The Oculus Rift is one of the biggest startup successes in the annals of Silicon Valley. In 2013 the small company set out to make a virtual reality headset. Oculus built an impressive prototype that generated a firestorm of hype in the tech press and launched a campaign on the crowdfunding website Kickstarter. The campaign was a huge success, raising $2.4 million in small donations from 9,500 excited video game fans who chipped in as little as $10 for the project.
But a rift developed between professional investors and the Kickstarter crowd, many of whom ended up feeling like chumps. Oculus also raised $16 million in venture capital funding from Spark Capital and Matrix Partners. In March, 2014, less than a year later, Facebook bought Oculus for $2 billion. The venture capitalists realized huge returns, and the participants in the Kickstarter campaign got nothing.
The Kickstarter supporters never expected to get any monetary gain, of course — the Kickstarter rules are very clear that project backers are not buying equity in the companies they fund — they just wanted the company to succeed so they would have a chance to experience virtual reality some day. But there was nevertheless a sense of unfairness that professional investors multiplied their money 10-fold, whereas the crowdfunders whose early donations had supplied momentum to the company had just given their stake away.
David Drake feels their pain. “People have expectations of not being excluded,” he says. “They feel hurt because they love the product, and then somebody else who put the same amount of money in gets rich. And it’s like, `Wait a minute, why didn’t we get a chance to put money in it for equity? Why do we get the short end of the stick?’ I think of it as an ethical issue.”
Drake, a Swedish-born venture capitalist, happens to be the one of the world’s foremost champions of crowdfunding and is credited with pushing and helping write the Jumpstart Our Business Startups act of 2012. The JOBS act has yet to go fully into effect because of bureaucratic tie-ups with the Securities and Exchange Commission. But when it does, the federal regulations that have stood in the way of crowdfunding for equity will be removed, and experts expect a whole new world of investing options to open up.
Drake will speak on Wednesday, November 12, at a New Jersey Entrepreneurial Network meeting from noon to 3 p.m. at the Princeton Marriott. The event will also include a speech by Bruce Lipnick, founder and CEO of the Asset Alliance Corporation. Tickets are $60. For more information, visit www.njen.com. Drake will introduce the new frontiers of crowdfunding and discuss how crowd-funded companies circumvent traditional distribution channels and go directly to consumers.
Currently crowdfunding campaigns in America are never really vehicles for investment. At most investors can claim “rewards” such as special-edition products or early tickets. The reason for this is that federal securities laws, passed in the 1930s following an epidemic of investment fraud, prevent small-time investors from directly buying stakes in companies.
The current limitations have not stopped a number of projects from raising millions using crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe. For example, the video game Star Citizen has raised more than $59 million, making it the most successful crowdfunding campaign ever. Supporters’ contributions get them not stock in a company, but virtual spaceships in a video game that has yet to be released.
Drake has pushed for the laws to be changed so that someone who chips in $20 towards a project like that could buy equity instead of a spaceship and see a return on their investment. The argument against this has always been that it would open up such small-time investors to scam artists.
Currently only “accredited” investors are allowed to buy stakes in startup companies, meaning they have to have at least $100,000 in cash or assets of at least $1 million. This limitation is meant to protect ordinary people from investing their life savings in companies that could go bust.
Drake believes the fraud epidemic of the 1930s will not repeat itself, due to the nature of the Internet. Gone are the days when a con man could escape his reputation by traveling to a new town. “The transparency online is so strong that it changes the premises,” he says. “Once you become part of the online community, you can’t go back. If you rip someone off, it’s going to explode, and you can’t try to rip somebody else off.”
In the new world of crowdfunding, Drake advises that investors stick to having diversified investments and not get emotionally attached to one specific area.
Drake grew up in Sweden, where his father was an electrical engineer and his mother was a personal assistant. “They were very entrepreneurial, and that encouraged me to become entrepreneurial myself,” he says. He moved to America when he attended American University in Washington. He later got an MBA in finance and a master’s in international law at George Washington University.
Drake has been a venture capitalist for 20 years and founded LDJ Capital, a private equity firm in New York, and the Soho Loft, a financial media company. He lives in New York City and Lake Como, New Jersey.
Despite his enthusiasm for the field, Drake has yet to participate in a crowd-funding-for-equity project. He has, however, donated to a crowdfunding campaign benefiting the Washington Ballet.
Drake encourages investors to look into the options that are opening up for crowdfunding campaigns. “Educate yourself,” he says. “You’ll be surprised what you find.”