Video Games

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

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

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

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.

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  1. Some internet billionaire douche bag offered me $400 million dollars cash for a kickstarter project I had dreamed up, the answer would be SOLD!!

    You really have to be a clueless idiot to think this guy is a “sellout”. He started a company. The whole point is to make money.

    1. There’s this odd leftwing slant to tech startups. Of course you want to make money, but that’s just a happy byproduct of your pure corporate social responsibility and overall goodness. Tech startups are not allowed to state money is the corporate goal. Look at the Facebook press release. It’s not about producing a product that people will buy, it’s about increasing the social connectedness of the ecospace or some such bullshit.

      1. Wait, I thought it was totally ridiculous, nay nearly illegal, for a corporation to pretend that it had beliefs other than making money. At least that’s what they were saying about yesterday’s Supreme Court case.

      2. I think it is more to do with being a KIckstarter thing. Successful tech start-ups tend to get bought up by big companies. But many Kickstarter projects seem to be more artsy projects that would have a hard time getting funding from conventional channels.

        If I’d contributed to the Kickstarter, I’d be mad that I wasn’t getting a piece of that payday. The guy they quote has a good point about smaller investors being locked out of really investing in things like this.

        1. Those two things play into each other. It’s SEC rules that prevent people from getting equity, because people aren’t smart enough to invest.

          Thanks to that rule, the sorts of things that get funded on Kickstarter tend to be arty and other projects that people fund because they are fans, not because they’re trying to make money.

          1. I was a backer of the rift and I don’t really feel angry at the guy. I would have done the same thing. If anything comes out of the purchase then it is icing on the cake of what I already have. They were able to spur several big players to innovate in this field and we might actually have a new way to play games at the end of all of this.

        2. But nowhere in the Rift’s kickstarter campaign did it state that “donating” would guarantee you a stake in the company. The various pledge levels offer different rewards, all of which Occulus is still capable of delivering on regardless of the buy-out. Kickstarter backers have absolutely zero reason to whine about this.

    2. What is weird about this whole thing is we are talking about video game peripheral hardware.

      How can you be a sell out for the next 3d screen or gaming mouse?

      If the occulas rift ever made it to market it would have been copied by the likes of Sony Microsoft and Nintendo and logitech almost instantly.

      Unless the Occulas rift developers got some very special patents (hard to imagine as VR has been around for over 20 years) then their buissness model was doomed from the start.

      The fact that they sold to the likes of Facebook (what the fuck do they know about hardware and video games?) instead of the big boys like Sony or Microsoft makes me think the value was never there.

      1. I don’t think i got my point across very well.

        The next Kinect or Wii controller is not punk rock.

        In fact it is kind of the exact opposite.

        Building a business plan around the idea of indy gaming peripheral is pretty much doomed.

  2. This way the people who came up with the actually-pretty-neat Oculus tech get to make some money off their creation, while Facebook will be left holding the bag for its inevitable failure on the marketplace (the problem with VR wasn’t that the technology was bad, the problem with VR was that nobody outside of the nerdiest of nerds wants to strap a video screen directly to their face). It’s win-win, I say!

    1. Yeah, I was waiting for FB to make their first dumb move with their investments and this seems like Exhibit A.

      1. Like all things internet, it won’t make any money until someone figures out a way to make it a porn platform. And doing that will take more than just graphics.

        1. I would have to imagine that they have plans for Oculus that are grander than a Virtual Game Boy, but considering the deep failures of other head-mounted VR technology (see: Glass, Google) I’m skeptical as to what these plans may be.

          I guess the porn app would be interesting but the internet has dropped the bottom out of the porn industry and I’m not sure if that’s going to be enough to justify buying this thing for a billion dollars.

          1. V/R, if it offered actual sensation would offer something ordinary porn could not. Also, it would not be something anyone with a cell phone camera can create for free, so it would be immune from the free competition on the internet that is destroying the porn industry.

            1. free competition on the internet that is destroying the porn industry

              I keep hearing this around here, but I would think that “you get what you pay for” applies to porn just like every other product. In other words, who is so desperate to watch sloppy ugly people porn just because it’s free?

              1. In other words, who is so desperate to watch sloppy ugly people porn just because it’s free?

                Teenagers?

