Crowdfunding, or minimising risk?

[The Stationmaster]

With a number of threads currently looking at crowdfunding and what it does or doesn't offer our hobby I think it might be time to start a thread on the subject in general.  As the market becomes increasingly crowded with new entrants, especially in 4mm and 7mm scales, I often wonder quite how the economics stack up and quite where our hobby will go.  While at present this applies almost wholly to r-t-r items it could also have relevance to kit production as well and this might increasingly become the case as the r-t-r providers extend their field to ever more unusual or previously unexploited subjects.

 

One thing which is immediately obvious is that some concerns seem to be able to enter the market either completely from simply saying they will be producing a whatever, via those who seek a number of firm orders (without or without deposit) before starting work, to those who seek almost total payment long before you will see your model, to those who ask you to commit to staged payments via crowdfunding.  With the last two in many respects coming to the same thing, i.e. let us see/have your money before we actually do anything or maybe after we've shown you an artist's impression or a picture of the prototype.   It takes very little thought to realise that all these various models demand different levels of trust from the end purchaser - placing an order is one thing and it costs nothing, placing a (hopefully refundable) small percentage deposit seeks a higher level of trust while paying 100% upfront or even seeking a firm commitment, possibly with initial payment, through crowdfunding is really looking for 100% trust.

 

We often hear about the 'risk' involved in developing a model - something which is probably increasingly the case in an ever more crowded marketplace where duplication or production delays can cause a major financial headache or worse.  and yet many companies, both big and small,  even right down to even a handful of individuals ,seem able to follow this path and get on with the job letting details into the marketplace at various stages of development from initial idea to almost production quality samples.  The folk who do this don't appear to be magicians although the magnificence of what they conjure up as models might well suggest that but the key thing to me is that they are placing their trust in us, the end purchasers.   And seemingly there are quite a few of them who are coming along and doing this so either we, the end purchasers, are considered remarkably trustworthy or maybe they just think plenty of us will buy anything as long as they make the right choice and do a good job.

 

Sometimes going ahead with a project might depend on our pre-orders but very often trust is still there as placing an order costs us nothing.  Sometimes they might be less confident and seek a small deposit but still a strong element of trust in their market knowledge and our willingness to buy what they create.

 

But what about trust the other way, where someone effectively asks us to not only bankroll the development and production of their model but expects us to trust them to deliver what we are paying for.  Sometimes the request for us to give them our money will go to a known name and, presumably to a project we individually support.  But one recent example appears to expect us to give money to someone using a name that isn't theirs and they have no past track record by which to judge the trust we can place in them.   Equally we do perhaps need to better understand what happens to our money in these situations - how it is held and accounted for and what it may cost us if the project we are bankrolling isn't getting off the ground or is cancelled.  For example if we pay by credit card to secure a measure of consumer protection who pays the increasingly onerous credit card company charges, or bank charges if we pay by other means?  And not only at the time of handing over our money but just as importantly if it has to be refunded.  Great to say 'you'll get your money back' but what does that actually mean and is the person who is getting and holding it sufficiently capitalised to ensure that we get 100% of our money back - people might be surprised by the costs involved in doing no more than refunding money already paid into a cancelled project?  And no doubt we could ask who is actually holding our money in whatever part of the chain that runs from basic idea to production?  Do we know the extent to which somebody 'borrowing/using' our money has an established relationship with the factory that will produce the model, do we know they have a contract with that factory, do we know what the business plan says and how any contract payments are staged?

 

To me the last two points are the critical ones; it might 'only be a hobby' and 'we might have cash to spare' but would anybody seriously consider what amounts to an unsecured advance of money if they haven't seen a business plan to explain how it will be spent and at what pace and what they will see at each stage of being asked for the next tranche of money?   Some people might of course be happy to gamble (because that is what it might be) or they're happy to take a punt on getting something into production which they think would be unlikely to ever appear otherwise.   But one question does I think always need to be asked - if somebody is seeking crowdfunding for a project why do they possibly lack a sufficient level of conviction in their own idea to ask us to pay for it instead of being prepared to invest in it themselves?

