Facebook Buys Crowdfunded Pioneering Virtual Game Company: Opportunity or Betrayal?

Regulations make it impossible for small backers to get a piece of the action.


Technological progress, but we'll still all look like dorks.

Those who remember the 1990s may recall some really expensive and awful virtual reality games popping up in arcades right before they mostly died off for good. Players put on giant helmets that projected a virtual space they pretended to play in while standing around in the real world looking like dorks.

While those virtual reality systems are long gone, the dream did not die. Meet Oculus Rift: a new virtual reality headset that has developed enormous buzz among gamers and in the gaming industry. And it owes a significant amount of its development to crowdfunding. Oculus, the Long Beach company designing the system, raised $2.4 million on Kickstarter after asking for just $250,000.

Then, Tuesday afternoon, Facebook bought Oculus for $2 billion, $400 million of which is cash. It may seem like a strange acquisition for Facebook—it's hardware, not some app that can be incorporated into Facebook's offerings. But Facebook CEO Mark Zuckerberg said in a statement he's looking beyond the current mobile setting: "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."

Some of Oculus Rift's funders feel betrayed and used, though they're undoubtedly still going to get whatever perks their backing paid for. The developer of Minecraft tweeted that he was canceling a deal to bring the game to Oculus Rift because Facebook "creeps [him] out." Reddit is full of rage about the sale, but rage is half of Reddit's deal anyway.

Over at ValleyWag, Joel Johnson, who donated $300 to the Oculus VR Kickstarter campaign, provides more useful detail as to why somebody might feel betrayed by the decision. What's wrong with Oculus Rift drawing the interest of Facebook, getting bought, and possibly becoming even bigger than anybody ever predicted?

The fact that everyone involved made a rational choice to sell out isn't what I find frustrating, I don't think. (I don't even particularly care that Oculus sold to Facebook and not, say, Microsoft. Ultimately a sale is a sale, even if Facebook is the worst possible partner for Oculus of any of the large technology companies.) It's that I, as a consumer, bought into the narrative that underpins almost every Kickstarter project: that without my contribution, something novel would not exist. And while that remains true—and is a reason that Kickstarter's owners continue to underline that their goal is to fund "creators" and not "products"—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.

The way our investment regulatory structure is run, those small Kickstarter donors are simply not allowed to be offered a piece of the company in exchange for their gifts. Johnson's early support of Oculus won't—and currently cannot—pay off like it would for an investor. It's a problem supporters of crowdfunding are trying to fix, and some are hoping a massive, 585-page new set of rules by the Securities 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 in a one-year period.

But obviously there are some strings attached, or it wouldn't take the SEC the duration of a novel to give companies permission to sell stakes to small donors. An analysis at VentureBeat calculates that the various reporting and compliance requirements the SEC wants to put into place to allow crowdfunded investment could eat up more than a third of funds raised this way. The compliance costs eat up less of the money the more money raised, which doesn't exactly encourage these companies to stick with smaller donors. For those who are frustrated that their early financial support of Oculus won't pay off with a share of Facebook profits, they are going to have to use the developer's kits they paid for to try to make awesome games instead. Clearly what Farmville needs is the feeling like you're on the actual farm, begging your virtual friends to help you milk cows.