridiculous, especially when juxtaposition against gambling.

The distinction is in the process of being removed with the JOBS Act. It was signed into law in 2012 but the SEC has been slow to enact the regulations. Hopefully it can be used to support the future Oculuses! (Occuli?)

alexqgb3• 12 years ago

Kickstarter specifically prohibits equity deals with backers, as allowing them would place them in the crosshairs of the SEC.

FYI.

asdfologist2• 12 years ago

Wow, you just missed the entire point of his post.

sroerick• 12 years ago

Could you elaborate on this a little bit? I've never encountered this before.

icpmacdo• 12 years ago

If a crowd funding website that was completely bitcoin based would it be able to avoid all SEC regulations? If there are regulations in the future is there a liability to creating this now?

pmorici• 12 years ago

No, There used to be 3 difference BTC denominated securities exchanges, Havelock, BitFunder, and some other one I can remember the name of. They were mostly based out of Canada then some regulators forced two of them to close and Havelock moved to a country in central America to avoid the same fate.

tim3333• 12 years ago

No doesn't work like that. Raising funds is raising funds whether it's in us$, bitcoin, pork-belly futures or whatever. You could list in another country like on Seedrs in the UK and then presumably be subject to UK rather than US law. Although if most of the investors and assets were in the US the SEC might still try to stop it.

anigbrowl5• 12 years ago

It's better to address the problem directly (investor eligibility) rather than trying to invent technological end-runs around it, because the law is not deterministic and such technological instrumentalities are very transparent to regulators..

loceng• 12 years ago

Would they really have offered equity though? I don't know.

yeukhon3• 12 years ago

I don't get the sentiment, those who feel they have been betrayed.

First Oculus gave out the perks they promised to deliver, haven't they? That's the whole deal with backers. You back a project and you should receive the promised perk in return.

Another way to look at backer is to think of them as your first set of customers. I don't see why Oculus should return equity even if KS allows them to do so.

If the option was "give us $10,000 and you get 0.1% of the equity then would we still have this discussion. Obviously not. But the contract these backers signed up for was just the perk.

ama7292• 12 years ago

First Oculus gave out the perks they promised to deliver, haven't they? That's the whole deal with backers. You back a project and you should receive the promised perk in return.

You don't back a project just to get the perks though most of the time, you back a project to support a company grow and thrive.

IMO they clearly broke the social contract between them and the backers.

ynd• 12 years ago

I think the kickstarter backers are really both investors and customers. They are investors because they do take a risk by paying for a product that doesn't yet exist. This leap of faith from these "customers" allowed Oculus to create a 2 billion dollar product.

People are mad because funding the project through kickstarter created some expectations that were not met. Funding through kickstarter feels like you're investing in grassroots human projects, but this made people realize that it's really just business as usual.

forrestthewoods2• 12 years ago

Don't be ridiculous. That's not how it works. Every dollar, and then some, needed to be spent on the headsets. Oculus wasn't going to give away 10% of the company in exchange for negative dollars.

If the SEC does allow equity via crowdfunding you'd have to be relatively insane to take them up on the offer. It just doesn't make sense.

tim3333• 12 years ago

I think a lot, probably most companies on Kickstarter would be ok giving 10% of equity to their backers if it was legal.

pushrax2• 12 years ago

I don't understand your reasoning – the point of selling equity is to have more money available for immediate use. If they had followed this path, they might have raised even more capital.

GBond2• 12 years ago

The real shame is not that the backers didn't a get a financial payout ('tho they should). The real shame is how Oculus' most passionate enthusiasts got burnt. They were in it for the shared vision but got a tough lesson in capitalism instead.

crummy• 12 years ago

What exactly did they lose?

rtpg• 12 years ago

what about the product they bought?

I don't expect financial payout from a McDonald's franchisee because I bought some hamburgers from them.

clef• 12 years ago

This is a giant casino for people that have a lot of money they can afford to lose.

sc68cal• 12 years ago

This reminds me of the same arguments that were made about Bitcoin and exchanges and how the mean old SEC wasn't letting the little guy get in on the action.

