I don't think it was the prototype itself that was barely functioning, it was the software side that wasn't great. I remember when Palmer first showed off the device, it seemed to track just fine. When they introduced actual content, though, it became disorienting really quickly.

I backed them on Kickstarter so I got to see the DevKit1, DK2, and the CV1. The difference between the early versions and the end versions really came down to the software that handled the tracking. Compensating for movement lag and predicting frames to ease the jerkiness are really what converted it from a prototype to a viable commercial product.

That being said, it makes me laugh a little to see that Valve and the HTC Vive managed to outpace Oculus. Oculus had so much momentum and marketing buzz and they really dropped the ball on that one. Who knows how much of that was due to the FB purchase, but it definitely is weird seeing them lose their huge advantage.