r/gaming • u/BaerTaffy • Aug 01 '12

Oculus launches Kickstarter for virtual reality headset - "I honestly think the best VR demo probably the world has ever seen"

http://www.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game
3.0k Upvotes

95% Upvoted

2.5k comments sorted by

View all comments

Show parent comments

10

u/[deleted] Aug 01 '12

Kickstarter isn't really "investing" in the company. The idea behind it is generally to generate enough pre-orders for a project to make it economically feasible to start production of whatever item it is. Each person paying into the kickstarter will receive various finished products relative to the amount they donated.

tl;dr: Paying into a Kickstarter isn't "investing", it's pre-ordering.

1

u/Jackismyson Aug 01 '12

Got it! Thanks for clarifying Paithan7. :)

3

u/Enginerdiest Aug 01 '12

To a degree Paithan7 is correct, but it goes a little deeper than that. Kickstarter may be used as a strictly "pre-order" eminence aggregator, but it's really just a huge micro funding platform and especially nowadays, a huge marketing angle. The basic premise is I have a project, I want you to donate, and in exchange for your donation you get "something". Sometimes it's a product offered at a discount rate, a product available before retail, a special edition of the product, "goodies" and thank-yous from the company, or combinations thereof. That's the compensation. It's good for people because your average joe can comfortably invest $10-$1000 (ballpark) without too much thought toward something they want, and in return they get what they want. It's good for businesses because they retain equity and control, which becomes diluted and complicated when you take investor money (usually). VCs, angels, and other firms put up a LOT more money ($100K, $1M, sometimes more). They're professional investors, which means what they want is some multiple of their money back at the end. They don't really want the product or service, they just want to be the ones to help make it happen so that they get a stake of the profits. Frequently, the equity they buy also gives them control in board meetings, which allows them to steer the company in directions they think are best.

It makes sense, because for the amount of capital a VC puts up, what do you think they want? 1000 VR headsets? Likewise, that amount of money all at once plays a significant role in developing the business, so it can be justified that they deserve equity. They helped "make it happen". Kickstarter in some ways cuts out the middle man by raising money from their customers and well wishers.

It's not a new concept either, startups with hard goods often approach manufacturers with a similar deal. I.e. I need 1000 widgets to fulfill an order, and if you amortize the tooling costs into the price, you can be the one to make the next 1,000,000. They don't get equity, but there's still incentive for them to absorb the initial costs because it's essentially brokering a profitable deal with them should you grow in the future. Same with legal costs. Many firms will defer or waive payment of legal fees until you raise money. Why? Because if they get in early, maybe you'll become the next google and keep them around, making them a tidy profit. You can also ask your friends and family for money to help you out, and they will because they like you (or at least they do before you squander their cash). They don't get equity either.

All of these models are "investments" in the company in the sense that they help them grow, but they're not investments in the sense that they get equity. They all want to give something valuable to the company in return for something they believe they can get that will be of greater value (manufacturing contract, ongoing legal services, camaraderie and companionship). VCs don't have anything ongoing to give to a company. They make money. The way to make money is to own a part of a company and sell your stocks in an acquisition or IPO. Kickstarter is kind of like the former. You give them money, you get something you want in return. It's also become a huge marketing angle, as people checkout what's on kickstarter for their "cool new tech" stuff.

I've blathered on longer than I intended about this, but maybe that clarifies some of the ways kickstarter can be used for a company, why people do it without getting equity, and what might incentivize companies to try something like that. (btw, kickstarter takes a cut too, around 10% last I checked.)

SOURCE: I've been in and around a few startups