The same thing would happen in the world of Kickstarter - big asset bubbles and rampant speculation, bogus funding campaigns, graft, and exploitation.

icelancer3• 12 years ago

The same thing would happen in the world of Kickstarter - big asset bubbles and rampant speculation, bogus funding campaigns, graft, and exploitation.

I see. So what do you call a roulette table with obviously addicted gamblers throwing their money away, then? Good old American fun?

AUmrysh• 12 years ago

Kickstarter already has plenty of exploitative scam campaigns. I knew (I use the term loosely, more like I had to ban from a social group for being offensively rude to women) one of the guys that ran a successful kickstarter. He hasn't updated his project in months, and his last updates were about how he's only spent a small amount of the money, is looking for a new dev team, and wants to hire a web developer on the cheap.

I knew it was a scam from the day I learned of it, just based on this guy's character and inexperience.

I can assure you that equity would be no different, unless the investments could be protected by law in some way. I don't really know how to prevent this sort of thing, investors needs to do their homework, but even that's not always accurate.

pavlov• 12 years ago

Here's an illustrative example of just how arbitrary these regulations are...

In USA, donation-based crowdfunding is legal but equity-based crowdfunding is not. In Finland, it's just the other way around: a company can sell equity to private individuals, but it can't take donations [0].

In both cases, the proponents of the laws claim that the average citizen is dumb and would be ripped off if these protective laws weren't in place. Yet somehow Finns are smart enough to invest into private companies whereas Americans aren't, and meanwhile Americans are smart enough to make their own decisions about donations whereas Finns aren't.

Both of these laws are just historical accidents at this point. They made sense in an era where information was hard to acquire, but today you can just google a person's name to find out whether you want to invest in her project. Arbitrary limitations around crowdfunding should go.

- -

[0] More precisely, one needs a "collection license" from the police to take donations in Finland. This is only available to registered charities, so doing a Kickstarter is effectively illegal for Finnish companies and individuals.

seventytwo• 12 years ago

Not arguing with you here, but I just wanted to say that the point of this rule is to prevent people from getting scammed in large numbers. Allowing equity crowdfunding would also have to come with a bunch of new rules to prevent a company from claiming all sorts of fantastical stuff and then folding after everyone's pitched in.

Just think how this would work - people can't even be bothered to read their ToS or Privacy Policy for Facebook. You think they're going to pour over an operating agreement to become an equity member for a company? This rule was enacted as a quick and simple way to prevent people from being fucked.

cookingrobot• 12 years ago

For $300 those backers got the promise of an awesome VR headset. I don't see why they should get equity for free on top of that.

It would be nice if kickstarter campaigns could add equity as and option in the reward tiers, but it's not like these people gave their money for nothing in return.

gfodor3• 12 years ago

I think this would be the idea. If there was even an option for equity, the entire sentiment of a quick flip changes. It becomes less about the company exploiting you and more about you not having enough faith to buy a few shares in addition to the prototype.

People right now currently feel akin to a benefactor who put a kid through college only to have the kid turn their back on them down the road once they're successful.

dlp2113• 12 years ago

And that is a stupid way to feel. Using your kid analogy, they didn't turn their backs on anyone, they took a better paying gig so that they can do more stuff for you. So that they can get you a quicker ROI by having more assets at their disposal, by being legitimized.

I don't understand any of your reactions to this. They took money, and so what? For a site that is dedicated to the entrepreneurial spirit, making it big, and "disrupting industries" you sure could have fooled me.

kevingadd• 12 years ago

You're assuming every backer paid 300. Some donated more, some paid less.

dlp2113• 12 years ago

And? They knew the terms of the deal.

phantomb3• 12 years ago

According to the article a majority of the backers and a significant majority of the money was at or above the $300 mark

tibbon• 12 years ago

But do keep in mind that the backers did bear risk- there is a significant chance that any Kickstarter project doesn't turn out, because Kickstarter shouldn't be thought of as a 'store to buy things'.