[woodenhead]

We are entering a new wild west I think and some of us will get burnt along the way.

 

The traditional model used by Bachmann, Hornby and Dapol et al isn't dead but it is coming under pressure from agile small companies and retailers who are now going straight to China.

 

There are differing levels of risk with Crowdfunding in it's most simplest format being an equal risk shared by all, whereas the character in mentioned by the OP is trying his level best to push that risk onto the purchasers and away from himself.

 

At the other end we have the Hattons P class which was wholly if i recall funded by themselves gaining income from the actual sales.

 

Rails have taken a new route with the deposits on the Terrier whilst using a known manufacturer in Dapol (of course we all remember the Warship debacle but this time Dapol do haveCADs albeit in 7mm)

 

Kernow, the pioneers of retailer led models look to be coming under pressure from Chinese partners to hand over cash before models are crated and price increases have also led to cash calls on other products to protect the buyer from further increases pointing to difficulties with relationships (are these the same partners that Dave is now having issues with?)

 

For some the old model is perfectly good, just not fast enough for others but clearly for Bachmann and Hornby speeding up production eats into funds/profit so it might be very costly to expand in what could be a slowly declining market.  So the crowdfunding is an answer to niche models but when what might be thought of as standards like a Terrier for example becomes a special order you have to be concerned how such an approach which is potentially flooding the market with models at the moment may come unstuck and impact the longevity of Bachmann and Hornby in the marketplace in the medium term if there are no sizable models to introduce and the market has had enough of Duchess upgrades that it can stand.

 

Edit to clarify who I was referring to in third paragraph.

Edited May 3, 2018 by woodenhead

[jjb1970]

The market has changed so much over the last five years or so with the rise of the commissioners, some of whom are now basically just as much manufacturers as the traditional manufacturers and then the emergence of crowd funding. I think there are three separate concepts being applied by different suppliers:

 

-manufacturing to pre-order as per the Rapido model but without needing to pay up front deposits

-manufacturing to pre-order and requiring initial up front payments to some degree

-crowd funding

 

The idea in all of these models is to de-risk projects, although in the case of the first it is still the producer carrying the financial risk in terms of funding development and manufacture and taking commitments to buy on trust. In the second two then customers are easing cash flow of development and in the case of crowdfunding ultimately funding development and manufacture directly. Is it a positive change? In some ways yes. We are seeing more players, models offered RTR that would have been quite niche as kits not that long ago and new players who seem much more responsive to market demands and trends. De-risking projects should help reduce costs (or at least retard inflation).

 

The downsides are that in the case of crowdfunding then consumers are carrying the risk, and in all three cases there is an increasing move towards expecting people to order sight unseen on trust that the resulting model will be good (and also on trust that it will be made). And for me the biggest problem is facing entering into a commitment to buy something with no idea when anything will be delivered at which point payment is due (it'd be very easy to end up committed to spend serious money, all hanging in the air waiting for the commitments to be called in at a future date) which personally I hate and refuse to get involved with. Or alternatively, hand over money with no idea when you'll see a model.

 

I pre-ordered the NRM APT-E but that was basically a one off and I've not gotten involved with crowdfunding or pre-orders. If it works for others then great, I'm not on a crusade or anything but my own preference is to buy in the old fashioned way when something is actually there to buy and I can make a decision whether or not to buy based on being able to see the actual model and without getting tangled in pre-order commitments and committing money in advance. Yes it means I miss some models but it's not the end of the world. In recent years I've returned to brass HO models of North American and Japanese prototypes. When UK OO prices went North I found that it wasn't that much more to indulge my passion for classic brass in some cases and by buying less and more selectively I buy some truly beautiful models in my own time and with no complications. It works for me.

[Zomboid]

Rapido essentially operate a crowdfunding style model for their American output, in as much as they need a certain number of pre orders to build a run of models in a particular roadname.

