title: "Episode 35: Oculus"
author: "Acquired"
source_type: podcast
content_hash: 6ae565742af45076a5ca21186478d7592b7abf4020c3ee92edbeb5d620b40d5f
extraction_method: generic_website
Transcript:
(disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Hey Acquired listeners, Ben here. You’ll notice for the first 8 minutes or so of the episode, my audio quality isn’t the greatest. But bear with us, it will be crystal clear for most of the episode. Thanks.
Is ocular and occluded from the same root?
David: I don’t know.
Ben: I don’t know either.
David: Anyway, we can get with it.
Ben: That feels right because I think that's their logo, right?
David: It’s an eye, yeah.
Ben: Yeah. All right, I can see.
Ben: Welcome back to Episode 35 of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today’s episode, we’re covering the Facebook acquisition of Oculus, a much requested episode by a lot of listeners in the Slack and one we’ve gotten a lot of email about. So we’ve now got enough distance from the acquisition that there’s a lot more to come but we feel comfortable covering it.
David: No doubt about that. We thought now would be a good time to do it given some of the themes we talked about on the Snap IPO episode, that this would be a good counterpoint, a sort of different approach to a camera company.
Ben: Indeed. So before we dive in, we have some incredible listeners that leave some great iTunes reviews and sometimes they’re even a little host deprecating, but we love them all the same as long as they’re 5 stars and they help us grow the show. So as we mentioned a couple episodes ago, if you leave one that we think is worth reading on the air, we’re going to go ahead and do just that. So one we’ve got from DanielX is an emoji review which is trophy, bag of money, unicorn, which I think is quite appropriate. This one’s a little... I had trouble parsing it at first and then I was like, “Oh, I see what they’re doing.” The subject is “Yup, yup” and the description is “That’s one of my favorite phrases Ben uses. ‘Oh man, yeah, and super interesting’ are up there too.” So I'm now going to be incredibly self-conscious every time I use those phrases. And thank you so much.
David: We love you just the same, man.
Ben: And the username on that one is ActiveUsers. So thank you to all the active users out there that really appreciate my catchphrases.
David: That’s great.
Ben: All right, moving on, and happy to leave that behind. But the point we’re trying to make is, leave us iTunes reviews. It helps us grow the show. We love it and hopefully, if you’re creative then we get to share it with the rest of our audience. Speaking of the rest of our audience, we’ve got a Slack, so join us @Acquired.fm. You can join the over 500 of us that are in talking about tech, M&A and any news that comes up between episodes. Now, on to the episode. David, can you take us through the acquisition history and facts?
David: I will, as always, Ben. So we pick up our story of Facebook’s 2015 acquisition of Oculus, the virtual reality company. In 2010, when a 17-year-old homeschooled kid in Long Beach, California named Palmer Luckey was taking – he’d been homeschooled for his education up till then and he was taking some classes at Cal State, Long Beach, and he had a problem. And his problem was that he loved video games and he loved the PC games in particular, and he loved them so much that he had created this massive setup at home where he had six monitors and wanted to get like as immersed into the games he was playing as possible. But even with all these monitors, it still wasn’t good enough. He wanted to get deeper into the game. While I was writing this, I was thinking about the EA Sports tagline “It’s in the game.”
Ben: I think I read somewhere he had like the largest collection of HMDs (head mounted displays) of currently existing or hacked together hardware in the world before he set out to build Oculus.
David: Yes. So, well, his problem was he wanted to literally get into the game. And so lots of kids, myself included, wanted to do that when I was 17. But Palmer actually did something about it. So he went over to USC, and USC has this thing called the Institute for Creative Technologies which is a lab that was created there in 1999 and it was actually funded by the Department of Defense. The idea is that in LA, they would combine sort of the resources of USC, a major research university, kind of all the special effects technology in Hollywood and the video game industry which has a huge base in LA. And they used it to build advanced training and simulation technologies. What that meant in practice was virtual reality.
Ben: Yeah. And it feels a great thesis to me. It’s funny thinking about funded by the Department of Defense. Boy oh boy have we seen that as a tech theme over and over again in a lot of these companies, either the companies themselves or the research labs they come out of or even the history of Silicon Valley and the importance of how the semiconductor came to be.
David: Yeah. So Palmer, a 17-year-old kid in Long Beach, he talks his way into getting a part-time job at the ICT at USC and he’s working on a team that’s trying to design cost effective virtual reality. But he still even wants to move faster, so in his parents’ garage, he starts hacking away with basically like components from smartphones, trying to make the device that’s really going to achieve his dreams which is be able to play video games in virtual reality. And at the same time, he’s on the internet natively as all kids are back then in these days and he hangs out in forums online and in particular, at this one forum called the Meant to be Seen 3D discussion forum which is, I don’t know if it was the largest but it’s certainly a very active internet forum dedicated to trying to create virtual reality devices at the time.