Risk is exactly what investors bear in exchange for a potential return. Companies require investment because they don't have the capital to get things moving upward otherwise, which is exactly the need that Kickstarer fulfills.

dalek2point3• 12 years ago

my complaint is mainly with the headline. if the word "kickstarter" was anywhere in the title I would not have clicked. d'oh.

maxden• 12 years ago

and the headline has changed again...

it was "18 months ago Oculus did one of history's smartest rounds $2.4M for a 0.0% stake (wsj.com)

ama7292• 12 years ago

From Notch:

"And I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition."

http://notch.net/2014/03/virtual-reality-is-going-to-change-...

refurb5• 12 years ago

Did Oculus raise more money after the Kickstarter or did these guys own 100% of the equity?

djloche• 12 years ago

They did a $75M round recently and have been hiring like crazy.

jes5199• 12 years ago

at this point, we should read "hiring like crazy" as "trying to get acquired". Having a lot of employees boosts your valuation but does little for your ability to deliver a product

ConnorBoyd• 12 years ago

Plus $16M back in June

mehwoot• 12 years ago

Well you can't have it both ways. If you put your money in on kickstarter and expect to get a product in return, you have bought the product. You didn't invest.

Of course, how much people who put money into things on kickstarter expect to get a product versus how much risk they are expecting to take is an open question.

daemin2• 12 years ago

So perhaps the answer is for Kickstarter to not allow any sort of companies to be funded, but rather only keep it for once off art projects...

phantomb3• 12 years ago

I understand that's what the Kickstarter team is most interested in. But what would that accomplish besides causing all the companies to simply move to the next crowd-sourcing site?

If Kickstarter doesn't want a cut of that money I'm sure Indiegogo will be happy to take it

daemin2• 12 years ago

It's a tough question Kickstarter might ask itself, but then again since it gets a cut of all the funding that comes through it, why would it want to stop (over)funding these company projects. I think at this stage it won't change unless it is forced to from a third party.

phantomb3• 12 years ago

"a $2.4 million early-stage investment in what would become a $2 billion business in a year and a half, in return for 0.0% equity" No. Those backers weren't investing in a company, they were purchasing a prototype device and software package. In practice, that's how Kickstarter works. Sure, there will be a lot of backers who are happy that their deferred purchase is helping a project actually get off the ground, but I guarantee every person who handed over the $300 read over the rewards carefully.

booruguru• 12 years ago

I've always found it bizarre that people would willing give hundreds (if not, thousands) of dollars to fund a business venture for some paltry token of appreciation while the founders (and investors) receive all of the financial rewards. (The "Veronica Mars" movie comes to mind.)

Also, I find it deeply upsetting that I am be allowed to give my life savings to a startup founded by a friend or family member, but I can't do this with a stranger...because the government wants to protect me or something.

But, really, I can't really blame regulators for this paternalistic policies since most people blame the banks for the financial crisis while pitying those impoverished home owners who stupidly purchased homes they couldn't afford.

interpol_p• 12 years ago

It wasn't a "paltry token" of appreciation in this case. It was the actual VR headset, unlike anything else you could purchase commercially, for $300. I am glad I got mine and knew what I was getting when I backed the project — a really fun toy I could mess around with.

icambron• 12 years ago

I'll just say it: Kickstarter is for suckers. When you give money to a project, you're doing one of two things:

1. Making a donation to a company. [1]

2. Preordering something that hasn't been built yet.

Doing 1 is silly, since you don't really get anything in return. "But it makes it more likely that this thing I want will happen!" In some tiny marginal way, sure, but mostly it's going to happen because other people donate (or fails to happen because they don't). Don't be the fool who tries to personally take on the collective action problem. And stop trying to make other people rich out of the goodness of your heart.

Of course, as the WSJ fails to make clear, most of Oculus's Kickstarter money wasn't straight-up donations; it was preorders of the Rift. That's obviously not a donation, but it's not a good idea either. As the buyer, you bear the risk that it never ships at all. "But I'm compensated with a discount!" Essentially, you're making an investment in which your returns come in the form of future discounts on a product. Forget that you like the Oculus Rift for a second; is this a wise investment structure? If someone set up a VC company that did that instead of buying parts of companies, would you think that was smart? Did you do any kind of analysis that suggests this is actually works out to be a good investment? Do the potential returns even justify that analysis? Do you think of other consumer products this way, or only shiny electronic things?