                1. Maybe, but teens were never a big consumer of real porn anyway.

              2. The attempts to go big budget over the last 10 years have been full of attractive stars, well produced action, and have largely been… uninspiring.

          2. but considering the deep failures of other head-mounted VR technology (see: Glass, Google) I’m skeptical as to what these plans may be.

            When you can get Google Glass type stuff on a contact lens or a direct brain implant, I’ll be the first in line.

            1. It won’t be long.

              http://www.patentlyapple.com/p…..n-eye.html

              Singularity, exponential growth, and all that.

    2. Hey I wanted to strap this thing on my head and take a walk on the Virtuix Omni! being able to look around and move ingame would have been incredible and would have make FPSs worth playing again.

      1. I played a little Half-Life on one. It was neat and fun being able to look anywhere in a 3D environment, but you still moved with the keyboard so it could be a little disorienting at times.

        1. Hence the need for the Virtuix Omnia. I love that you can shoot at somewhere OTHER than the centre of the screen.

          HL1 or HL2?

  3. Oh I like how inconspicuous it is. I’m sure wearing that on the bus won’t get me jumped.

    1. It has to be conspicuous. Otherwise, how are you going to get hipster retards to buy it?

    2. I don’t think that is intended to be worn all the time. And if it takes off as a product it will inevitably get much smaller and more stylish.

  4. The Oculus Rift is pretty cool. That said, it’s just a Virtual Boy with better graphics.

  5. I can’t wait not to join “the most social platform ever”.

  6. Hey Scott, Oculus might have an office in the LBC, but they are headquartered in Irvine.

  7. Clearly whatFarmvilleneeds…is the farmers daughter getting naked.

  8. 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 little people need government to protect them from their stupidity. Just imagine how much worse Madoff’s scam would have been without the SEC keeping an eye on things!

  9. Let’s see….. you donate $300 to help fund the initial round of $2.4 million. Assume the initial valuation (with initial round cash included) is $3.0 million, and the founders keeper 20%, giving you a 1/10,0000 share of the company. They then sell to Facebook for $2.0 billion, and you cash out your stake for $200,000.

    But wait, you don’t 1/10,000 share of the company, because the SEC says you’re not a qualified investor. Gee thanks SEC, for protecting me from scams!

  10. On its surface, the primary incentives for crowdfunding and investing are different. When you invest in something, your focus is on making a profit. When you donate through kickstarter, your focus is on getting a product, but you probably also want to help the company out because you believe in what they’re doing. At some point the company will need investment – I believe Oculus Rift got $16 mil or so back in June – so what’s the difference if it’s a group of investors or a purchase?

    I think the difference is that early stage investment carries an emotional component to it, however small. For a lot of small startups, their initial funds come from family and friends up until they get a prototype working and can attract investment. Those donations aren’t investments, but they’re recognized as playing a critical roll in getting the company up and running. Angel investors are sort of “us”, sort of “them”, and later stage investors are always a “them”, but a purchasing company becomes an “us”. I think that’s where the discomfort comes in. The initial donation was an investment in the product and the people, and now it’s just the product.

    I don’t think most kickstarter donors would be interested in being investors, and I don’t think most businesses would want them involved as such.

    1. “I don’t think most kickstarter donors would be interested in being investors, and I don’t think know most businesses would not want them involved as such.”

      1. I would be 1000 times more interested in funding stuff on kickstarter if i got a cut of the profits, if any. Who wouldn’t?

        1. But I’m not talking about what you want. I’m talking about what businesses want. No business would rather have stockholders than donors.

    2. It’s really hard to say, since there’s a law making it illegal.

      If the SEC rules weren’t in place, who’s to say what culture would grow around Kickstarter, or other crowdfunding sites if Kickstarter wanted to avoid equity, and what sort of projects would happen.

      Not to say that you’re necessarily wrong (analogy: fed ag policy helps larger farms, but I don’t think in the absence of fed ag policy we’d have a real halt in the move to larger farms and a wholesale change in farm size), but Kickstarter only has projects that aren’t about profit and investing because it’s illegal for them to host the other sort of projects.

      1. I think you’re right. My guess would be that you would see more service-based businesses develop, rather than businesses that produce a consumer product for the donor.

