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3/26/2014
06:45 PM
Thomas Claburn
Thomas Claburn
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Oculus VR: Crowdsourcing Or Mass Exploitation?

Facebook's $2 billion acquisition of Oculus VR should consider rewarding its Kickstarter backers with something more than a T-shirt.

Facebook's decision to acquire Oculus VR as a way to connect social networking with virtual reality hasn't gone over well with the Kickstarter members who backed the startup.

Comments from Kickstarter participants have been predominantly negative, with backers saying they feel sickened, betrayed, saddened, and disappointed. Similar sentiment dominates discussions of the deal on Reddit -- so much so that Oculus VR co-founder Palmer Luckey bothered to respond.

"I am sorry that you are disappointed," Luckey wrote. "To be honest, if I were you, I would probably have a similar initial impression! There are a lot of reasons why this is a good thing, many of which are not yet public. A lot of people obviously feel the same way you do."

[Whom does Oculus join in the Facebook "family"? Read Facebook Oculus Deal: 5 Older Siblings.]

Luckey defended the rationale for selling his company, and only time will tell whether Facebook's stewardship of its acquisition can win back the disaffected. But the deal reveals a fundamental flaw in crowdsourced funding: It's too easily exploited.

Oculus VR initially sought $250,000 to start the company and ended up raising more than $2.4 million from more than 9,500 backers through Kickstarter, a crowdfunding platform. If these backers had invested in Oculus VR for, say, a 50% stake in the company, they would have received $1 billion of the $2 billion price to be paid by Facebook. So each dollar of initial investment would have resulted in a $416 return. For the more than 5,600 of Oculus VR's backers who made $300 contributions, that's a theoretical payday of almost $125,000.

(Source: James Cridland)
(Source: James Cridland)

That kind of math, optimistic though it might be, hasn't been lost on contributors. Brian Bedford noted in a comment on the Kickstarter page that he backed Oculus VR for $10. "I'd like my $8200 (0.00041%) of that $2 billion Facebook deal now, please. I backed a VR project for games, not a massive social media company's fairly obvious attempt to stay relevant... I'm a game developer/artist struggling to even find a job in the face of frequent studio layoffs. Shareholder stake in something I believed in would have helped a LOT right about now, but screw the little people, right? Thanks for that."

Of course, deals can be structured in many ways, not all of which would be that favorable. What's more, Oculus received venture capital funding after its Kickstarter round, making the equity percentages more complicated. Regardless, Kickstarter is not an equity investment platform. It's a way to promote the production of products through prepayment. The backers didn't invest; they contributed and hoped for something in return. Many of them got T-shirts, as promised.

Kickstarter really should offer equity as an option, the way Fundable works. At the very least, it should require companies that get funded to repay their backers in full or more upon acquisition or receipt of venture capital.

Oculus VR might be under no legal obligation to pay back its Kickstarter funders, but it would be the right thing to do after receiving such a large sum from Facebook. You see this in other industries. When a movie does spectacularly well, bonuses are sometimes paid.

Paraphrasing the French writer Honore de Balzac, Richard O'Conner wrote in The Oil Barons: Men of Greed and Grandeur (1971), "Behind every great fortune there is a great crime." The modern version would be something like this: Behind every fortune founded on aggregated resources, there is exploitation.

Social platforms get your content -- free labor -- or, in the case of Kickstarter, your money. When aggregated, the whole is worth more than the sum of the parts. You get a free account to express yourself amid ads or maybe a lovely T-shirt. Someone else gets an empire. Some people are fine with that. But if fairness matters to you, insist on an equity stake.