Ben: Yeah, man. Forums were like that’s where everything happened back in the day.
David: Totally. It’s like the more things changed, the more they stayed the same, right? The original like Netscape and ARP in that days.
Ben: Yeah. But predating forums or mailing lists and Usenet, it’s just a constant reinvention of the same thing. People seed community, internet is incredible for community, revision, revision, revision, revision.
David: Yup. And now we have virtual reality. So maybe the next great entrepreneurs will meet on Oculus sort of vibe.
Ben: Yup.
David: So he’s posting progress as he’s building these prototypes in his garage on the Meant to be Seen forums. And it turns out that among the other posters on the forum or lurkers on the forum is a guy named John Carmack and that name might ring some bells for some of our listeners. John is probably one of the most famous people in the video game world. He was the cofounder of id software and id created and John in particular pioneered a lot of the techniques.
Ben: Is that Doom, Quake?
David: Quake, Doom, Wolfenstein 3D. You know, all of the first generation of first person shooter PC games.
Ben: Yeah. I think one of his greatest contributions was the algorithms to do the shading of shadows so that things look appropriately far away and appropriately lit as you approach them or turn corners. Or things that we take incredibly for granted today but were actually required a lot of complexity.
David: Yeah. I mean, I remember, gosh, I was probably in middle school when those games were coming out and like, they were so far advanced versus anything else on the PC at the time, PC or like the NES. So, Carmack is on the forums and he’s on the forums because he is also interested in VR and he kind of shares Palmer’s dream that playing video games in VR is going to be a totally new paradigm and really, really compelling. And actually, Carmack’s dream, id had release Doom 3 recently. He wanted to port Doom 3 into VR and so he sees all the progress that Palmer is making and he reaches out to him.
Ben: And there’s no great hardware out for VR, right? Like if anybody wanted to port to VR at this point, it’s like highly specialized installations in science centers and stuff, right?
David: Yeah. I mean, basically it’s the kind of stuff that USC is doing at the ICT for the military or science applications. We’re talking hundreds of thousands of dollars for a room scale installation. Nothing like what the Rift becomes which was you could go on Oculus’ website and order a development kit for $300. So Carmack reaches out to Palmer, asks if he can buy a Rift and Palmer apparently says, he says in an interview later he decided he was just going to play cool and he’s like, “Oh, I’ll just give you one.” So he does and it’s fortunate for him and for the future of VR that he did. This was, we’re now into 2012 and John Carmack goes to ER which is one of the two big industry conferences for video games. The other one is GDC which we’re going to talk about in a minute. But John goes to ER in 2012 which is in June and he gives a big talk and he talks about how excited he is about VR and he shows, he demonstrates a version of Doom 3 that he’s created that is running on the Rift. And the Rift is like a totally hacked, duct taped together prototype that Palmer had sent him.
Ben: It was actually duct taped, right? Like there was an actual meeting with them where he actually duct taped the display to the head mounting piece.
David: Yeah, there are great videos online and of course, after this all the tech and video game press covers this and then goes and tries it out and wears it, like the unit is actually duct taped together.
Ben: Just like ridiculous watershed moment when John Carmack is deviling on your hardware at E3. This is pre Kickstarter, is that right?
David: So this is pre Kickstarter. There’s not even a company yet. It’s literally just Palmer working on this stuff and he’s at this point I believe either 18 or 19 years old.
Ben: Crazy.
David: Totally crazy. So E3 2012 is the big moment for the artist that would become known as Oculus. And a few other folks in addition to the entire video game industry sort of take notice and two of the folks who reach out to Palmer, when they hear a story about this, are two guys named Brendan Iribe and Michael Antonov who also were in the LA area. They had been cofounders of a company called Scaleform which was a sort of a videogame UI technology company that Adobe had acquired several years earlier. They worked at Adobe for a while and then Brendan actually had left and he joined a company called Gaikai which folks in the videogame industry might remember was a streaming video game company that Sony acquired a couple of years earlier and the idea being – and actually a lot of consoles use this today that rather than buying a game on a physical media or downloading it, you can play a game just by streaming it over the internet.
Ben: Oh yeah. I remember Microsoft showing some tech like this too where the whole idea was that you’re done with downloading the bits to your device and in fact on this is actually a Windows phone demo, the device hardware constraint, with this amazing cloud computing and we’re going to in a low latency way stream your interactions back up to the cloud, the game computation is going to happen in the cloud and then stream it back down to your device and it will feel native. I feel like I’ve seen a lot of those demos and the trend seems to be toward powerful clients still, like we haven’t gone to this world where gaming is happening with a –
David: It’s never totally worked, right? I mean, the dream is really cool that like on any client as long as you have a fast enough internet connection, you don’t actually have to do all the hard rendering on the client. It can all be done in the cloud and just streamed as video but it’s never quite lived up to the promise.