 

I have been part of the crowd a couple of times for music purposes, but never for a model. Haven't been badly burnt yet, though one artist took 3 years longer than they promised to deliver what I'd bought, but I guess that can happen with musicians...

[woodenhead]

Here's a conundrum - the Oxford Dean Goods if it hadn't been a general model but a crowd funded model and hadn't had an involvement with the NRM what would it have looked like.

 

Everyone was excited till they saw the model and under pressure eventually Oxford made some changes, but if it had been crowdfunded would all those funders have put in the extra cash to make it good or simply accepted or had to accept what was offered up.

[jjb1970]

Rapido essentially operate a crowdfunding style model for their American output, in as much as they need a certain number of pre orders to build a run of models in a particular roadname.

 

I have been part of the crowd a couple of times for music purposes, but never for a model. Haven't been badly burnt yet, though one artist took 3 years longer than they promised to deliver what I'd bought, but I guess that can happen with musicians...

 

No, Rapido manufacture to pre-order for their American products, and do not require up front deposits (or rather, their retailers don't, no idea what the deal is between Rapido and retailers). So Rapido are paying their own development costs. Yes, they're reducing risk and do not carry inventory but that is very different from crowdfunding. In crowdfunding the consumer pays for the development and production costs directly and carries the risk.

[Zomboid]

That's why I said "style". It's the same in as much as the model doesn't get built without enough pre orders, but I agree that the consumer isn't taking the risk.

[chris p bacon]

I haven't coughed up for any 'crowdfunding' although I have paid for 2 Singles with the NRM in advance (Pre-order).

 

Personally,  I've become a little uneasy at how some projects have started up. The latest by someone with a false name and a limited company using payment processes which give no protection to the customer takes the biscuit. I think even if you seek some external funding for some of the project, you should have something to show for it, either some design work or preferably on the verge of production with a fully costed plan. But that one was more of the order of a wish list with other people paying for it. There was previously another who wished to manufacture quad-arts in N & OO.  Although well intentioned, it became clear as the thread developed that he hadn't really costed the project and it was never heard from again.

 

I think Crowdfunding can work and work well, but I would personally think long and hard about actually signing up to anything. I would most likely treat it like gambling and part with what I was prepared to lose. .. which in this household is nothing.

[Andy Y]

if somebody is seeking crowdfunding for a project why do they possibly lack a sufficient level of conviction in their own idea to ask us to pay for it instead of being prepared to invest in it themselves?

 

Certainly a pertinent point Mike although I think there's some categorisation within that necessary.

 

1. Person or persons who are motivated by a desire to see a particular model happen, altruistic and enthusiastic with the motivation and commitment to manage the process. Prepared to accept their share of any reward at the end of the process (if there is some left!) and maybe re-invest any surplus in future projects. Typically this category is likely to be someone managing the project in their spare time with a main source of income providing their personal security.

2. Person or persons who are principally motivated by a project as potentially generating a surplus for the business providing an alternative means of financing rather than loans with interest or personal investment. Without another source of income inevitably a salary or expenses will be drawn down from the project and place additional cost against a proposal. The longer the product takes to reach the market the more they will need to extract from the sums raised. Any surplus can be carried forward to finance future projects.

 

Undoubtedly there are elements of both 1 and 2 is most crowdfunding situations and it helps to know more about the person(s) and their motivations in assessing whether to 'invest' and whether the potential reward is high enough.

 

To come back to your statement the need for crowdfunding is only likely to be brought about by a need for cash or to establish market confidence but as long as the needs are clear and communicated then it isn't necessarily a problem - a good example is here - https://www.kickstarter.com/projects/1176713488/a-house-in-your-hand-architectural-miniature-model?ref=nav_search&result=project&term=model%20rail:

 

The Money & Rewards

 

The expensive part of the development in a new kit is having the first two rounds of brass etch made, to test the shapes and folds, to be certain of a successful kit. Each time a new drawing is sent for etching, a new photo-tool has to be created. I already funded this process for the first kit, but the remaining models still need to go through it. This is estimated to cost a total of around £1040. The remainder will go towards paying for the production runs of backer-reward kits, and I will fund the shortfall myself. I could have set a higher target fund to try and cover the whole cost, but I figure if there is sufficient interest in my product to hit a £2k target, then there is a sound reasoning behind me investing more to launch the product.