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Thomas Claburn has been writing about business and technology since 1996, for publications such as New Architect, PC Computing, InformationWeek, Salon, Wired, and Ziff Davis Smart Business. Before that, he worked in film and television, having earned a not particularly useful ... View Full Bio

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PatR987
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PatR987,
User Rank: Apprentice
3/26/2014 | 7:37:13 PM
The benefits of late adoption
I've been following this project closely for a while. I'm very big on flight sims amd I was looking forward to this coming out. I -almost- bought in to the kickstarter effort. but decided to wait for a product. Glad I did. Pretty sure Zuck & Co are going to lock this down for FB's -awful- games. Farmville in 3D...
jekarayan
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jekarayan,
User Rank: Apprentice
3/26/2014 | 7:45:25 PM
were the kickstarter contributors exploited
You have raised a very important issue, and a very uncomfortable one:  did the kickstarter contributors get what they paid for.  Were thier contributions made in exchange for a promise to use teh funds in a certain way, or did they just buy a T shirt?
applesauce87
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applesauce87,
User Rank: Apprentice
3/26/2014 | 7:59:52 PM
Wefunder estimates that had backers bought equity, they'd get a 145x return
Wefunder posted a blog post today estimating that had backers bought $1000 in equity back in the Kickstarter days that they would (could) have experienced a 145x return. 

https://wefunder.com/post/42-what-if-oculus-crowdfunded-for-equity-145x-return
Axulus
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Axulus,
User Rank: Apprentice
3/26/2014 | 8:04:55 PM
Re: The benefits of late adoption
Crowdfunding sites can't offer equity without violating U.S. securities laws.  Perhaps the laws need reforming to allow for more financing alternatives in today's world.

I think the expectation was that the Oculus Rift would remain completely open platform for independent developers to make custom games and content without having to get licensed.  The Facebook acquisition threatenes that.  However, this is the nature of crowdfunding: there are no guarantees of what will happen with the product years into the future.  The only promise is that the rewards will be provided.  $300+ backers got a developer unit, which was a very fair price for what was received.

I do like the idea of offering the seed capital back to the original donors if an acquistion like this is made.  
Joe Stanganelli
IW Pick
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Joe Stanganelli,
User Rank: Ninja
3/26/2014 | 9:30:55 PM
That's the whole point.
This happens all the time whenever the founder or creator does something that Kickstarter donors don't like.  Kickstarter donors feel a huge sense of entitlement -- and there's a major hipster vibe/clique fostered there.

What they fail to realize is that -- no matter how "indie" the project may seem -- Kickstarter donors are helping a person or persons try to get rich -- with no expectation of anything in return (outside of the tokens promised for certain levels of giving).

Oculus just happens to be a major success story.  THAT'S THE POINT OF KICKSTARTER.
Joe Stanganelli
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Joe Stanganelli,
User Rank: Ninja
3/26/2014 | 9:32:02 PM
Re: The benefits of late adoption
I think it will go further and be more ambitious than that.  Could lead to Facebook's answer to Google Glass.
Madhava verma dantuluri
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Madhava verma dantuluri,
User Rank: Apprentice
3/27/2014 | 8:51:42 AM
Yes
FB is on verge of massive expanding and taking the right steps towards growth. This would help expand the broader genere because of FB data.
Ariella
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Ariella,
User Rank: Ninja
3/27/2014 | 9:43:08 AM
Re: The benefits of late adoption
@Joe that's a possibility, though I'd mind wearing Google glasses a lot less than wearing those huge boxes I see for Oculus.
Ariella
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Ariella,
User Rank: Ninja
3/27/2014 | 9:47:09 AM
Re: Wefunder estimates that had backers bought equity, they'd get a 145x return
@applesauce87 a 145x return is quite something. But I got the impression from the Guardian's article about it that people who put money into Kickstarter projects do it more as a way of funding people whose ideas they like than as way to make money. 
Juan MarioI563
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Juan MarioI563,
User Rank: Apprentice
3/27/2014 | 9:06:32 PM
Re: Wefunder estimates that had backers bought equity, they'd get a 145x return
Really interesting Thomas, thanks!

 I think that you would be really interested in some of the most cutting-edge research that I have come across explaining crowds, open innovation, and citizen science. 

 http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1919614

  And you may also enjoy this blog about the same too: 

https://thecrowdsociety.jux.com/


 Powerful stuff, no?
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