The great crowdfunding exit debate

The sale of Kickstarter-backed Oculus VR has ignited the opinions of many who question how early-stage backers benefit when businesses do well.

Facebook has just made its latest ‘game-changing’ acquisition: virtual reality gaming company Oculus VR.

The $2 billion purchase marks the first time that a crowdfunded company has been subject to a mega-deal – with thousands of its initial supporters not privy to any of the windfall.

While this example involves a company which used an incentive/reward crowdfunding platform to secure development capital, it begs the question: are investors in early-stage companies likely to benefit though an exit?

Backers of Oculus VR were supporting fledgling technology which they themselves wanted to use and, thought their commitments, gained access to an early version.

However, not one of those backers, unless they invested privately on the side, will see any of the $2 billion that their pledges were pivotal in securing.

Investors making commitments through equity platforms are joining hundreds, or thousands, of others in grabbing a portion of equity that is very often no more than 20 per cent.

This figure held by an individual investor, say 0.1 per cent, is then likely to be diluted further if another crowdfunding raise or separate angel deal is completed.

More on crowdfunding:

Speaking to GrowthBusiness back in 2013, equity crowdfunding investor Georgina-Kate Adams said that she believed it was really important to have a tangible share of a company she was backing, so made sure to secure 0.1 per cent.

However, she then felt a ‘bit gutted’ when that business reopened the funding to raise more money and diluted her stake down to 0.001 per cent.

We are still a few years away from exits involving British companies which previously used crowdfunding to finance early development. There have been a number of large fundraisings involving promising companies which should go on to become successful, and it will be interesting to monitor these.

Ultimately, the concept of crowdfunding is bringing together investors who believe in a concept, want to see it succeed, and would like to financially benefit from that if it happens.

Incentives, alongside the requisite equity offering, made at the start lure in backers and are designed to keep them interested an involved. This passion for a company is likely to quickly dissipate if an exit doesn’t bring them a decent return.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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