Was a New Virtual Reality Rig Funded by Suckers?

The SEC mulls kickbacks for Oculus Kickstarter contributors.

It's hard to look cool while wearing virtual reality goggles. Just ask all those 1990s dreamers who shelled out big bucks for subpar experiences that left them standing alone in the nation's rapidly emptying arcades, waving their arms like dorks.

While the bulky helmets of yore are long gone, the dream did not die. Meet Oculus Rift: a new virtual reality headset that has generated huge buzz in the gaming industry. In 2012, Oculus VR raised $2.4 million on Kickstarter after asking for just $250,000 to help get the headset from drawing board to factory. The head-mounted displays are not yet commercially available, but developers are already hard at work on scenarios in which players can observe the landscape just by turning their heads. And Oculus' potential goes beyond games: The headsets made waves at the annual South by Southwest festival this year when HBO used them to offer tours of the Game of Thrones kingdom Westeros. The goggles also work as 3D media players, and may have applications in medicine and defense as well.

The whole setup had the makings of a classic crowdfunding success story. The folks who ponied up cash were promised swag such as posters and T-shirts, plus first dibs on those early developers' kits. And as with all Kickstarters, the terms of the deal clearly state that donors don't get their money back; the payoff is the warm fuzzy feeling you get from supporting a cool project.

Then, in late March, Facebook bought Oculus for $2 billion, $400 million of which was cash. This may seem like a strange acquisition for Facebook-the technology is hardware, not some app that can be easily incorporated into the social network's current offerings. But Facebook CEO Mark Zuckerberg explained his strategy in a statement: "Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow. Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate."

Online reaction to news of the sale was swift. Some of Oculus Rift's funders felt betrayed. The developer of Minecraft tweeted that he was canceling a deal to bring the game to Oculus Rift because Facebook "creeps [him] out." Reddit was full of rage about the sale. User "g_roller" summed up the community's feelings nicely with a succinct "I wish I never kickstarted you."

OculusGalyonkin.comAt the tech blog ValleyWag, Joel Johnson-who donated $300 to the Oculus VR Kickstarter campaign-provided a more nuanced take. "I, as a consumer, bought into the narrative that underpins almost every Kickstarter project: that without my contribution, something novel would not exist," he wrote. "And while that remains true... Oculus' sale to Facebook also highlights the disparity inherent in the current capitalist and investment structure, where small investors are excluded from returns by regulation, but investors with more capital can quickly extract more capital by pushing a quick expansion into untapped markets, even without proving that those markets actually, truly exist."

And that's the crux of the thing. The way investment regulatory structure is run, small Kickstarter donors are simply not allowed to be offered a piece of a fledgling company in exchange for their early infusion of cash. Johnson's early support of Oculus will not, and currently cannot, pay off like it would for a regulatory-approved investor.

That's a problem supporters of crowdfunding are trying to fix. Some are hoping a massive 585-page set of rules by the Securities and Exchange Commission (SEC) will help. The new rules will allow a company to raise up to $1 million in investment-not just donations-from crowdfunding sources over a one-year period.

Obviously, the SEC wants to attach a few strings. Why else would it take a novel's worth of prose to give companies permission to sell stakes to small donors? An analysis at VentureBeat calculates that the various reporting and compliance requirements that the commission wants could eat up more than one-third of funds raised. Bigger donations mean lower compliance costs, which doesn't exactly encourage upstarts to stick with a model involving hundreds or even thousands of smaller donors.

Those who are frustrated that their early financial support of Oculus won't pay off with a share of Facebook profits are going to instead have to use the developers' kits they paid for to try to make awesome games. We may not know exactly what Facebook has in mind for the revolutionary technology, but who wouldn't want to play a version of FarmVille where you have the sensation of standing in front of a big red barn, begging your virtual friends to help you milk the cows?

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  • Response||

    Having only large donors be able to purchase stakes in a kickstart company would not likely be that big of a deal given kickstarter's tier based system. I would consider donating even more if I knew I was investing as well. It could actually increase donation/investment capital.

  • BakedPenguin||

    Some people don't have more to donate. Why should they get screwed?

  • Zunalter||

    How are people getting screwed in this deal if all the tier-specific deliverables are delivered to the backer?

    For all the people who backed the Oculus and are now pissed that they aren't going to get a piece of the profits...get a brain. When you backed this project, you KNEW you weren't buying a piece of the company, you were essentially preordering a headset for yourself. And, since all the backers got exactly what Oculus VR said they would get for their money, what is all the complaining about?

    Though the article makes a good point about the need for investment reform to allow smaller investors into the game, but the title is ludicrous.

  • BakedPenguin||

    I don't think they are by Oculus, I think they are by a government that stops them from investing small sums for a return.

  • Free Society||

    The peasants shouldn't get a return on their investments. The poverty the government keeps them in is for the common good, that is; to justify the existence of the government.

  • craiginmass||

    I doubt many poor people visited kickstarter and backed 3D glasses.....just saying!

  • ||

    "Some are hoping a massive 585-page set of rules by the Securities and Exchange Commission (SEC) will help."

    Idiots.

