Kickstarter to conglomerate: Facebook buys OculusBy: Domenic Romano and Josh Wueller

Last month, Facebook reached a $2 billion deal to buy Oculus VR, a company dedicated to developing virtual reality devices.  Before the big buyout, Oculus made a name for itself as one of the most successful Kickstarter projects ever; it raised over $2.4 million with the help of more than 9,500 backers.

Many of Oculus’s original supporters are outraged at the high-tech startup for agreeing to a buy-out.  Instead of increasing Facebook’s bottom line, backers argue, they thought they were helping a small business get off the ground.  How much control should Kickstarter backers have over the projects they support? 

How Kickstarter works

Kickstarter describes itself as “a new way to fund creative projects.”  The crowdfunding company, which launched in 2009, amounts to a turbocharged version of the patronage system that supported generations of artists like Wolfgang Amadeus Mozart and Ludwig van Beethoven.

Historically, startups and creatives seeking bank loans to fund their projects haven’t exactly been greeted with open arms.  Kickstarter allows filmmakers, game designers, musicians, artists and inventors to launch online campaigns to seek funding from supporters.  Project creators set a fixed deadline and dollar goal, offering rewards to thank backers for their support.  The lucky 44% or so of campaigns that meet their goal receive the money that others have pledged.

Kickstarter and similar crowdfunding sites like IndieGoGo and Peerbackers have helped fund projects big and small.  The Veronica Mars movie reached its $2 million, 30-day deadline in less than 12 hours and ultimately raised $5.7 million.  In 2013, Inocente became the first Kickstarter-funded film to win an Oscar.  Board and video games, books and a variety of electronics have garnered similar success through crowdfunding.

Oculus and Facebook

Oculus’s Kickstarter story is an enviable one for any startup:

In September 2012, the donations site raised $2.4 million for the business’s Oculus Rift project from several thousand backers, with those who put money into the company qualifying for a host of goodies, including posters, T-shirts and, for more generous backers, early prototypes of its virtual reality equipment.

On March 25, 2014, Facebook’s Mark Zuckerberg announced that the social media giant would be acquiring Oculus and entering the realm of virtual reality.  As part of the deal, Facebook will fork over $400 million in cash and 23.1 million shares of Facebook common stock, as well as $300 million in additional cash and Facebook equity if Oculus can meet certain performance milestones down the road.

Oculus owners have walked away with a payday in the billions, but some of the virtual reality company’s original backers are up in arms.  Although Oculus delivered the rewards that it promised to backers, many of the project’s initial supporters feel cheated.  As one communications and media professor in New York City noted, Oculus supporters feel “psychologically robbed of the illusion of being part of a company.”  Markus Persson, one of Oculus’s top backers and creator of the popular video game Minecraft, wrote in his blog that he was upset by the deal stating, “I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition.”

Backers are outraged, but who’s to blame?

Kickstarter backers contribute money only as a gift and not as an investment.  Although supporters receive one-off rewards, they don’t walk away with ownership interest or control over the fundraising company.  Websites such as Fundable and Crowdfunder, however, allow backers to earn equity in the companies they back.

Although Kickstarter donors can’t ask for a refund when they’re unhappy with a project’s post-fundraising performance, there is some recourse available against project creators who don’t come through on the rewards they pledge.  According to Kickstarter’s Terms of Use, creators who offer rewards but fail to perform must refund any backer whose reward they do not or cannot fulfill.  Kickstarter hopes that backers will only use this provision if they feel a creator did not make a good faith effort to fulfill any promises or rewards.

Oculus backers may be outraged, but the crowdfunding platform worked exactly as planned.  Following its Kickstarter campaign, Oculus was only required to come through on the posters, t-shirts and prototypes that it promised to backers.  Oculus was not required to check in with its crowdfunding donors, before deciding whether to do the Facebook deal or anything else.

Kickstarter does a quick review of projects to ensure that they meet the guidelines, but reminds users to assess the validity or worthiness of projects for themselves.

Did Oculus “sell out”?  Do supporters of the Kickstarter campaign have a right to complain, or are angry backers living in their own virtual reality?

Contributing Author: Victoria Gionesi
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Josh Wueller

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Domenic Romano

Managing Attorney

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