Crowdfunding, or minimising risk?

[Ravenser]

3 hours ago, adb968008 said:

Call me old fashioned but isn't there a more proven route to fulfilling demand and making a profit...

 

1. Conduct market research

2. Establish requirements,

3. Obtain costs & timescales

4. Prepare a plan

5. Establish demand by polling customers.

 

6. Put it altogether in a business case, goto the bank, get a loan or issue shares and do it.

if your guarantor seeks further guarantees, ask for a deposit at step 5.

 

Crowdfunding just seems a risk free way of trying to make money with minimal responsibility.

For businesses seeking to make a profit, I think It needs more responsibility, better management with assurances.

 

Any old joe can open a go daddy website with a .co.uk domain from anywhere in the world and ask for any amount of cash without any guarantees or binding commitments of any kind, and attract money.. I think its madness.

 

However I have read that some US states and some Canadian provinces have legislation requiring crowd funded schemes to be registered, licensed and subject to fundraising controls, at some point it may be introduced here, the EU has this debate currently.

 

Does that include Alberta???

[Jonboy]

3 hours ago, adb968008 said:

Call me old fashioned but isn't there a more proven route to fulfilling demand and making a profit...

 

1. Conduct market research

2. Establish requirements,

3. Obtain costs & timescales

4. Prepare a plan

5. Establish demand by polling customers.

 

6. Put it altogether in a business case, goto the bank, get a loan or issue shares and do it.

if your guarantor seeks further guarantees, ask for a deposit at step 5.

 

Crowdfunding just seems a risk free way of trying to make money with minimal responsibility.

For businesses seeking to make a profit, I think It needs more responsibility, better management with assurances.

 

 

Working for a wholesaler supplying a similar, hobby based retail market we saw a considerable reduction in the traditional lending patterns following the 2007/2008 recession. 

 

Prior to that, many shops were being opened on £12-15k of credit card lending. After that new business owners were setting up business banking and genuinely being given credit cards with a £50 limit with similar business plans.

 

This change in bank lending patterns has been a prime driver of the crowdfunding/ micro lending finance processes instead of step 6. This may be through formal platforms, or often parents, redundancy payments, grants etc.

 

We benefit from a relatively easy legal setup/liquidation business process in the uk that allows many people to give it a go and sometimes make a good successful business, employing others, and a relatively easy escape route, albeit at the expense of creditors who should normally only lend what they can lose, if it does go wrong (not withstanding that some failed business owners do end up paying for years if they fail as a sole trader rather than a LLC).

 

Although our business environment isn’t perfect I would much prefer that to the USA method where many many jobs require permits, excessive zoning restrictions etc, taking months to setup. Or the situation in some European countries were redundancy of surplus staff is such a onerous process that they simply don’t take on with the vast youth(under 30 years of age) unemployment figures that result (hitting almost 30% in some European countries over the last decade).

[billbedford]

4 hours ago, adb968008 said:

Call me old fashioned but isn't there a more proven route to fulfilling demand and making a profit...

 

1. Conduct market research

 

 

 

Sure, that will work really well, especially for model railways, as the potential sales volumes are likely to of the same order of magnitude as the sampling errors of any poll to take.

[billbedford]

On 08/06/2019 at 11:38, Roy Langridge said:

 

That is not crowdfunding, what you describe there is no more than expressions of interest or pre-orders with no financial commitment.

 

 

I do wish people would read what I wrote and not what they would like to think I wrote. Lets put it more starkly; In a low-volume business, like model railways, the only more or less certain way of assessing sales is to have the money from such sales firmly in your bank account. Anything else is just guesswork.

 

 

Quote

 

Crowdfunding, as we have seen it for model railways,  is a means to raise the capital from your customers.

 

 

And the use of Escrow accounts, or similar, firmly closes that door. Unless the producer has enough standing with his bank to arrange some sort of bridging loan using a proportion of the escrow account as collateral .

Edited June 9, 2019 by billbedford

[Roy Langridge]

15 minutes ago, billbedford said:

 

I do wish people would read what I wrote and not what they would like to think I wrote. Lets put it more starkly; In a low-volume business, like model railways, the only more or less certain way of assessing sales is to have the money from such sales firmly in your bank account. Anything else is just guesswork.