Or to think about it a different way: imagine if someone set up a store that worked like this: you take your item to the counter, where they don't actually let you buy the item. Instead what you can do is pay the price minus n% and then they roll this big roulette to decide whether you get the product (m% success rate). If you win you get to keep the product and if you lose it goes back on the shelf and they keep your money. To spice things up, they don't tell you what n and m are either, just the price to play and whether you get the item. Now, it's possible--though unknown--that m and n work out that you're EV positive here. But would you really shop at that store? Especially when there's another store next door that just sells you the same stuff at a known price (i.e. just buy the Rift when it comes out).

The fact of the matter is that you're aren't pre-buying the Rift on a rational basis. You've been convinced by clever marketing to shoulder risk for a company because it seems cool and feels good. Total sucker move. That probably explains why it tastes bitter when the company whose capital requirements you fronted rolls that into a $2 billion dollar acquisition.

[1] Maybe it's not a company. Maybe it's a cause you support like improving CoffeeScript or something. For those cases, I withdraw my objections.

nathancahill• 12 years ago

"Don't be the fool who tries to personally take on the collective action problem"

That's exactly what Kickstarter solves. My $10 probably wouldn't help much, but the $10 of thousands of backers will actually do something.

InclinedPlane• 12 years ago

Who cares?

You seem to live in a universe where everything goes according to plan, that's not any real universe I'm aware of.

Kickstarter is about being a patron of creators for specific projects. Sometimes those projects are by people working in good faith, sometimes not. Sometimes those projects succeed, sometimes not.

The idea that this is somehow unusual is ridiculous. The idea that it should be discouraged is actively harmful. One of the most powerful things anyone can do with their money is to fund the development of things which change the world. Create products they wish existed, create art they desire, support creative or productive people, help others, etc.

GBond2• 12 years ago

The fact of the matter is that you're aren't pre-buying the Rift on a rational basis. You've been convinced by clever marketing to shoulder risk for a company because it seems cool and feels good.

This is the point that many commenters are missing.

Many of the comments here are addressing the straw-man argument of the legal aspect of the transaction (yes, technically the backers are not owed anything... but we know that).

What the WSJ post questions is the ethics of a KS Project making a human to human appeal to the heart and ask for donations when in reality it is a Corp asking for debt-free seed funding from regular people.

blazespin• 12 years ago

Actually, in all of this anger, there is great news. This is validation of the crowdfunding format in a big big way. I hope this is just the start (well, the start of getting actual ROI for your crowdfunding investment. Enough of this Donation silliness..)

shurcooL• 12 years ago

This is all that I'm reminded of:

http://mashable.com/2010/04/02/facebook-acquires-divvyshot/

shittyanalogy2• 12 years ago

    1) Kickstarter is not an investment platform.
    2) Kickstarter is not a store.

Kickstarter is ONLY for giving your money away to ideas you want to see succeed. The perks are a gamble at best and misleading at worst.

If you give money to a kickstarter for any other reason, despite what the campaign or your friends or some blog tells you, you're quite unfortunately doing it wrong.

makomk2• 12 years ago

Yes, and from the point of view of backers this introduces a new risk of failure: the company doing so well that it's bought out by a company whose goals are at odds with the original purpose of the Kickstarter. They originally backed the Kickstarter as a way to create a platform for VR gaming and other applications that developers could use, but instead that was abandoned in favour of a good exit from a venture capital perspective.

They may have thought they were giving money to an idea to help it succeed, but in retrospect they were providing early-stage seed funding for 0% equity exactly as the article says.

nemetroid• 12 years ago

The perks are not a gamble. If the project creator fails to deliver, you are entitled to a refund. Straight from the Kickstarter Terms of Use:

Project Creators are required to fulfill all rewards of their successful fundraising campaigns or refund any Backer whose reward they do not or cannot fulfill.

shittyanalogy2• 12 years ago

Through what enforcement?

fiatjaf• 12 years ago

If the government let it, every small company or utopian project would sell stocks, not empty dreams, to believers in the internet.

Aug. 1, 2012: When Oculus Asked for Donations

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