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Kickstarter: The Cheapest Money a Company Can Raise
Posted on Friday, April 4 2014 @ 11:29:31 Eastern

This member blog post was promoted to the GameRevolution homepage.
There is a fair bit of anger over the $2 billion acquisition of Oculus by Facebook. A large amount of that anger is misplaced in the idea that Oculus is performing an about-face and betraying core gamers by selling out to a social company. This is silly: Oculus CEO and co-founder (think Sean Napster in The Social Network) Brendan Iribe was trying to distance his product from “just a fun alternative game console” as early as a December 2013 interview with Techcrunch.

Kickstarter backers, on the other hand, saw the potential of Oculus's product almost before there was a product to see. Months ahead of the very first venture capitalist and over a year before Marc Andreessen's vaunted technology investment firm caught wind, crowdfunders saw the potential in Palmer Luckey's innovations and put up $2.4 million to support his dream. Now, after the $2 billion validation of their intuition and savvy, Kickstarter backers are left holding a pair of prototype goggles that were outdated before they shipped while the 'real' investors race their yachts into the sunset.

Legally, Kickstarter backers have no leg to stand on—but do they lack even a conceptual kick-stand on which to prop themselves up? How much would the $2.4 million Oculus raised from Kickstarter be worth if it had come instead from an early investor?

Let's build the world's simplest model:
 
[Click to embiggen. ~Ed]

As a regular equity investment, the $2.4 million Kickstarter donation would be worth $281 million dollars today, or a one-hundred sixteen (117 – 1) times return on investment over two years. Put another way, the average Kickstarter participant who pledged $300 was actually donating a potential $35,100 in 2014 dollars. Minecraft creator Markus Persson's $10,000 donation would be worth $11.7 million.

We can also look at this from the perspective of Oculus’s founders. Had they gone the traditional start-up funding route of angel investors and seed funds, $2.4 million in capital would have cost them $281 million of their current ownership of the company. And what did that capital ‘cost’ when it was raised through Kickstarter?

Nothing.

It’s well understood (and if not here you go) that because Kickstarter treats all funds submitted as a donation, backers have no claim to any equity ownership of the company or product they back. In fact, Kickstarter backers barely even have a claim to the rewards at the tier they pledge at (as if to prove this point, Oculus was late on backer reward fulfillment with absolutely no penalty imposed upon them).

What was NOT considered until the sale of Oculus was the true value of the capital being donated. Nearly every Kickstarter project positions itself as a single transaction proposition: Backers pre-pay for a product, the company delivers the product, and both parties walk away in a state very similar to the one they began in. Sure, some noted that Double Fine had a completed video game that they could sell to everyone who DIDN’T back the project and reap 100% of those profits, but until Oculus there wasn’t a clear, well-publicized example of an entire company being built on the back of donations that at first blush appeared to be simple manufacturing costs. R&D, headcount, marketing--all of the vital functions for large-scale startup growth were funded at no equity cost to the owners.

Every product-based company with early-stage capital needs should be on Kickstarter. There is no more cost-efficient way to raise capital, and no other alternative for non-millionaire funders . Equity crowdfunding, in which a backer receives ownership in a company rather than in a product (or the non-contractual promise of a product, as in Kickstarter’s case), is slowly being written into law and regulation. For now, the only way early Rift adopters will see any of their $281 million contribution to Oculus's founders is to put on their pair of outdated, prototype goggles.

The opinions expressed here do not necessarily reflect the views of Game Revolution, but we believe it's worthy of being featured on our site. This article, posted originally on February 5, 2014, has been lightly edited for grammar and image inclusion. You can find more Vox Pop articles here. ~Ed. Daniel Bischoff
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