A big fat zero

When you invest in a Kickstarter, you are helping a company get their legs, giving them the money they need to achieve stability with zero risk. The risk is foisted onto those initial investors. Is that a fair trade?

Back in August, 2012, Oculus launched a Kickstarter with a goal of raising $250,000. To date, the Kickstarter raised more than $2.4 million. Since then, the company has succeeded wildly, getting purchased by Facebook for $2 billion.

So what percentage of the company do those first investors get? You know, the ones who took the initial risk?

Yeah, I know, they weren’t truly investors. There were no promises made, no shares traded hands, no documents signed. I guess the lesson is, before you sign up for a Kickstarter, realize that you may be using your hard earned dollars to stepladder some CEO to future riches. The risk is yours to take.

Caveat emptor.

  • GFYantiapplezealots

    They should just be happy they weren’t scammed out of $600 like FlyKly kickstarters were.

  • Adam
  • Anthony Visceglia

    It does make you wonder about the Rift founders’ original intentions. It seems the business model for tech startups these days is to do just enough to get bought out by a major industry giant. They’ll sell it as still being about the tech, and obviously there’s nothing wrong with their approach, but my guess is it was always about the money. Unethical, perhaps, to not make that clear to their Kickstarters — but certainly not illegal.

    • “It does make you wonder about the Rift founders’ original intentions”

      Maybe I’m misinterpreting your comment, but I think it’s safe to assume the founders never dreamed they’d be offered a $2b exit – least of all from FB – within two years and with just 75,000 unit preorders. This was like getting struck by lightning.

      • Anthony Visceglia

        Perhaps our views on humanity are just vastly different, but I think it’s entirely safe to assume the founders dreamed of getting rich.

        • which isn’t the same. the question is how they wanted to get rich — by being bought by an advertising company, or by building a successful product company that stood on its own feet.

        • If that is the breadth of your view of humanity, then I think you are missing a big part of the picture.

          I would be surprised if the founder’s dreams didn’t include getting rich, but I would be even more surprised if that was all, or even most of, what they dreamed about.

      • yes, they would. anyone active in tech startups could predict a buyout offer. the question is whether you jump at the first one, or choose to build an empire instead (like dropbox’s founders).

        • “anyone active in tech startups could predict a buyout offer”

          Of course. That’s implied. I was referring to the specific deal: $2b.

  • “The risk is yours to take”

    This story certainly doesn’t sit well with me, but where’s the risk to Kickstarters?

  • I gave money to http://www.gropener.com/ to help them get started. Got 2 GrOpeners for my money. Did not expect more. Helped to increase beer consumption.

  • drkhrse

    They shipped Dev Kits as promised by their Kickstarter and they are not exiting their business at all as far as anyone can tell. We did not invest in them so much as preordered a Rift. I didn’t expect anything besides that. There are many other Kickstarted projects that did not fulfill their promises, but I do not consider Oculus to be one of them.

    • as KS makes clear, you are not buying a product on KS — you’re backing a project.

  • Joseph Blake

    If you got a product for your money, then I don’t see the problem. You basically pre-ordered.

    I don’t get why people are upset at this, but not at the debacle of the Veronica Mars movie. Backers put up money, didn’t get a copy of the movie out of it, and WB got to keep all the profits.

  • DrBlock

    I’m really surprised by the backlash against this. Would people have been this upset if EA had bought them (or Nintendo, Sony, Microsoft, Apple, Steam?)

    Facebook wants to get into gaming, this not only rewards the founders for doing a great job creating a great product but gives their company access to a lot more resources in producing a better product. (It sounds like Occulus has been having supply issues recently, perhaps Facebook could stop that.)

    (On a side note, the original KickStarters were in no way investors. They were people who purchased a product that might have been delivered. It sounds like everyone got what they ordered. If they wanted to become investors, then they should have been talking with the CEO about how to make that happen.)

    • Bingo. That term “investment” tends to mislead people.

      You aren’t investing in the company (in fact, if I understand correctly, that’s specifically prohibited by Kickstarter, and likely by securities laws)

      You are investing in a project, so that it can happen. In hopes that the product of that project will then exist.

      It’s also not a charitable donation. The recipients aren’t making any claim of poverty. Heck, some Kickstarters don’t even need seed money. It’s just another way to pre-sell a product, or determine if there is a market for their product (case in point: the Veronica Mars movie, it’s Kickstarter was one part PR, one part market research. As it was largely funded by the studio that owned the show.

  • I have mixed feelings about this. I think the original indie appeal of Kickstarter is pretty much dead. There are certainly still small, scrappy projects, but their seem to be more and more projects that have a healthy dose of seed funding that use Kickstarter as a way to pick up free money while demonstrating market interest to “real investors.”

    I’m pretty sure Occulus falls into the latter category. I don’t know how much funding and/or sweat-equity was accumulated before the Kickstarter, but I doubt it was trivial, and since then they’ve raised tens of millions more.

    On the one hand, I think this is all fine and good, on the other hand, it is hard not to see this as part of the age old problem of people figuring out how to get the little people on the hook for most of the risk in exchange for almost none of the reward.

    People will claim that it is a free market, but it is anything but. An efficient, free, market requires equality of information and a minimization or elimination of externalities. Kickstarter is anything but. Projects know that, barring obvious evidence of fraud, they’ll get paid, no matter what. Backers can only trust that they’ll get what they were promised. Projects know exactly how ownership is apportioned, investments to date, etc. Backers don’t necessarily get this information, and even if they do, most lack enough knowledge to make anything of it.

    Meanwhile, the backers, as a group, carry significant risk due to project failure. It is, however, limited by the amount of money they contribute, but then the upside is limited too. The projects, and their equity investors, generally shoulder some risks, but they get ownership, and that ownership entitles them to all the upside.

  • Hardik Panjwani

    Its the internet, of course there is going to be over reaction. The green eyed monster is stirring lust and greed at someone’s success.

    I think the problem is this. The halo of kickstarter is ‘These people have a nice idea but cant get money to get it off the ground. Don’t have money of their own, cant get money from VC’s. Do you want to help them and get something shiny in return?’ The problem is that the halo is advertising not the truth and people don’t really get that. The halo is tapping into people’s niceness.

    In Oculus’s case it turns out there was VC money around the corner and so they did not really need kickstarter money. I remember there was some grumbling at that too. Now that they have been sold to FB at a big price tag and the huge negative reaction comes from many fronts. Many people have a love hate relationship with FB. People see it as a betrayal of their trust as they get emotionally involved with projects on kickstarter which they tend to see as a scrappy little thing they helped save or a small thing they breathed life into. There is some fear too, people have seen big companies like EA buy small game studios with a good thing and then ruin their creation. And I think the big one is the realization that as a middle class person you may have just enough money to chip into a game changer and get a piece of shiny in return but you don’t have the kind of money that would give you control over an idea that can change the world. People want control over their surroundings and kickstarter sells you the idea that you are getting in on the ground floor of something big but now it turns out that is not the case. I think it is this one manifesting itself as ‘I don’t just want a piece of shiny, I want a piece of the pie.’