 

 

 

And the use of Escrow accounts, or similar, firmly closes that door. Unless the producer has enough standing with his bank to arrange some sort of bridging loan using a proportion of the escrow account as collateral .

 

 

I have reread what you posted and I still can't read it as you describe it above in the context of crowdfunding. Yes, to know what sales you will get, selling them is a good way of knowing.

 

Escrow accounts can work, but only for true crowdfunding, not this piecemeal approach that DJ took.

 

Let us say that I wish to market a crowdfunded Fell (popular choice for some unknown reason to me). I need sufficient capital to launch a crowdfunding venture that demonstrates that I am serious. Let us say, for the sake of argument, a 3D printed EP.

 

At that point I set the price point and timescales and launch the venture, stipulating the number of buyers needed and the timescale over which that number must be reached. Would be buyers then deposit the full price of the model in an Escrow account (plus any contribution needed to cover the cost of that account). If at the end of the sign-up period sufficient numbers are reached the cash is released to me, funding the rest of the development. If not, it is returned to the would be purchasers.

 

In setting my price point, I need to factor exchange rate fluctuations, delay costs etc.

 

I hope that makes sense?

 

Roy

 

 

[Budgie]

1 hour ago, Roy Langridge said:

I need to factor exchange rate fluctuations,

 

Ask your bank for a foreign exchange forward contract, and you won't have any exchange rate fluctuations.

[Roy Langridge]

Just now, Budgie said:

 

Ask your bank for a foreign exchange forward contract, and you won't have any exchange rate fluctuations.

 

When we looked into that as a business some time ago it was not beneficial. For fairly small amounts (i.e. small 6 figure sum) the rates they would give were very poor. In the end we decided to take the risk and it paid off.

 

As an aside: I used to work for a company where one lady used to do buying and selling currency in advance as her job - she used to make more money than the rest of us put together. 

 

Roy

[adb968008]

5 hours ago, billbedford said:

 

Sure, that will work really well, especially for model railways, as the potential sales volumes are likely to of the same order of magnitude as the sampling errors of any poll to take.

You missed the point.

 

in our hobby, I would imagine a fair input to market research is this forum itself.

Many times we’ve seen forums such as rmweb seeded with a post for a model by a manufacturer looking for input or interest prior to launch.

[jjb1970]

I'm not really sure that more regulation is necessarily the answer, rather more diligence by potential customers. And I do think that more transparency might help build trust and promote greater confidence in crowd funding. And maybe if those seeking funds were willing to commit their own funds up front by asking for crowd funding once they'd already produced the CAD and 3D prints etc to show that they have something to offer it'd demonstrate they were serious. I still think use of a third party platform like Kickstarter, with the controls they have to weed out complete non-starters might be the quickest win to building some confidence in the case of new entrants with no provenance.

 

I do think the question of how money is spent is something that should be made clear. I don't think many would object to the project manager making a profit out of a scheme, but what is reasonable to expect is some means of demonstrating that monies paid are actually being used for the purposes for which those supporting the scheme believe it is being used for.

[The Stationmaster]

On 09/06/2019 at 12:51, Phil Parker said:

 

I could see this being a nightmare as people pile on forums claiming that the Project Manager shouldn't be paid at all, or that they could do the job for a lot less money/faster etc. Many people don't understand the complexity of this sort of business unless they have been very close to something similar. IMHO, it isn't reasonable to expect all costs other than physically making a model to be nil, but I suspect I'm in a minority on this.

I think the $64,000 question is exactly that (amount) or more.  I don't say a project manager should not be reimbursed for his/her time but it should be made clear what such expenses are going to amount to.  And, crucially, what percentage of the project money they will absorb.

 

A good many years ago I employed a project manager when we extended our then house.  I knew from the off what percentage he would charge of the contractor's price and I also knew the price the selected contractor had quoted and that it had been professionally assessed.  The project manager was well worth his fee in keeping the builder's eye on the ball and his chaps working on the site and in assessing bids from subbies for various tasks.  When we built our present house I project managed it myself because by then I knew more than enough about various aspects of the building trade to enable me to do that and I had experience from past railway work that enabled me to fully understand how various parts of an overall project should be integrated.

