What If Oculus Crowdfunded For Investment?

In 2012, Oculus successfully raised $2.4 million through a Kickstarter campaign to develop their virtual reality headset. On March 25th, 2014, Oculus was sold to Facebook for $2 billion. As you know, Kickstarter is not a equity crowdfunding but rather a rewards-based where backers of projects are offered tangible rewards and special experiences in exchange for their pledges. But what if Oculus crowdfunded for equity and the 9522 backers were investors? How much would their invests be worth today? Probably about 145x.

Assume that instead of preorders and donations, Oculus's Kickstarter campaign was for equity and raised a seed round entirely online. It's anyone's guess as to what those terms would look like – Oculus is a sexy hardware company that captures the imagination and it's easy to believe that VR will be a huge industry someday. I'm going to be conservative and assume founder-friendly terms for this hypothetical fundraise: a convertible note with a $15m valuation cap and no discount or interest rate. You can read more about convertible notes here but back-of-the-envelope this is like saying Oculus was worth $12 million with an exciting prototype and promising customer development:

After their crowdfunding campaign they went on to raise a $16M Series A and then a $75M Series B. I don't know what the valuation of those rounds were but as a general rule of thumb startups tend to give away 15-25% in venture rounds. I'm going to assume 15% for both, making their Series A and B pre-money valuation of about $90m and $425m, respectively.

Okay great. So in this universe what would've happened if you invested $1,000 during the crowdfunding campaign?

Your $1,000 would have started as "convertible debt" until it converted the day Oculus raised its Series A. Since the Series A valuation is above the $15m cap on your note, your $1k converts into equity as if the Series A valuation is $15m instead of $90m. Collectively all the seed investors own 16% ($2.4m / $15m) of the company before applying the Series A investment, so your $1k investment converts to 0.00567% equity of Oculus after the Series A.

This sounds pretty small but your investment is worth about $5.1k.

Six months later Oculus raised their Series B diluting your hypothetical stake by 15% to about 0.00482% of the company, but the higher valuation makes your investment worth about $20.5k.

Fast forward to Oculus's $2B sale to Facebook. Since you own 0.00482% of the company your $1k investment is now worth $145k. That's a 145x return on your $1k in less than two years!