Some brief thoughts (while traveling) on what is yet another fascinating move by Mark Zuckerberg and Facebook, including some open questions, the potential ripples across venture capital, and some fun wordplay with optics — I couldn’t resist 😉
The rising tide of all tech markets (public and private) is affording Facebook a strong tailwind which makes strategic M&A possible. Public tech stocks and hyper-growth, late-stage, private tech companies are the hottest equity items on the markets right now. Whenever this topic surfaces in conversation where a participant is skeptical, I usually pose the question: “Where else would you put the money right now?” The implication is that there aren’t other good places at the moment. Anyway…Facebook’s own acuity is not in question, steadily seeing its market cap creep up and flirt with $200bn. With this acquisition, Zuckerberg calculated that spending 1.3-1.5% of Facebook for Oculus VR is good business, especially at a time when the market values his stock at a premium. (Note the deal is 80% stock-based, so Facebook spends little cash and instead spends equity, which right now may be slightly overvalued by market — about $2.24bn total.)
Instagram was the near-sighted threat; Oculus is part of the far-sighted, astigmatic vision. As Zuckerberg pointed out in his note about this acquisition, he feels his team has corrected its vision with respect to mobile, so he’s scouring the field for possible platforms which integrate with Facebook’s mission — to make the world more open and connected. Of the new platforms emerging, such as Bitcoin (the protocol), drones (also, incidentally, benefiting from the dividends of the smartphone wars), crowdfunding, wearable technologies, 3-D printers, Internet of Things, and so forth, part of Zuckerberg’s job is to monitor these and strike when he sees a fit. The consumer-level experiences of Oculus VR could be part of the next era of gaming. If one thinks of Carmack as Facebook’s Tony Fadell, and if one considers Facebook’s offerings to be about killing time, leisure activity, and social, bringing the feel of a game to the Facebook experience is a bold vision of extending the platform — such as this.
With Oculus VR, Facebook not only acquires the company, the team, the brand, and the IP, but they also bring in “their Nest” of software and hardware makers into the company. I wrote a longer piece breaking down the Nest acquisition, which you can read here. Part of that discussion focuses on the broad, horizontal nature of what that particular team could do for Google. Larry Page didn’t wire $1bn to Tony Fadell’s bank account to have him making other connected home devices — he wants Fadell to marshal his troops to build brand new hardware for Google, across a number of categories. If we extend this to Facebook and Oculus VR, Zuckerberg now has a world-class integrated software and hardware team at his disposal to complement with his cutting-edge web and cloud technologies talent. The talent inside Oculus VR alone would perhaps make up over a quarter of the deal’s final value. (A side note, it’s becoming hard to imagine a hardware company remaining independent given how much money the current tech giants have. Distribution is hard, and getting to a point like Apple with true vertical integration between hardware and software requires a unique founder, decades of pain, lots of financing (and dilution), and much more. Oculus VR, as one of the most promising integrated companies to emerge recently, is part of this trend. Investors, beware! It takes a lot of green to make this stuff stay out of the red.)
Marc Andreessen, the co-creator of Netscape and the VC firm which bears his name (which invested $75m into Oculus VR about four months ago), is also very close to Zuckerberg as one of the original angel investors in Facebook and a current board member. I have never met Andreessen, but based on watching many of his interviews on YouTube, enjoying his endless Twitter stream, and the bold thesis of his firm (which has correctly predicted many things — I’ll write on this aspect soon), he strikes me as a true intellectual polymath — not just conversant or convincing on a range of complex topics, but one of the earliest people to connect the dots of high technology at the highest of levels. Given his access to and rapport with someone like Zuckerberg, it’s not difficult to imagine the two of them discussing the future of technology platforms over the course of the years. Part of Zuckerberg’s job is to constantly be aware of what could be “next,” and who better to share ideas with than someone like Andreessen? His firm, a16z, has recently made huge bets across a range of industries which could present platform-esque characteristics — the software layer for drones, the software for three-dimensional printing, the software for transferring value across the Bitcoin protocol, and so forth. In Oculus, they likely envisioned yet another emergent computer science platform which could rewrite how people communicated with the Internet. No doubt Zuckerberg pays attention to what his board member pays attention to, and Zuckerberg can conduct his own brand of due diligence like none other in technology. [On the venture side, (a) early firms in Oculus should be noted for their early conviction and will be rewarded with a likely 20x return in about 20 months or so; (b) for a16z, their $75m investment in December 2013, just four months ago, presents them with a staggering IRR and highlights Andreessen himself as the modern standard for venture capital today — there are many ways to win in venture, but he’s effectively leveraging his relationships, his technical know-how, his robust team at the firm, and his capital like no other in the business.]
Open Questions: As with any deal of this magnitude and orthogonality, big questions loom…
Why didn’t other, more logical acquirers get into the mix? It would be common sense to think that companies like Sony (with Playstation), Microsoft (with Xbox and Kinect), Google (just because), and Apple (immersive experiences) would be interested in a team and technology like Oculus VR. We don’t know the details yet, but it’s safe to assume all players took a hard look, and that a few were involved. In such a scenario, one could assume the team had some leverage and perhaps even chose Facebook over the other suitors (for reasons we don’t entirely know just yet, though the founders may have calculated Facebook’s platform gives them the best chance to distribute their technology at scale).
How will the Oculus “community” respond in the long-term? Check out the top comments on the blog post by Oculus VR on the announcement — not pretty. Time will tell if this was fueled by hurt feelings at an emotional time in the moment, or whether over time, this refracts into what could be perceived as the poisoning of the well. Put another way, the non-myopic view could be the loss of trust with the Oculus community, which would drive the development on top of the platform. While a Kickstarter campaign does not bound a company to a path of independence, part of the belief and adoration driving platform developers and fans may have been the dream of seeing Oculus VR come into the market as an independent company, a place where the next Carmack’s would paint the next great immerse gaming canvases. In such a world, Facebook could’ve been one game of many others — maybe there could be a Snapchat VR game! — instead of Facebook owning the platform and its future direction.