 

I also knew a exactly what my time was commercially worth to me or a prospective employer, and that was one heck of a lot more than managing a comparatively simple project like producing a model loco via a factory in China (I've been involved in one of those as well so I speak from a degree of experience albeit without the direct factory liaison part).  

 

So let's say it's 10% of stage payment value (not a bad rate at all) plus identifiable expenses incurred and reported.  Specifying that strikes me as presenting no problem at all although some expenses might be an emerging cost but that too is easily reportable to crowdfunders.  

 

Now let's compare it with what appears to have happened in respect of the DTOS/DJM APT (where there is any case a degree of dubiety about who it was actually ordered from - see a post in that thread from AY dated 3 May 2018 in response to a question from a forum member).  But standing that issue aside we can look at what might be some reasonably indicative numbers which seem to indicate that the viable number of crowdfunders required for the project was 400 and despite the nonsense about 'hacked emails'  DJ reported on 8 April that the  were now the required number of crowdfunders plus a surplus of 10% (and increasing) which would provide some contingency cover.  That implies a total of c.440 crowdfunders.

 

If all of those paid their 25% depost (which is unclear from the posts) that would have created a fund of £110,000 which DJ noted in any event would be paying for scanning (and presumably for the 'scanning party' as well).   Logically deducting a 10% project management fee would absorb £11,000 plus some expenses.  However because of Paypal problems some of the deposits were subsequently refunded and then repaid through the new DJM website.

 

If we assume, not unreasonably in my view a 10% dropout rate during the deposit payment stage there would still have been £99,000 paid - and a project management fee of £9,000 leaving £90,000 to cover the scanning and initial CAD work plus no doubt a very substantial amount left over - measurable in tens of thousands.

 

Or putting it another way even a project management fee of 10% plus expenses is not going to make a massive hole in the crowdfunders' money going into any project provided there is a clear business plan and proper estimation of costs.  The only question is whether or not 10% is a reasonable fee?

[jjb1970]

If anything good is to come out of the DJM debacle then hopefully it will be that people apply a little more judgement before parting with their money for crowd funded schemes. If a project or company has red flags all over the place then people need to ask why that might be the case. I think as a minimum people should be asking for the following:

 

-clear terms and conditions that provide all necessary information to prospective purchasers and clarity on what you are funding, who is responsible for what and which are consistent with legal requirements;

 

-a project schedule, with key milestones and deliverables specified, the DJM offering just descended into being a glorified wish list with people asked to pony up money if they wanted it to happen;

 

-transparency in what the funding will be used for and some means of satisfying prospective customers that the money will be used for the scheme the purchaser thinks they are supporting, otherwise it could easily end up as a form of Ponzi scheme with people paying into new projects and the money then being used to support existing schemes and other things; and

 

-personally I think there should be a CAD or EP when a company goes to the market to ask for funding for the production phase, this is just a personal attitude of mine but I'm very much of a mind that if a person isn't willing to risk their own money supporting an idea then why should anybody else?

 

Ultimately however it all comes down to judgement and a decision as to whether you see the company as being credible and a safe bet.

[chris p bacon]

5 minutes ago, jjb1970 said:

personally I think there should be a CAD or EP when a company goes to the market to ask for funding for the production phase, this is just a personal attitude of mine but I'm very much of a mind that if a person isn't willing to risk their own money supporting an idea then why should anybody else?

 

I agree with this.  

 

There are various schemes at present which use the actual funding to gauge whether a model is viable. Although they start with 'Expessions of interest' the real work begins with the cashflow from funders.  EOI are useful to establish interest but I think that at the very least those seeking funding should have something tangible (CAD ready for tooling) before asking for monies. If they put some of their own money up first it will instil some confidence with those that might be interested in funding. 

One scheme in particular is already at second stage payment (£120 paid) with nothing to show but some unfinished CAD's. I see further issues ahead for it as too many costs and implications for funding are seemingly unresolved.

[The Stationmaster]

4 hours ago, chris p bacon said:

 

I agree with this.  

