From Kickstarter to exit: how Oculus made billions without building a single product

Well this is interesting. Facebook has been on a Yahoo-cum-Google spending spree of late. As everyone who cares and some who don’t now knows, the social network has doled out US$2-billion on a startup that hasn’t actually finished building its product. Welcome to the “Unicorn Club” Oculus.

“Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate,” Facebook CEO Mark Zuckerberg said in a statement following the acquisition announcement.

The Oculus Rift project became a Kickstarter favourite after its debut on the crowdfunding platform, raising more than US$2 million from just more than 9 000 backers at zero percent equity. The company then went on to raise more than US$91 million in venture funding in 2013. This exit makes Oculus Rift the most successful Kickstarter project of all time. (Not like Kickstarter needed any more feathers in its cap, but this sends a message to startups: raise money here and you could exit before you have to go into production.)

Interestingly, the Oculus team never seemed all that interested in bringing a consumer version of its Virtual Reality headset to the market, but more than 75 000 developers had already ordered developer kits for the technology — the protoypes do look great.

“This is really a new social platform,” Zuckerberg said during a conference call with analysts and reporters. “We’re making a long term bet that immersive virtual and augmented reality will become a part of people’s daily lives.”

But Oculus doesn’t even have an actual product, so what is it selling?

What is Oculus selling? There are six key factors to take into account when analysing this on a venture capital exit level:

• Profits — Any exit takes this into account. If I am buying your company I need to see profit margins — how much money is coming into the business after expenses. In this case none. So Facebook didn’t buy that.
• Revenue Stream (recurring revenue) — What is the revenue stream like? Is there incoming revenue that can be used to sustain as well get this business to the next level? Right now Oculus’s revenue is stream is pretty much up in the air. Developers are already buying it, but there’s no hint of when it could make its way into the hands of the wider public.
• Market share / Customers / Sales channel — It’s virtual reality, everyone wants a piece of this. Oculus is, or was, at the cusp of an industry about to explode. As a society, we have been waiting for decent VR since before The Matrix and Blade Runner. With 75 000 developers already in line for starter kits and insane Kicterstarter popularity, the sales channels here are pretty clear.
• Growth Potential (Opportunity or Threat) — Again, this industry is about to blow up and Oculus was set to lead the charge. The opportunity here is too hard for anyone to resist, even for a non-hardware company like Facebook.”Facebook’s support will dramatically accelerate the development of the virtual reality ecosystem. While we are sad to no longer be working with Oculus, we are very happy to see virtual reality receive the support it deserves,” wrote Chris Dixon, one of the VC backers of Oculus in a blog post following the sale announcement.
• IP / Skills / People / Technology — From what we have seen of the tech behind this VR headset, it is wicked cool and very cutting edge. In his post, Dixon points out that both the team and the tech behind Oculus were the real deal:
  

  Oculus was founded on the contrarian belief that the right people at the right time could finally deliver on the science fiction promise. Hardware components had become sufficiently powerful and inexpensive, and the pioneering engineers who invented 3D gaming were eager to explore a new frontier.

• Brand — You have to have a brand consumers can get behind and, without trying terribly hard, Oculus built one. That brand has now aligned with one of the most recognisable brands in the world.

So what did Facebook buy exactly? The way we see it, the social network is betting on a market trend and growth potential. Yes it is playing on opportunity but also, as Knife Capital‘s Keet Van Zyl explains, “a defensive position to create future scope for monetisation of the platform”.

He argues that Facebook has essentially “bought the intellectual property, the technology and the opportunity”.

The need to create the future scope of this industry has people worried though.

“…virtual reality just became a monopoly before it even became a market, its development now serving whatever agenda Facebook has for Oculus. And Oculus won’t be the last: An entire generation of hardware innovation is up for grabs right now, and neither Facebook or Google seem about to close their wallets,” says James Robinson over at Pandodaily.

How did Oculus go from Kickstarter to the largest exit the platform has ever seen? Create massive opportunity in an industry that everyone has been waiting for to take off.