  • Bill||

    The gear was obviously designed to make you look like a Cyborg. Yessss!!

  • The Late P Brooks||

    Only 585 pages? It's a Wild West style free for all.

  • califernian||

    Only because the extremist libertarians have token over our government. NOTHING LEFT TO CUT

  • The Late P Brooks||

    It's just another example of a corrupt Rethuglitard administration stealing from the poor to give to the rich.

  • politicsbyothermeans||

    And you're a racist if you think otherwise.

  • Tommy_Grand||

    Or if you are "white."

  • np||

    Regulations are crazy enough as it is for everyday life, but are through the roof for certain sectors like finance/banking/monetary matters (which lends itself to cronyism). There are however some interesting developments in the cryptocurrency world to get around this while at same removing counterparty risk. Using the same decentralized blockchain technology, you can develop smart contracts, smart properties, trustless escrows, and related to this: autonomous corporations without a centralized entity for handling shares; basically any business function that can be expressed programmatically.

    The most promising right now seems to be Ethereum. There was demo showing how it can be used to control physical things like door/locks.

  • Another David||

    Any funders who felt like they deserved a cut of the deal are idiots. Kickstarter clearly spells out what you're getting when you fund a project, and it's not equity.

    (Funders who felt betrayed because they thought they were funding an independent company and not a startup looking for good press so they could sell themselves to a big company that would proceed to ruin the original plan, well, that's a different story, but it's not one that would be fixed with less regulation.)

  • craiginmass||

    You are correct - it's like your friend buying a lottery ticket and then you claiming that was with the $5 you lent them a couple months ago.

  • wwhorton||

    Crowdfunding is donation, not equity investment. When you send money through Kickstarter, there are no strings attached apart from any spelled out by the Kickstartee. Once you've gotten your special ballcap, signed hardcover, or beta access, the obligation is fulfilled.

    Which is not to say that some sort of investment model along the lines of microlending shouldn't exist, because it absolutely should and probably will soon. But that isn't crowdfunding.

    Also, a valuable alt-text opportunity was missed with the headshot of that greasy Swedish technohipster. For shame!

  • poloniusium||

    IIRC, microlending is a thing in developing nations for small businesses.

  • Virginian||

    Well we'll be back to that at some point.

  • poloniusium||

    Kickstarter is where you go to get funded by suckers. The people on kickstarter understand this. I'll call your attention to ouya. It did kickstarter very well; capitalize on the nolstagia and foolishness of industry outsiders and allow them to project their desires onto the project.

    Kickstarter is a donation service that most of its users perceive as a VC service, because they're stupid.

    Kickstarting companies tend to go to kickstarter specifically because they have no real obligations to the people who give them money. It's a way to raise money for people who would never get a loan from a bank or advance from a developer (for video game kickstarters).

  • Hydra||

  • Mark22||

    Kickstarter campaigns are not investments, they are pre-purchases of products.

    And the SEC isn't helping, it created this problem in the first place by making it impossible for these kinds of campaigns to be treated as investments.

    Of course, if these kinds of small investments are allowed, there will be a lot of fraud and junk. The SEC doubtlessly recognizes this as an opportunity to grow even further, hire more enforcers and extend its bureaucracy, when actually enforcement should simply be left to civil litigation.

    Finally, the idea that as a small investor you can't participate in the riches of startups is b.s. Facebook wasted its money on Oculus and is not going to get a reasonable return on its investment, at least when it comes to Oculus' sales; if you had invested in Oculus instead of buying one of their prototypes, your money would be gone. But if you really want to waste your money on startups, there are a few ETFs and other vehicles you can use. There would be more if the SEC didn't create so many obstacles.

  • ~Knarf Yenrab~||

    And the SEC isn't helping, it created this problem in the first place by making it impossible for these kinds of campaigns to be treated as investments.

    Look, they *had* to write a 600-page tome that permits companies to raise up to a million dollars in investments. It's not like they could just burn the rules that prevent consensual investments in the form of private contracts--that would be anarchy!

  • CE||

    We can't just let non-rich people invest in stuff. They might get rich.

  • brec||

    ... raised $2.4 million on Kickstarter in 2012 .... Later that year, Facebook bought Oculus for $2 billion

    The deal was announced earlier this year.

  • John Galt||

    And what's wrong with Pong? Pong is technology that works. Pong is here today. Nobody is getting ripped off with Pong. With Pong you know exactly what you're getting. Pong is in your face.

  • CE||

    ...developers are already hard at work on scenarios in which players can observe the landscape just by turning their heads.

    I can already do this just by looking out the window.

  • VicRattlehead||

    Yeah but think of how fucking cool it would be to have it look like mars, or the pyramids, anything you can imagine and program at the touch of a button. I love outdoors and camping, but total immersion into a video game world would be pretty fucking sweet you have to admit.
    (disclaimer- i used to do a lot of LSD)

  • DC_36||

    This reeks of anti-profit motives. Shame on the kickstarter funders who complain. And really, I suspect the whiners are small-but-vocal minority, and some media outlets sympathetic to the motive above simply latched on and amplified it.

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