Crowdfunding, or minimising risk?

[Ravenser]

28 minutes ago, rue_d_etropal said:

A fundamental principle of crowdfunding is that the money 'pledged' is secured so can not be spent until the target is reached.

 

 

It seems to be such a fundamental principle of crowd-funding that most model railway crowd-funding projects completely ignore it.....

 

Is this something that we should now insist is demonstrated before people  are asked to support a crowd-funding project?? 

[Phil Parker]

3 minutes ago, Ravenser said:

Is this something that we should now insist is demonstrated before people  are asked to support a crowd-funding project?? 

 

This would suggest some official body to regulate crowd-funding for the model railway world. The point of it is that anyone can set-up a crowd-funded project, but no-one is compelled to give them any money.

[rue_d_etropal]

Fundamentally that is the problem here. Crowdfunding(Kickstarter) was originally conceived after the 2008 financial crash, and it used concepts more commonly used by cooperatives to raise money. It would be a good way to raise funds to restore a loco, as rewards could easily(and cheaply) be created such as footplate rides, driver training courses, which don't cost much to set up, and would attract more. Certainly less risky than the traditional method of fund raising, where money could just disappear.

[Ravenser]

Just now, Phil Parker said:

 

This would suggest some official body to regulate crowd-funding for the model railway world. The point of it is that anyone can set-up a crowd-funded project, but no-one is compelled to give them any money.

 

The promoter could simply indicate that funding would be paid to a suitable "bag-holder" , who would release it to the promoter when the target had been met. Kernow did this for DJM in respect of the Class 74 . Kickstarter I think do this

 

I wasn't suggesting any kind of regulator , merely raising the question of whether in future people should stand back from any crowd-funding project that wasn't set up with a "bag-holder" to "secure" the money in the way rue_de_etropal describes. Should the lack of such a structure be treated as a red flag against a crowd-funding project by potential investors? 

[rue_d_etropal]

This would suggest some official body to regulate crowd-funding for the model railway world

kickstarter was originally set up as a company to do just this for most projects. It would need to be changed a bit, but maybe it needs the model railway industry(ie the big manufacturers  and traders) to group together to set up something similar to kickstarter.

[Ryde-on-time]

1 hour ago, Ravenser said:

................

Surely we need more costing disclosure and more transparency from crowd-funding promoters before people are asked to hand over 3-figure sums? Otherwise we are going to have a long trail  of disasters,

 

The problem is people are still willing to throw money at the KRModels GT3 with precious little info forthcoming

 

Whereas the likes of Cavalex to me show how it should be done. They fund the research, scanning if necessary and design work to the point where the model is ready to be tooled before asking for the first payments. We can see what the product will be and the spec.

 

In contrast KRModels have asked for the second (of 3 payments) already for the GT3 having shown nothing more than a few doodles on Facebook. 

 

There is no official body to police crowdfunding, it’s down to modellers to use their judgment and perhaps pressure new comers to do more to demonstrate they are worth backing 

[PMP]

29 minutes ago, rue_d_etropal said:

Fundamentally that is the problem here. Crowdfunding(Kickstarter) was originally conceived after the 2008 financial crash, 

 

 

It was nothing of the sort.

 

Crowdfunding has been around for many years, earlier highly recogniseable forms are war bonds. Pop/Rock groups records and films have been produced using crowd funding models well before 2008.

[The Stationmaster]

1 hour ago, Ravenser said:

 

 

Hmmm.

 

One issue which picking over the rubble of the DJM crowd-funding projects raises is "Are the costings for this project credible?". Apparently he was proposing options including a 14 car APT in OO, and for this you would stump up £1000 as a crowd-funder.  How many crowd-funders were required for the project is unclear, though the expressions of interest for the DJM  N gauge APT required 400 punters.

 

Now just how realistic is it to tool up a 14 car APT for £400,000 - supposing the number was 400 crowd-funders?  Perhaps it might have been 600 crowd-funders and £600,000. Is that a realistic figure to do the job? Apparently we are not supposed to ask questions like that - at least the promoters don't think we have any right to know

 

Supposing that the APT project failed in itself - and the lack of CAD and failure to move to tooling in 18 months suggests it might have - and was not brought down by a failure elsewhere in the organisation

 

- The project might have failed because not enough people had paid up to  fund it- yet the promoter started development work, used up the available funds and then was stranded , neither able to tool nor able to cancel and refund

 

- The project might have seen costs rise over the last 18 months, and been left stranded without sufficient funds to complete 

 

but also , critically:

 

- The project might have failed because the costings were hopelessly wrong , and the funds were never going to be enough to do the job.

 

Given Dave Jones' background you might have hoped he would get the costs more or less right

 

But A N Other in Malta? Someone we don't know at all.  How do we know that his costing for the Fell makes any sense?  I think on Kickstarter promoters say how much they are raising, and therefore how many crowd-funders they need  . Does Kickstarter advise how many have signed up so far?