Ben: Yeah. I think this is kind of a tech trend for me later but I think to quickly derail into it, we continue to pursue this dual track of pushing the envelope on desktop grade or even – it’s called desktop grade gamer PCs so you see the Oculus hooked up to really crazy towers and then simultaneously what we were trying to do in a low power way on phones, like phones keep getting more powerful and the processors in phones keep getting better at originally apps and casual games and now a little bit more serious games on mobile. And we’re definitely seeing the trend of anyone who is interested in pushing all the intense compute up to the cloud for games that are played on mobile, well mobile got good enough to largely just play them themselves and then the ones that require better experiences, the intense sort of R&D pushed the envelope of what can be done is really still being done on towers and that’s not going away anytime soon.
David: Yup. And especially in VR. One of the things limiting the market right now which we’ll get into is, you need a super powerful PC to make this stuff work, which not that many people have anymore.
Ben: Yeah. I remember – really not interrupting a lot – but as a quick aside for listeners, I remember going into David’s office like a few years ago at Madrona and he’s like putting together this crazy tower to hook up his dev kit Oculus to and telling me about how VR is here, like we’re looking seriously at this now, like it's the future, like people or maybe not a consumer option right away, like no one has a tower, nobody can buy a $4,000 gaming rig. Like that’s still kind of the state of good VR right now.
David: Yeah. I mean, we’re going to get into it but we still have that at Madrona and the thing weighs about 50 pounds. It’s huge. But anyway, so Brendan and Michael coming from Scaleform and Brendan immediately from Gaikai, they reach out to – they’re really excited about this. They’re game guys and business guys in the game industry, reach out to Palmer and basically convince him that there’s a big company to be started here and that they want to start the company together. So the three of them get together with a few other folks who are the initial engineers. Brendan is the CEO of the company. They found the company kind of in June-July 2012 and then immediately afterwards they launch the Kickstarter in August 2012 which Palmer had been planning to do before him and right after E3 but got delayed as they were starting the company. And the Kickstarter becomes hugely successful and I actually went and re-watched it right before we recorded this and, like, it is great to watch but so funny knowing the history of what happens immediately thereafter. So Carmack is featured heavily in the video as are folks from Valve including Gabe Newell.
Ben: What?!
David: The founder of Valve. Go watch the video. We’ll link to it in the show notes. He gives a kind of glowing discussion of Palmer and the future of VR and he says, “We strongly encourage you to support this Kickstarter.” We, meaning him and Valve.
Ben: Oh, my God. That’s awesome.
David: It’s so awesome. So on the strength of this –
Ben: And for listeners that don’t know why we’re saying that’s awesome, like Valve and HTC would go on to create the only serious competitor to the Oculus right now and arguably better. Anyway, leaving that aside, the Vive, it’s hilarious to see him on Team Oculus at the start.
David: Well, and Valve’s had such a long history with trying to get into VR but they finally do it right after the Facebook acquisition. So the Kickstarter is hugely successful. They had set an initial goal of $250,000. They end up raising 10 times that. There is almost $2.5 million and then they do something really smart which is after the Kickstarter ends, they basically just continue it on the Oculus website and anybody can go there and order a developer kit for $300.
Ben: This was like earlier in the crowdfunding era and it’s like amazing to see. You know, if you’re an entrepreneur and you’re trying to just put together around to 250k, like you don’t want to raise 2.4 million because you give up your whole company. But like isn’t crowdfunding great where there’s no equity, so it’s just like money for you to play around with. And sure, you have to fulfill those pre-orders and that’s the biggest issue with Kickstarters, but like what an amazing model to bootstrap a company and get some cash in there long ahead of when you’re going to ship the units.
David: Yeah, totally. And they turn it around pretty quickly but when they put the preorders up on the website after the Kickstarter campaign, there’s so much momentum continuing that they’re selling supposedly for the first couple of days that it’s up on the website, they’re selling four to five developer kits, DK1s as they come to be known. “DK” for developer kit, the first one. At four to five every minute at 300 bucks a pop which is pretty impressive.
Ben: Wow, yeah.
David: So they go along and they’re working on shipping the developer kit. They start shipping it and by the summer of next year, June 2013, the VCs start to get wind of what’s going on down there in Southern California. The company ends up raising a $16 million Series A co-led by Spark and Matrix. Then that’s in June of 2013. Then right after the first, well, company-wise, a first really big victory happens that John Carmack actually decides to leave id and join Oculus as the CTO. And this is a huge, huge moment in the gaming world for the company.
