How Zuck met Oculus: The story behind Facebook’s big bet on virtual reality

How Zuck met Oculus: The story behind Facebook’s big bet on virtual reality

By Erin Griffith April 14, 2014: 9:27 AM ET

CEO Brendan Iribe recounts the steps leading up to the $2 billion deal.

FORTUNE — Mark Zuckerberg’s acquisitions have a formula: They never, ever leak because they come together quickly. Facebook’s (FB) $19 billion acquisition of WhatsApp, for example, was reportedly sealed over chocolate-covered strawberries on Valentines Day, and the deal announced four days later. One month after that, Facebook’s $2 billion deal for Oculus VR was solidified over dinner at Zuckerberg’s home. Within the week, the deal was done.

The wooing process for Oculus started last February when Mark Zuckerberg called CEO Brendan Iribe for a 10-minute chat. Zuckerberg asked Iribe what the “killer app” for the Oculus headset would be; Iribe told him it was gaming, but hinted that there would also be an opportunity to use virtual reality for communication. He pushed Zuckerberg to get a headset and demo, eventually flying up to Facebook’s headquarters to show off Oculus’ Crystal Cove prototype to Zuckerberg, Chris Cox, Facebook’s vice president of product, and CTO Mike Schroepfer.

A month later, Iribe invited Zuckerberg down to Oculus’ offices in Irvine, Calif., to show off the company’s latest consumer-facing prototype. Oculus is particularly proud of this prototype because very few people who use it experience disorientation (a common problem with earlier versions of the headset).

It’s “very close to the vision everyone’s had for VR,” said Iribe, who was speaking at theF.ounders conference in New York last week. “When you see it, you start to believe how big this could really be.” As John Carmack, Oculus’ CTO and a legend in the gaming industry, likes to say: “You get religion on contact.”

That definitely happened for Zuckerberg. According to Iribe, after trying the headset, Zuckerberg said, “So that was probably one of the coolest things I’ve ever seen in my life, and maybe ever will see.” He followed that declaration with a question: “How can I help?”

Iribe said he wasn’t sure that a floating window of a Facebook app would be very popular in virtual reality.

“That’s not what I’m talking about,” Zuckerberg said. “We’d like to help you. What other big problems do you have?”

Iribe explained that Oculus needed to create an ecosystem and support it with an infrastructure. Zuckerberg responded that Facebook knows a thing or two about platforms and users.

Iribe also explained that Oculus was going to have to raise a lot more money to get its hardware right. Oculus’ early claim to fame was that the entire device was built out of cell phone parts. But it became apparent that the product would be much better if it had custom screens, optics and sensors. That requires an enormous investment. The company was going to have to raise half a billion to a billion dollars, which was, Iribe joked, “above my paygrade.” Zuckerberg told him Facebook could help with that problem, too, as the company “tends to make a lot of money.”

Iribe said the two CEOs started to see eye-to-eye on a lot of things, but “the number wasn’t quite there,” (meaning the price), so Oculus decided to stay independent. “They never made a formal offer, but we did have a pretty big number in mind for a 20-month-old company,” he said.

Soon after, when Facebook spent $19 billion to acquire WhatsApp, the Oculus team “started to believe in our number a little more,” Iribe said. But he noted that ultimately the deal was more about the partnership than the money. Oculus didn’t run an auction process, or try shop itself around to other potential buyers.

Zuckerberg won over Oculus with his vision for virtual reality as the next big platform. Facebook doesn’t have its own platform, its own version of Google’s Android operating system, or Apple’s App Store. It just has a website and a set of apps. But Oculus could be that platform for Facebook.

So when Zuckerberg called on a Saturday in March to invite the Oculus team over for dinner, they hopped on a flight to San Francisco the next morning. Carmack impressed Zuckerberg with his vision of virtual reality replacing 2-D monitors. Zuckerberg showed the team how Facebook could help Oculus get virtual reality headsets to people quickly, at a lower cost, and in a bigger way.

The two teams reached an agreement, and that Wednesday the four Oculus founders had dinner at Zuckerberg’s house, along with Cox, Amin Zoufonoun, head of corporate development, and Cory Ondrejka, a Facebook VP of engineering who was also a co-founder of the virtual world Second Life.

At the end of the dinner Zuckerberg said, “We should do this.”

“I don’t know if he put anything in the dinner, but we were certainly all smiling and felt good about it,” Iribe joked. “And it felt like the right thing to do.”

Zuckerberg said he thought they could close the $2 billion deal in around three and a half days.

Both companies’ legal teams camped out at Facebook’s headquarters over the weekend, working around the clock without sleeping to pound out the details of the deal. “When you hear Facebook likes to move fast — that’s their motto — they move fast,” Iribe said. At 5:30 a.m. that Sunday he left the Facebook office to go straight to the airport, and from there straight home to bed. “I was hallucinating a little bit and a little delirious because we hadn’t slept,” he said. When he woke up, he was still disoriented. Had that really just happened, or had he dreamt it?

That Tuesday, it became very real: Facebook announced the deal after the market close, shocking the gaming world, the tech world, Oculus’ Kickstarter backers, and Wall Street (Facebook’s stock dropped slightly in after-hours trading). Even Oculus’ board wasn’t enthusiastic about the deal, preferring the company stay independent, Iribe said.

Since then, Iribe has been eager to tell Oculus’ side of the story. He and his co-founders postedthree separate blog posts on the deal, and Iribe is quick to note that the whole Oculus team was in favor of selling to Facebook. He admits that Facebook wasn’t the obvious choice, and even he might have had some initial skepticism upon first hearing about it.

He’s a believer now, though: “When you look at what’s going to make Oculus, and virtual reality in general, successful a decade from now, I really believe that Facebook’s backing and their support in this is really going to make a big difference,” he said.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

One Response to How Zuck met Oculus: The story behind Facebook’s big bet on virtual reality

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