 

That crowdfunding proposal was a stepping stone along the way to becoming a successful cottage industry attending 20 shows a year.

 

Maybe some don't care about the finer points and are solely interested in the end result, arguably the second category has more at stake to ensure the project is successfully completed and delivered (from personal experience outside of this hobby).

 

The next issue of BRM contains an article in considering risk and reward from both sides of the transaction in a crowdfunding context.

[The Stationmaster]

I think 'invest' (or 'bankroll' as I called it) is a critical point in all of this.  Andy has mentioned an example which worked and is one where investment in helping to start a business has worked although if you are providing investment it comes back to expecting 'rewards' of some sort.  While interest rates are low the 'rewards' might be relatively small and you might well be happy with satisfaction as an important part of your reward.  So crowdfunding can - with appropriate project information and financial structure - work well as this examples shows.  But if/when interest rates rise does one then look at potential investment in crowdfunding in a different light? 

 

My views are very similar to Dave's ('ChrisPBacon') and I would definitely think a lot more than twice about giving somebody what amounts to an unsecured loan against what might be no more than a promise.  But having ordered a Stirling Single this week I suppose I have just given a public organisation which can well afford to invest in a product almost the same thing although at least I've seen pictures of what I'll be getting for my money and it's coming from a reputable supplier rather than a promise of jam tomorrow.  

[The Nth Degree]

Financing and funding is a very interesting issue at the moment, and I look forward to reading the article in BRM.

 

It's an odd fact that there are quite a few funding specialists that have cropped up in the last 5 years – many of which use private equity (or crowdfunding at our common level) to finance their funding operations. The reward for funders can be many: from an ownership stake in the invested company to a simple discount in the product it provides.

 

Bank loans are very restricted in the level of finance they offer; often small sums of less than £100k (apologies for that offensive word 'small' when quoting £100k!), while funding specialists offer sums of £1 million plus. There doesn't seem to be any middle ground at all. The problem for many small manufacturers is that £100k is often not enough and £1 million is way too much. So where to turn?

 

Organised crowdfunding providers are great at marketing your idea to a wide audience, which generally means that to be a success it is far more likely if your idea appeals to that same wider market, especially if larger sums are required. The ~10% fee of these organisations can also be problematic if not budgeted for, or your budget is very narrow. For a niche product in a niche sector it is far more efficient to pitch yourself directly at the audience you are targeting, but how you do that is critical for the success of your proposal.

 

I'll leave issues on marketing, communication and trust to others, as this is much more personal in the way it affects you as a consumer.

[Zomboid]

I have been part of the crowd on numerous occasions in funding musicians and wouldn't hesitate to do so again. Though that is rather different as the sums involved are more like £10 and they usually have some evidence that songs are written, gigs have been played etc. It has revolutionised the bottom end of the music industry where most of the musicians also have real jobs to put food on the table.

 

In model railways I have only once pre ordered anything, and that was from a big player (Atlas) who you'd have quite a bit of faith in actually delivering, and I'd think long and hard before crowdfunding anything where the cost is going to be more in the hundreds range.

[bill_schmidt1]

Some seem to have too many plates spinning for my liking! 

Who is to say that the money is being used purely for one crowdfunded project and not being shared around to support other projects if funds are tight? 

People can do what they like with their money and its their choice and risk to put towards crowdfunding projects but giving money to projects that have no T&Cs in place is asking for trouble. The APT-P is an example where the T&Cs only got put on DJmodels and DToS sites yesterday, well after the first deposits had been paid.

