9,522 people that put money in Oculus Rift might think so
Crowdfunding as we know might be dead. The acquisition of Oculus Rift for two billion dollars magnifies what is not right with traditional crowdfunding.
Two popular platforms, Kickstarter and Indigogo, have occupied most of the crowdfunding spotlight. They allow anyone to sign-up and begin funding ideas in to existence.
Funding campaigns begin by setting a goal amount. This amount if reached can bring the product/company to the masses. Donations are categorized into tiers determined by the company. Each tier promises a unique ‘perk’ enticing you to contribute the associated amount. Perks can range from a $10 donation for a thank you to a $1,000 donation to meet the founders. Backers know they are not investing in the company for equity, but to see a product born out of public demand.
Crowdfunding campaigns mostly target niche markets, but in sometimes you stumble upon a game changer. Oculus Rift is just that. They sought $250,000 on Kickstarter to bring their virtual reality platform to the public. Their donation perks ranged from $15 for a poster, to $5,000 to be flown out and spend a day at the Oculus Lab. Most of the tiers included development kits and prototypes. A $300 donation to have exclusive access to a prototype was worth it for many. In the end, Oculus surpassed their goal of $250,000 and brought in a total of $2.4 million and 100% of their equity intact.
Oculus then went on to secure millions of funding from venture capitalists. The difference between the two funding amounts is equity.
Many Oculus backers took to the Internet to express their disappointment for ‘selling out’. Underlying motivation was the fact backers did not get a piece of the company they ‘funded’ to life.
A simple equation can be used to calculate how much ROI we are talking about if those Kickstarter backers actually received equity for their donations.
Amount Donated = D
Company Valuation (at time of Donation) = V
Acquisition Price = A
Return on Donation = R
(D/V) A = R
Lets assume that Oculus Rift, at the conclusion of the Kickstarter campaign, was valued at $2.4 million (the amount raised). V = 2,400,000
We’ll also assume that you were one of the 434 backers that donated $25 and received a t-shirt. D = 25
Facebook purchased Oculus for $2 billion (other escalators can make it more lucrative) but we’ll keep it at a cool $2 billion. A = 2,000,000,000
Now we set up our equation as such:
(25 /2,400,000) 2,000,000,000 = R
(0.00001) 2,000,000,000 = R
R = 20,000
If your $25 donation were for equity, rather than a t-shirt, it would have returned $20,000 with the sale to Facebook. The realization of what $25 could have yielded is the reason ‘free’ crowdfunding is about to change.
The JOBs Act – specifically Title III of the bill – will allow crowdfunding for equity (once it goes into effect). Previously, crowdfunding for equity was only legal if the investors were accredited. An accredited investor has a net worth of $1 million or more and grosses over $200k per year. With Title III, anyone can invest in a company via crowdfunding. Allowing people to invest in this manner opens the door for individuals that may not have had the opportunity otherwise.
What backer would donate $25 to get a t-shirt rather than equity after this Oculus acquisition? At this phase your investment could have returned your money 800 times over. Lets all take a moment of silence for the seven backers who donated $5,000 to Oculus and missed out on a potential return of 4 million dollars.
Backers in the very near future will be able to receive equity instead of thank yous. This will open the doors for more investors and more companies. Startups are not a sure bet, but as with Oculus, the potential return is astronomical.
The evolution of crowdfunding is about to begin, buckle up.