Tags: Oculus | crowdfunding | invest | Zuckerberg

How Virtual Reality Will Kill Wall Street

Wednesday, 02 April 2014 08:04 AM Current | Bio | Archive

Last week, Facebook (FB) founder and CEO Mark Zuckerberg spent $2 billion to buy virtual reality startup Oculus VR. I think the Oculus technology is interesting, but the company's financial evolution is even more so.

I explained recently how Crowdfunding Will Change Small Business Forever. I said the side effects of this revolution would not be good for conventional banking. Oculus is a great example. Follow the money and you will see why.

August 2012: Oculus raised $2.4 million from almost 10,000 fans on crowdfunding portal Kickstarter.com. The contributors didn't buy Oculus stock; they just received t-shirts or early prototype virtual reality devices. Oculus got seed capital without giving up any ownership.

June 2013: Three Silicon Valley venture capital firms invested $16 million in Oculus. The terms were confidential, but they probably received a minority equity share.

December 2013: A bigger venture capital deal pumped another $75 million into Oculus. Industry media sources reported at the time that the transaction valued Oculus at $250 million. That would give the second-round investors roughly 30 percent ownership of Oculus.

March 2014: Facebook agreed to buy Oculus for $2 billion in cash and Facebook stock. Zuckerberg apparently thinks his Oculus investment will generate many more billions in the future. Time will tell if he is right.

The math is both impressive and bewildering. How does a company that has never delivered a product go from a $250 million valuation to $2 billion in just three months — or from zero to $2 billion in less than two years? Those aren't virtual dollars. They are completely real.

The most fascinating part is who did — and who didn't — make money in the deal.

Oculus completely bypassed conventional corporate finance. The company didn't borrow money from banks. It didn't float an initial public offering on Wall Street.

Instead, Oculus got an initial boost from devoted fans, and then took relatively small sums from venture capital specialists. The investors who bought in December will have a healthy payday. Their $75 million turned into something like $600 million (my own estimate) in one calendar quarter.
Banks and brokers got zilch.

Obviously, not every Kickstarter project has such a successful conclusion. Some of those early fans are quite angry, in fact. They think Oculus betrayed them by selling out to EvilCorp.

In 2012, it was illegal for Oculus to sell equity shares to small investors online. That will likely change later this year when the federal government issues regulations implementing Title 3 of the Jumpstart Our Business Startups (JOBS) Act.

The JOBS Act may not create many jobs, but it will let regular people look inside the tent, invest on the ground floor when they see an opportunity and maybe win big.

If I had to sum up the last 20 years of economic history in one word, it would be "disintermediation." Intermediaries in all sectors are going extinct. Wall Street may not go the way of the dinosaurs, but it will surely change radically.

Crowdfunding will give company founders many more financing alternatives in a vastly more transparent process. Inventors with good ideas will be able to find investors without an expensive middleman. Investors will have a universe of opportunity.

Today's capital finance framework — banks, stock exchanges and all the rest — is residue of a 1930s economy. We've learned a thing or two since then.

Financial dinosaurs had better watch out. The next meteor will be reality of the non-virtual kind.

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Last week, Facebook (FB) founder and CEO Mark Zuckerberg spent $2 billion to buy virtual reality startup Oculus VR. I think the Oculus technology is interesting, but the company's financial evolution is even more so.
Wednesday, 02 April 2014 08:04 AM
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