Ben: Actually, someone who wasn’t following it that closely at the time, this was the first time that I took Oculus seriously and I didn’t realize that Carmack was in the video or presenting on stage. This is the first time I had heard his name associated with it and suddenly it was like, “Okay, this company is serious.” Like the creator of Doom and Quake is joining as their CTO.
David: You weren’t the only person to notice this. They had obviously raised the Series A that summer but Marc Andreessen and Andreessen Horowitz also noticed that John Carmack has just gone and left id and joined this baby virtual reality company based down in Southern California. And in December, a couple months later, Andreessen Horowitz ends up leading a $75 million Series B in the company and Marc Andreessen joins the board.
Ben: So, what was the time between that Series A and Series B?
David: It was 6 months or less.
Ben: Wow.
David: And the other sort of foreshadowing of the future here, Marc of course, and why this is important to the story, also happens to be on the board of another company that’s going to get involved here which is Facebook.
Ben: Yeah, that’s convenient.
David: Yes. So that was December 2013. A couple months later, GDC, which as I mentioned is the other big industry conference in the video game industry and that happens in San Francisco, that’s in the beginning of March, and Oculus announces that they’ve been successful with the DK 1 and they’re coming out with a new version of the developer kit. So still focused on shipping these to developers, they’re not ready to release a consumer device yet but they announce the DK 2 and that that’s going to be in shipping in July 2014. And the DK 2 is vastly improved over the DK 1.
Ben: I think, yeah, the DK 2 is the first one I had tried and I remember putting it on and being like, okay, this is very different. I understand what the hype is about now but I still wasn’t like, this is the next tidal wave. But then the one after that, I think the Crescent Bay, which I don’t know like how many different parts they have in there.
David: Yup. They never actually sold the Crescent Bay. That was sort of like the first iteration of what would become the consumer version that they had shipped in 2016.
Ben: Yeah. I think I tried that at 2015 CES and they take you into this private room. You have like a 15-minute little demo with it and that was the one, the Crescent Bay was the one where I was like, “Okay, this is the next tidal wave of technology.”
David: Yeah. And really, the DK 1 still had a lot of the duct tape heritage in it. I’d say the DK 2 did from like a software perspective. But from a hardware perspective, it was pretty good and it had solid components in it. And when you used it, it really enabled the average person couldn’t I think just buy one off the internet and set it up on their laptop. However, if you had a friend or knew somebody who had a setup with the DK 2, you could put it on and it would kind of just work and you could see what was so amazing and how different and immersive VR was versus just playing a regular video game. So that was the beginning of March and then very shortly thereafter, our recurring character on Acquired, Mark Zuckerberg, comes knocking and he gets in touch with the company and says, “Hey, I heard some really cool things about what you’re doing. I’d love to get a demo.”
Ben: Do you know how that introduction was brokered? Is that through Andreessen or like do you just get an email from Zuck at Facebook that’s like, “Hey”?
David: I don’t know. Maybe out there, listeners if you know, hit us up on Slack or shoot us an email. I assume that there were easy channels to make that introduction happen. But somewhat like the Snap, our original Snapchat episode, Zuck I believe, as the story goes, asked for them to come up to Facebook’s campus and do a demo up there. Brendan responds to him and says, “Hey,” and this is from an interview with Brendan after the acquisition, “Hey, actually it would better if you come down here because we have a better setup here.” So just like he did with Evan Spiegel.
Ben: “So get on your private plane and fly down to Irvine.”
David: Mark flies down to Irvine, meets with Oculus, is really impressed with what he sees and says, “Hey, what can Facebook do to help you?” And that quickly leads into acquisition discussions. So by the end of the month, the deal’s done. It gets announced. Facebook acquires Oculus for $2.3 billion in total, of which interestingly, only 400 million in cash, 1.6 billion in Facebook stock, and then there was an additional earnout of 300 million. But this was similar to the Instagram deal and the failed Snapchat deal from the year before and WhatsApp. This is sort of cementing Facebook and Mark Zuckerberg’s reputation as a very aggressive acquirer.
Ben: I think, again, we always bleed into tech themes here but like it’s really exemplifying Facebook’s FOMO. I mean, their fear of missing out where they see something that they’re not currently working on that is either something with an existing strong network effect like a WhatsApp or Instagram that could unseat them, or a powerful new piece of technology that could become the next wave of computing and if they’re not on it, they’re kind of screwed. So they very masterfully had an M&A strategy to kind of make sure that they stay on top and don’t act like the social networks of years past.