Crowdfunding 101

Death threats and social media havoc followed the recent announcement that Facebook acquired Irvine-based Oculus VR for $2 billion ($400 million in cash and the rest in Facebook stock). Oculus’ virtual reality device has been a focus of attention among hardcore gamers since it was released two years ago

Much of the outrage was apparently generated by hundreds of virtual reality fans who contributed $2.4 million via a Kickstarter campaign to help launch the company. Did those contributors really think they owned a stake in the company?

The fuss over Oculus’ acquisition by Facebook brings to mind this example: if I buy a pair of Tory Burch shoes, that means I own the shoes, but not a fraction of her company.

You don’t have to own stock in a company to support its success. Rewards-based crowd-funding creates a powerful new source of capital for entrepreneurs to test market a product, hire new employees or provide money for expansion. Successful crowd-funding campaigns provide proof of concept and attract another round of equity investors.

Following its successful crowd funding campaign, Oculus subsequently raised about $90 million in venture capital from several firms. Those investors had equity in the company, unlike the crowd-funders.

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The hoopla surrounding the acquisition highlights the confusion about crowd funding and how it works. Rewards based crowd funding platforms like Plum Alley and Indiegogo, offer fans and followers a chance to trade cash for a reward of some sort. Contributors do not get equity. Rewards need to be appealing and are tiered depending on how much you contribute to the campaign.

Equity-based crowd funding platforms like CircleUp and AngelList rely on accredited investors—affluent people who can afford to lose their investments. (The Securities and Exchange Commission defines an accredited investor as “an individual or couple with income exceeding $200,000 in each of the two most recent years, with a reasonable expectation of earning the same in future years.”)

In contrast, reward-based crowd-funding, which is what Kickstarter and Plum Alley do, offer backers rewards including pre-orders of a new product, credits for a film or theatrical project or a free pass to an event. The reward is just a perk–not equity.

What surprises me is that the people who contributed to Oculus’ campaign must not have understood the difference between reward-based and equity-based campaigns.

Meanwhile, Oculus Rift creator Palmer Luckey told Reddit: “We expected a negative reaction from people in the short term. We did not expect to be getting so many death threats and harassing phone calls that extended to our families.”

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