DJmodels also say that "Any 'pure' crowdfunding venture is an investment with no guarantee of return, and your invested capital (deposit payments) are at risk. Please consider carefully whether you wish to partake in this venture before ordering." which hasn't been made very clear in the past and I don't remember reading anything like this in the Class 71, 92, King or HUO threads? Surely this kind of information should be made very clear when the original announcement is made? ( Sorry to pick on DJModels here but its relevant)
 


The other crowdfunding project where the guy was hiding behind a false name would put me off giving any money over straight away!

I guess overall if projects fail and people lose money they only have themselves to blame but will that in turn impact other crowdfunded projects that are maybe going about things in a better way?

[chris p bacon]

I guess overall if projects fail and people lose money they only have themselves to blame but will that in turn impact other crowdfunded projects that are maybe going about things in a better way?

 

 

This sums it up to me,  A raft of poorly planned and executed 'wish lists' could harm what should be a useful business model.

[The Stationmaster]

Financing and funding is a very interesting issue at the moment, and I look forward to reading the article in BRM.

 

It's an odd fact that there are quite a few funding specialists that have cropped up in the last 5 years – many of which use private equity (or crowdfunding at our common level) to finance their funding operations. The reward for funders can be many: from an ownership stake in the invested company to a simple discount in the product it provides.

 

Bank loans are very restricted in the level of finance they offer; often small sums of less than £100k (apologies for that offensive word 'small' when quoting £100k!), while funding specialists offer sums of £1 million plus. There doesn't seem to be any middle ground at all. The problem for many small manufacturers is that £100k is often not enough and £1 million is way too much. So where to turn?

 

Organised crowdfunding providers are great at marketing your idea to a wide audience, which generally means that to be a success it is far more likely if your idea appeals to that same wider market, especially if larger sums are required. The ~10% fee of these organisations can also be problematic if not budgeted for, or your budget is very narrow. For a niche product in a niche sector it is far more efficient to pitch yourself directly at the audience you are targeting, but how you do that is critical for the success of your proposal.

 

I'll leave issues on marketing, communication and trust to others, as this is much more personal in the way it affects you as a consumer.

 

 

There is the possible alternative of peer-to-peer lending/borrowing although i don't know much about how that would work from the borrower's end.  As far as the lender is concerned they are putting 100% of their capital at risk but they usually get a reasonable rate of interest as a consequence plus their investment can make profits.   For a borrower it might be more flexible than a bank loan, perhaps with less onerous conditions and a better rate of interest?

[woodenhead]

Going back to my question, assuming the crowdfunding initiative is honest - what happens when you and your fellow Crowdfunders order an Orange and you get a Lemon?

[PMP]

Going back to my question, assuming the crowdfunding initiative is honest - what happens when you and your fellow Crowdfunders order an Orange and you get a Lemon?

Tough.

 

Which is one reason perhaps for understanding the conditions of any project you support. Unless within the scheme there are specific quality markers to meet/pass/exceed, prior to continuing, that the funder/investors have a veto within, you’ll get what your given.

[chris p bacon]

Going back to my question, assuming the crowdfunding initiative is honest - what happens when you and your fellow Crowdfunders order an Orange and you get a Lemon?

 

 

I'm guessing you have to take the Lemon.

 

When you sign up to the project it is probably an aspiration to design and make something, if it doesn't quite work out as expected  then that is part of the risk you took as an investor.

[woodenhead]

Tough.

 

Which is one reason perhaps for understanding the conditions of any project you support. Unless within the scheme there are specific quality markers to meet/pass/exceed, prior to continuing, that the funder/investors have a veto within, you’ll get what your given.

Which is what I thought it would be - £600-£1000 of unsecured funding for a Lemon is expensive, £10 to help a band along is a couple of pints.

[bill_schmidt1]

£600-£1000 of unsecured funding for a Lemon is expensive

Yeah but its the best, most expensive and exclusive Lemon ever!

[scottystitch]

There is a lot of focus on the negative side of the crowdfunding concept. But there are success stories out there.

