$375 Million Crowdfunding "Scam"

By Matthew Milner, on Wednesday, April 2, 2014

In August 2012, a start-up called Oculus VR raised money on a crowdfunding site.

To help get the company off the ground, thousands of people chipped in a total of $2.4 million.

Last week – just 18 months after raising money from the crowd – Oculus was acquired by Facebook for $2 billion.

Using back-of-the-envelope math, that $2.4 million stake is now worth $375 million. That’s a stunning return…

If you’d invested just $10,000, it would be worth $1.5 million…

Even a thousand bucks would have turned into $150,000.

It pays to be believer, right?

Umm, actually… no, not this time.

Despite this start-up going from $0 to $2 billion – and despite this event providing even more evidence that crowdfunding sites are attracting massive opportunities – the people who wrote the initial checks didn’t receive a dime.

How did this happen?

Let’s take a look.

A Perfectly Legal "Scam"

Oculus raised the $2.4 million to develop a futuristic headset for virtual reality.

It was a legitimate and highly anticipated project.

But in at least one article we read describing the acquisition, the writer suggested that Oculus backers got duped in what was, effectively, “a perfectly legal scam.”

Many Oculus contributors agreed.

“I felt a little used, I guess,” said one backer. “Maybe I was naive. I thought it was more just like someone doing it for a hobby and just wanted to do something fun for the community. I didn’t know it was going to turn into a $2 billion deal.”

Others expressed something closer to outrage. Markus “Notch” Persson, the creator of legendary video game, Minecraft, said: "I did not chip in 10 grand to seed a first investment round to build value for a Facebook acquisition.”

Did backers not understand what they were getting into?

Rewards Versus Equity

Oculus raised the $2.4 million on a crowdfunding platform called Kickstarter.

Kickstarter is a powerful force for good. They help fascinating projects – from films and music to games and art – get funded by people like us. Since 2009, they’ve raised more than $1 billion for 58,000 different ideas.

But – and imagine the sound of screeching tires here – it’s a “rewards-based” crowdfunding site. People back these projects not to profit from them, but to bring them to life; to help support other folks’ dreams.

In fact, Kickstarter’s rules explicitly forbid backers from earning a financial return.

(In the case of Oculus, backers received rewards like a “sincere thank you,” a T-shirt – or if they contributed $300 or more, a prototype headset and some software.)

That’s different from the equity-based crowdfunding sites that we write about on Crowdability. On sites like AngelList and FundersClub, backers like you receive equity – you become owners of the start-up, and you can profit from its success.

It’s Nice To Do Well

So what lessons did we learn from the Oculus acquisition?

1. Tomorrow’s big acquisitions are being funded on crowdfunding sites today

A start-up – a crowdfunded start-up – was acquired for $2 billion.

This company didn’t even exist 2 years ago.

If you’re not looking at crowdfunded investment opportunities, you’re missing out.

2. It’s great to do good – but it’s nice to do well, too

Plenty of the crowdfunding opportunities you see on Crowdability are businesses that do good. But they allow you do well, too, because you’ll profit if they become financially successful.

Crowdability’s mission is to teach you about early-stage investing – and to present you with equity crowdfunded opportunities where you can earn a financial return.

To get started, check out our Deals page…

And keep an eye out for our weekly Monday morning email: it’s a round-up of the most promising equity crowdfunded deals from across the web. You never know when Facebook’s next acquisition will show up in your inbox.

Happy Investing!

Best Regards,
Matthew Milner

Founder
Crowdability.com

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Tags: Kickstarter Oculus Virtual Reality

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