Facebook bought Oculus Rift, a bit of geeky, Borg-like headgear, for $2B. Never mind that the company has yet to ship a product. Their venture backers made more than 50x their initial investments. The true initial investors, individuals, invested in the company via Kickstarter, which helps companies raise money. They received T-shirts or discounted pre-release headgear.
And that’s all the initial investors made. The trouble with Kickstarter is that initial investors aren’t equity owners – they don’t participate in the upside like a venture fund. And the original Kickstarter investors are fuming over Oculus Rift!
But the real trouble is with the JOBS act, which in theory allows individuals that have no demonstrated financial acumen to invest in start-up companies. Previously, accredited investor laws limited certain types of investments for those that had sufficient personal financial assets as a proxy for their level of financial sophistication.
Proponents of the act claim that start-ups create jobs and generate financial success, and every American should be able to participate in that.
But this forgets one important, historical lesson. The laws were created originally because hucksters, shysters, and con-men would take advantage of individuals, sucking their money into “fly by night” schemes. Start-ups are pretty darn risky. Full time VC investors see thousands of deals, invest in half a dozen, and still get it wrong 50% of the time.
Kickstarter is not a huckster. They clearly state that you are not investing in the company, merely giving it money. The fact that those initial Kickstarter supporters are now up in arms underlines the problem with the JOBS act — these early supporters were not appropriately qualified for this type of investment.
We’ll hear more over the coming years of individuals that are bilked by start-up companies or their fund-raisers. At some point, when the Bernie Madoff moment arrives, we’ll reinstate the protections lost in the JOBS act. In the meantime, remember the old adage “if you can’t spot the sucker in the room, it’s you.”