 

Revolution Trains have successfully crowdfunded and delivered An N Gauge Pendolino, 100 Ton Bogie Tank wagons, and 35T 4 wheel tank wagons. The first and last are in the process of delivery, and by all accounts meet the original specification, if not exceed it. I believe the bogie wagon won an award as well. There are at least two modern wagons in the pipeline,  and a Sturgeon bogie flat was announced as a proposal at Model Rail Scotland. The TEA atracted so much interest from oo modellers that it is soon to be available in that scale as well.

 

I understand that each models finances are ring fenced so that they only fund that model. It seems to work and there is great confidence within the N gauge community that crowdfunding done well is a viable means of obtaining models that traditional manufacturers won't touch, for whatever reason.

 

Crowdfunding can and does work. 

[woodenhead]

There is a lot of focus on the negative side of the crowdfunding concept. But there are success stories out there.

 

Revolution Trains have successfully crowdfunded and delivered An N Gauge Pendolino, 100 Ton Bogie Tank wagons, and 35T 4 wheel tank wagons. The first and last are in the process of delivery, and by all accounts meet the original specification, if not exceed it. I believe the bogie wagon won an award as well. There are at least two modern wagons in the pipeline,  and a Sturgeon bogie flat was announced as a proposal at Model Rail Scotland. The TEA atracted so much interest from oo modellers that it is soon to be available in that scale as well.

 

I understand that each models finances are ring fenced so that they only fund that model. It seems to work and there is great confidence within the N gauge community that crowdfunding done well is a viable means of obtaining models that traditional manufacturers won't touch, for whatever reason.

 

Crowdfunding can and does work. 

You're right and RevolutioN is a good example of communication, commitment and having a good partner to do the design/build part in Rapido.

 

I was skeptical of RevolutioN at the very beginning but once they had Rapido on board it became clear it was a well thought out campaign and if I had been modelling the WCML I would have invested.

 

I'm not anti Crowdfunding but I do think people need to consider the risk of some of the schemes 

[scottystitch]

You're right and RevolutioN is a good example of communication, commitment and having a good partner to do the design/build part in Rapido.

 

I was skeptical of RevolutioN at the very beginning but once they had Rapido on board it became clear it was a well thought out campaign and if I had been modelling the WCML I would have invested.

 

I'm not anti Crowdfunding but I do think people need to consider the risk of some of the schemes 

It's worth pointing out that not all their projects involve Rapido. The 35T tanker, for instances, does not.

 

I'll say no more for fearing of speaking out of turn. I just thought it worth highlighting that it's not all (perceived or otherwise) skullduggery in the crowdfunding world.

[souwest]

I was keen to see a Scottish pre grouping loco on OO, and contacted Hornby and Bachmann several years ago, asking for an idea of costs to produce a model, and what the minimum order was.  I had contacted a number of Scottish pregrouping societies who indicated an interest.

One company said they decided themselves what they produced and did not seem to have read my enquiry properly.

The other after a little prompting said £150,000 for a tank loco (ish) and they only dealt with large sized shops and not individuals.

 

This was, until, a few months very depressing, being blank-faced by the manufacturers.

 

Luckily Hornby now are offering  J36 and Rails are obviously big enough to be able to support the Caledonian 812.   

We can hope for a Caley 044T 439 class, but the G&SWR Baltic is still confined to Farlie Pier shed  

 

 

Souwest

[34theletterbetweenB&D]

I feel the major risk is to the continued expansion of choice in rolling stock. No good pretending that there is no cost in maintaining a significant range of rolling stock in a catalogue, which at present in OO Bachmann and Hornby alone provide. The business plan is likely to be significantly altered once these businesses face competition from others making essentially loco releases alone, which in combined volume well exceed that of the two 'full range' businesses own new loco release plans. I believe we are already seeing the effect in the very rapid inflation of rolling stock pricing: this product no longer gets cross subsidy from loco sales.