 

There are various schemes at present which use the actual funding to gauge whether a model is viable. Although they start with 'Expessions of interest' the real work begins with the cashflow from funders.  EOI are useful to establish interest but I think that at the very least those seeking funding should have something tangible (CAD ready for tooling) before asking for monies. If they put some of their own money up first it will instil some confidence with those that might be interested in funding. 

One scheme in particular is already at second stage payment (£120 paid) with nothing to show but some unfinished CAD's. I see further issues ahead for it as too many costs and implications for funding are seemingly unresolved.

This is really getting to the nitty gritty.  To get to a workable CAD for a single vehicle is likely to cost somewhat less than £5,000, in some cases barely half of that for a simple subject, so it isn't exactly an expensive proposition for any reasonably founded business (although it could well be for a private individual).   Thus seeking EOIs before going any further could be a guide to taking that first step or putting you off having a go with the project - and with no need to take  anybody else's money.  Back to the oft mentioned point about having sufficient belief in your own project to back it with your own money.

 

Once you have sufficient EOIs (with a drop out margin allowed for if you have any sense) you will know if it is worthwhile pursuing your project and you can put your money where your mouth is and develop something tangible to offer those who will put in their money.   Interestingly some commercial organisations work in a rather different way and announce before starting work (but after getting their numbers sorted and the project costed) and in some cases they ask for deposits from purchasers - mainly to ensure continued commitment as much as anything else and in any case the deposit payers will have normal consumer protection.  I'm far from sure what 'a deposit' delivers or is worth in a crowd funded scheme where all that exists is an idea and a picture of the real thing.

 

 

[truffy]

On 09/06/2019 at 17:29, Roy Langridge said:

As an aside: I used to work for a company where one lady used to do buying and selling currency in advance as her job - she used to make more money than the rest of us put together. 

I used to work for BP. In one business, the role of one of the team members was solely 4X, to ride the exchange rate fluctuations. And the company car suggested he was very good at it.

[The Stationmaster]

On 18/06/2019 at 19:17, truffy said:

I used to work for BP. In one business, the role of one of the team members was solely 4X, to ride the exchange rate fluctuations. And the company car suggested he was very good at it.

The most profitable part of BR - according to some well informed folk - was the Central Banking Unit which borrowed and lent money on the short term money market, and made a substantial profit in doing so.

[bécasse]

4 hours ago, The Stationmaster said:

The most profitable part of BR - according to some well informed folk - was the Central Banking Unit which borrowed and lent money on the short term money market, and made a substantial profit in doing so.

But the Unit wasn't all that clever, there were certainly at least a couple of occasions when it came so close to breaching the EFL that certain stations were instructed to bank all their cash immediately. They weren't told that it was so that the four-weekly salary payment could be made, but it was. I can remember being given an hour by my boss to identify which stations were likely to be holding large amounts of cash at 10.00 on a mid-week morning - no easy task given that, even at the time, credit cards were being used for most high-value ticket purchases. Still, my pay made it to my bank on time so I must have got it more or less right. It rather surprised me at the time that no one knew which stations generated large amounts of cash (as opposed to total takings), although I was later seconded to a DDK-inspired retail strategy study which uncovered the uncomfortable fact that local managers were actually (and unnecessarily) increasing the railway's retail costs while claiming to be reducing them.

[The Stationmaster]

On 25/06/2019 at 22:05, bécasse said:

But the Unit wasn't all that clever, there were certainly at least a couple of occasions when it came so close to breaching the EFL that certain stations were instructed to bank all their cash immediately. They weren't told that it was so that the four-weekly salary payment could be made, but it was. I can remember being given an hour by my boss to identify which stations were likely to be holding large amounts of cash at 10.00 on a mid-week morning - no easy task given that, even at the time, credit cards were being used for most high-value ticket purchases. Still, my pay made it to my bank on time so I must have got it more or less right. It rather surprised me at the time that no one knew which stations generated large amounts of cash (as opposed to total takings), although I was later seconded to a DDK-inspired retail strategy study which uncovered the uncomfortable fact that local managers were actually (and unnecessarily) increasing the railway's retail costs while claiming to be reducing them.