 

In model railway crowd-funding , it seems the amount to be raised and the number of people to fund are treated as commercially confidential info , and not disclosed. The so-called "investor" is being asked to invest with zero information as to whether this is a viable proposition in the first place.

 

How can anyone judge the viability of a project with zero information and no costing at all?? In no other form of investment would this be tolerated for an instant.

 

Surely we need more costing disclosure and more transparency from crowd-funding promoters before people are asked to hand over 3-figure sums? Otherwise we are going to have a long trail  of disasters,

 

 

I have seen on a couple of occasions detailed costings from DJ in response to people who have asked for costs when considering launching a project and looking for support.  Not so much crowdfunding but 'this is the estimated cost and how big a share are you willing to take?' or 'will you take 1% of the cost if I can find 99 other people to join in?' type of approach.  Thus there should be no doubt that costs, inevitably at current prices and exchange rates, can be established either from direct quotations from those who will undertake the work or by estimates (which might or might not be accurate).

 

But the instant you start giving out such detail - and neither of those projects happened due to lack of support although Hornby subsequently released something which almost met one of the ideas (freight brakevan) - the detail could reveal how much you are taking for running the project, especially if you are the 'manufacturer'.  And that might put off a lot of people when they see those figures - how for example do you value the 'project manager's' time and how do you know if he has actually spent the time claimed working on that project, how much goes into overheads (surely something must?), how much goes on things within the business which might have no obvious connection with the project and model you are paying for? 

 

With Hornby and Bachmann we just moan about rising prices without considering why they are rising - apart from claims of profiteering.  How do we know the 'manufacturer' making our crowdfunded model isn't profiteering too?    Clear numbers are exactly what I would want to see but they need to include something more than saying the scanning will cost £5,000, especially if I am one of, say, 200 people paying £250 for the first stage of development (research, scanning and through to CAD).  When - as Ravenser has clearly illustrated in another thread what could actually be going in at that stage is £50,000 - which would more than pay for research and a CAD with plenty of cash leftover.   So we need to know also how many funders are 'in' and where the money is going.  Going off half cock with only part funding onboard is never going to make sense because if that money is spent it can nv ever be got back, it will have gone - model or no model at the end of the process.

 

Ravenser's numbers - albeit criticised for being estimates - make considerable sense when you look at the number of crowd funders sought for various projects in the example of DJM.  And with any crowdfunder if the number of contributors is measured in hundreds and the stage payments are also measured in hundreds, even if only £200 a time, the amount of money that should be inside a project specific ring fenced account rapidly gets into the tens of thousands.  With the DJM APT it must inevitably have ultimately  run into the hundreds of thousands if the project was fully subscribed by crowdfunders.  So the need for transparent financial information becomes even more crucial if we are being asked to place our money where our wishlist reaches.

 

The point about a viable proposition is a critical one and unfortunately the only people who can decide that are the 'organisers' of the crowd funding.  With Revolution it seems to have been absolutely transparent - 'sorry we haven't got enough supporters therefore we won't go ahead'  (and we won't be taking any money).  Can you wing it on being almost there?  Dangerous and those putting in their money need to know if that is happening - back to transparency and trust; both are far more important than cheery statements like 'we're almost there so tooling will start next Tuesday' etc.   All of which takes us back to those putting in their money and, sorry to say it, if their wishlist eyes are bigger than their business plan checklist and spreadsheet it will only encourage potential risk takers among those running crowdfunding schemes.  And lack of communication from the organiser is going to be a mighty big red flag because there must be a reason for it.

 

And so to organisation.  If a project manager can't simultaneously run several projects each worth £100, 000 or so then there is something desperately wrong, even if it involves detail checking and so on.  No you can't do it all at once but there are usually 5 working days in a week (6 or 7 if you're working hard to develop your business) and getting on for 50 working weeks in a year.   Let's say 45 working weeks, 5 days a week, 8 hours a day and you've 1,800 hours in which to do your work, and at times a longer day might be needed to get work finished against a deadline.  You can do a heck of a lot of work in a 40 hour week and when it comes to managing projects provided you are organised and your information is organised you can easily cover several at once,  yes the work is intensive at times but so are many other jobs.  I don't buy the idea that managing these projects needs vast amounts of time to the extent that you can't do several at once and this comes back to looking at track records (and possibly watching somebody's activities on Farcebook

[The Stationmaster]

1 hour ago, Ravenser said:

 

The promoter could simply indicate that funding would be paid to a suitable "bag-holder" , who would release it to the promoter when the target had been met. Kernow did this for DJM in respect of the Class 74 . Kickstarter I think do this

 

I wasn't suggesting any kind of regulator , merely raising the question of whether in future people should stand back from any crowd-funding project that wasn't set up with a "bag-holder" to "secure" the money in the way rue_de_etropal describes. Should the lack of such a structure be treated as a red flag against a crowd-funding project by potential investors? 