    3. What? All of my friends and family expect a percentage for their investment. Why should crowd funders?

      1. Why shouldn’t…

  11. I don’t think Occulus or FB (or even Kickstarter) did anything wrong, but it demonstrates how crazy the KS process is. You finance the start up of a company, and in return you get none of any future proceeds or any control over what the company does.

    Only a complete fool would think that’s a good deal.

    1. Only a complete fool would think that’s a good deal.

      Thus explaining why KS is so very popular among SWPL progs.

      1. I think that Kickstarter is a great idea and I’m glad it exists. But the progressive dopes don’t get that far more good is done for more people through ordinary, “greedy” investing and money making.

        1. But…but….but…profits are evil. So evil.

    2. It’s a good deal if it is someone’s art project or film that wouldn’t get funded otherwise and you are interested. It’s a bad deal if it is something that would grow into a successful business or technology.

    3. Only a complete fool would think that’s a good deal.

      I give money to the Institute for Justice, and I don’t feel like I’m a complete fool for doing so. So long as people view it as contributions and pseudo-charity (with similar types of recognition and sponsor rewards that get auctioned off to charities), it’s fine.

      We don’t know how it would end up without the SEC rules. Possibly there would be some crowdfunding sites with equity, some without. The rules for equity would be more complicated.

      1. Except that to the extent that IJ solicited donations for a particular purpose, they are legally required to use them for those purposes. They couldn’t, for example, announce tomorrow that they’ve decided to merge with Moveon.org and henceforth all your donations will now be spent suing Christian bakers for not making enough gay wedding cakes.

      2. To clarify, I’m not necessarily saying all donations need a monetary return to be worthwhile. What I’m saying is that the KS supporters clearly had a different vision for the future of Occulus than the owners did. In this case the control aspect of ownership was more important than the financial aspect of it.

        1. A different vision, yes, but certainly changes in vision less drastic than that happen in the non-profit world. Look at what happens to university donors who ask to endow chairs in certain kinds of studies. Non profits change their focus all the time, and build up endowments as well.

    4. It is not a good deal Dragon. You only do it because you think it is some goofy project that you would like to see done. You can’t expect it to ever pay you back or be angry if the creator ends up making a fortune.

      It is so funny progs are angry about this. Progs are always talking about “opportunity” and such. You would think it would make them happy to fund something that made these guys a fortune. Why should the progs care about the money? I thought Progs didn’t want to sully themselves with commerce. Well, now they don’t have to. This guy did it for them.

    5. The sad thing is that a venture capital version of kickstarter is illegal under US law.

      Kickstarter exists because a real start up market that lets anyone invest is impossible.

      1. Clearly false. Matt Yglesias tells me the US has no federal securities laws and it’s a laissez-faire Wild West. So there couldn’t possibly be any laws to stop this, though there SHOULD be.

  12. Now all they need to do is buy Omni by Virtuix and you’ll be able to burn calories sowing seeds on cheesy FB farming apps.

  13. If Occulas rift actually put at a consumer priced product (or any product at all) then I would be impressed.

    This deal makes me think there never was a consumer priced product in the cards and amusingly the owners just got a cool 2 billion for a market that the Occulas never had a chance in and Sony will probably scoop up in a few years anyway.

    1. I forgot about Sony’s VR headpiece. They might pull VR out of the Facebook but that would require Sony not sucking and they are kind of iff on that regard.

      1. The PS4 is rocking the console market and their new control is beloved by the press and youtubers.

        What are you even talking about?

        1. Everything else. Almost every other Sony division is bleeding red. The PS4 is looking great (although I am not so sure about its game catalogue) but the PS3 was, for most of its life, a brick.

  14. Well there goes my hopes of VR gaming anytime soon. I am sure FB will try to use OR for some stupid shit before they go broke and run out of money. The fact that FB didn’t buy the Virtuix Omni, which is really needed to complement the OR, tell me they aren’t serious about virtual gaming.

  15. I’ve done kickstarter. Its crystal clear what you get in exchange for your support, and its not a piece of the company.

    The people whining about this are fools and morons.

    Even the complaint about how securities laws prevent the little guy from investing in startups is beside the point. That’s not what kickstarter has ever been. Many (most?) of the kickstarter projects would never be funded by venture capitalists, anyway.

    Not only that, but millions of little guys invest in startups every year. Either their own business, or their neighbor/friend/relative.

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