In the 1970s we regularly had to collect a cheque from a particular freight customer and strangely it was very rarely available before about 14.15 in the afternoon on a Friday (Friday being the payment deadline day).  The customer never missed the deadline day but we were inevitably with a cheque for well over £1 million (often more than twice than amount) on a Friday afternoon after the banks had closed.  No wonder the BRB preferred payment by credit transfer

[jjb1970]

I am still sometimes surprised at the arcane practices that linger in the world of shipping. 

 

I think one valuable lesson from the DJM debacle for anyone thinking of getting involved with crowdfunding is to make sure they pay by credit card so as to be protected. 

[The Stationmaster]

It's been quite a while since this thread was last active but I do wonder if the lessons which should have been learnt out of the DJM debacle and more general comments about crowd funding  or advance payment might be slipping away from people?

 

In essence being asked to fund, in whole or in part, a manufacturer's or even more pertinently a commissioner's  model project, whether by crowd funding or by pre-order deposits or staged payments, is exactly the same kind of risk as far as the purchaser's money is concerned.  Legally if the product fails to live up to its description or to meet reasonable expectations based on such description we, the retail purchasers, are entitled to a full refund of our money.  This doesn't include any lost interest although in present circumstances that amounts to nothing or an infinitesimally tiny amount more than nothing although the purchaser has still lost the use of that money while it was standing idly as a deposit.  

 

Equally there is the question of what happens to that (i.e. our) money while in the hands pf the business?  If it is a crowd funding payment there should be stage work progress reports to see where it has gone.  And before the project is launched a wholly transparent indication from the commissioner who is being funded regarding what is needed to be spent on what for each planned stage payment.  After all the person asking for the money will obviously have that information so it could readily be shared especially by a new venture with no established record of both its past achievement and probably of those involved - an excellent example in this respect being Revolution Trains who are clearly identifiable and have a very good track record in this field.

 

With deposits the situation is in many respects similar If, for example,  I pay a deposit with the NRM/Locomotion for a future model where tangible progress is already visible I know I am dealing not only with an established concern but one which is subject to considerable official, and publicly available,  scrutiny in respect of how it spends money.  The same with many established model railway retailers where it can sometimes be very easy to get a pretty good idea of their financial state of health from information readily, and freely, available to the public.  There might still be risk but it is generally not too difficult to value and assess that risk before you spend your money.

 

On the other hand when a newcomer comes along, particularly one without any publicly visible financial information, or one which is not prepared to disclose how its finances work, or even disclose what any deposit money might or might not be used for the risk becomes greater.  You might not even know not only how your deposit money will be used but perhaps more importantly you might not know or be able to find out what it would be repaid from if the final model does not meet your expectations or should it not deliver what was promised or reasonably expected.   If your deposit has, in effect, become the equivalent of crowd funding finance how will you get it back should things go pear shaped?

 

Similarly a prospective purchaser, through paying a deposit, should I would think at least be able to see or get. pretty good idea of what he will get for his or her money.   CADs or even engineering drawings, while not cheap,  are a relatively inexpensive stage to reach in the development of a model and if nothing else show a lot more commitment on the part of the person who gets your money than a picture of the real thing or an outine sketch.  If we are talking about deposits - not crowd funding - clearly the promoter of the project should be able to progress to the CAD stage fairly easily once they have sufficient expressions of interest because their research would surely have been fairly complete before the model is announced?   Far better to see where your money will be going than not although maybe I'm old -fashioned when it comes to thinking in that way.  I'm not suggesting or implying dishonesty but trust is an important element when laying out money and surely anybody who believes in their project will have already done sufficient work to know what is involved and to have got a quotation from a factory or factoties in order to price the model before they are able to ask for money,  If they can go that far a properly developed CAD is going to do more to convince everybody there is a viable project.

 

For lots of folk it is a risk they are happy to take because it might help them get something nobody else was ever likely to offer and they are just as happy to lose their money if things don't work out.  But as the DJM collapse showed there were a lot of people who put money into its various ventures who definitely wanted their money back when the company, and its projects collapsed.  Maybe it is easier to say you don't mind losing your money than it is to actually lose it?  and in my book it is essential that I know what will be done with my money while I wait for the fruits of spending/lending it?