Yes, an excellent - but unfortunate for them - example was Kernow acting as 'bag holder' for the DJM Class 74 project.  The regrettable thing was that the only people who lost out there were Kernow who took a major hit financially from the bank charges for refunding the money plus the administration cost of doing the work.  So 'bag holders' are a great idea but in view of that episode I doubt you'll ever find any again who are prepared to do it at their own expense and lose out in consequence if they've heard of Kernow's experience.

 

Yet again it comes back to having the project properly 'subscribed' and ready to go before any money is collected. 

[Ravenser]

7 minutes ago, The Stationmaster said:

Yes, an excellent - but unfortunate for them - example was Kernow acting as 'bag holder' for the DJM Class 74 project.  The regrettable thing was that the only people who lost out there were Kernow who took a major hit financially from the bank charges for refunding the money plus the administration cost of doing the work.  So 'bag holders' are a great idea but in view of that episode I doubt you'll ever find any again who are prepared to do it at their own expense and lose out in consequence if they've heard of Kernow's experience.

 

Yet again it comes back to having the project properly 'subscribed' and ready to go before any money is collected. 

 

This implies that any future project must come with the caveat - "If the project does not attract sufficient funding , it will be cancelled and funds returned to you. A deduction of X will be made to cover banking and administration costs".

 

X might be say £5 . Awkward if it's a £30 deposit, but if it's a £250 payment a slight cost to get protection.

 

But then - if you're unhappy losing a fiver if the project fails and is cancelled should you really be playing the crowd-funding game at all?? It might serve as a sufficient deterrent to weed out the uncommitted - and stop them dropping out at second instalment

[jjb1970]

I think there is something to be said for crowd funding platforms such as Kickstarter. They do not eliminate risk, but by imposing certain barriers in terms of requiring money to be pledged and a time limit they do seem to filter out the complete dreamers and no hopers.

[Roy Langridge]

2 hours ago, Ravenser said:

 

This implies that any future project must come with the caveat - "If the project does not attract sufficient funding , it will be cancelled and funds returned to you. A deduction of X will be made to cover banking and administration costs".

 

X might be say £5 . Awkward if it's a £30 deposit, but if it's a £250 payment a slight cost to get protection.

 

But then - if you're unhappy losing a fiver if the project fails and is cancelled should you really be playing the crowd-funding game at all?? It might serve as a sufficient deterrent to weed out the uncommitted - and stop them dropping out at second instalment

 

This is what Escrow accounts exist for - they act as a pot between two parties. They are not free, but they do offer protection. What would be needed would be an independent person to act on behalf of the customers and be the one to release the money to the manufacturer when the agreed terms were met.

 

Roy

Edited June 7, 2019 by Roy Langridge

[The Stationmaster]

11 hours ago, Roy Langridge said:

 

This is what Escrow accounts exist for - they act as a pot between two parties. They are not free, but they do offer protection. What would be needed would be an independent person to act on behalf of the customers and be the one to release the money to the manufacturer when the agreed terms were met.

 

Roy

Yes, but again who carries the risk of the costs should the funds have to be reimbursed.  Kernow took it on the chin while everybody else walked away from the Class 74 debacle with their money intact or used the credit to support Kernow by buying from them (the polite thing to do in my view but that wasn't compulsory).  Kernow have never disclosed how much it cost them but I understand it was no cheap and they, so I understand, have never made a claim against DJM for reimbursement of their costs.

 

So any arrangement like this would have to include a proviso about covering costs in the event of money bein g refunded if the scheme falls over.  Perhaps better to not start  collecting the money until the project is fully supported although that does have a small risk of people not paying up when thh money is requested?

[Roy Langridge]

Just now, The Stationmaster said:

Yes, but again who carries the risk of the costs should the funds have to be reimbursed.  Kernow took it on the chin while everybody else walked away from the Class 74 debacle with their money intact or used the credit to support Kernow by buying from them (the polite thing to do in my view but that wasn't compulsory).  Kernow have never disclosed how much it cost them but I understand it was no cheap and they, so I understand, have never made a claim against DJM for reimbursement of their costs.

 

So any arrangement like this would have to include a proviso about covering costs in the event of money bein g refunded if the scheme falls over.  Perhaps better to not start  collecting the money until the project is fully supported although that does have a small risk of people not paying up when thh money is requested? 

 

You are quite right and I believe the comments made that those investing should cover some/all of that cost is sensible. Personally I agree that the supplier should be showing some financial commitment and not just relying on other to cover all costs. Perhaps an arrangement whereby the supplier and funder equally cover the cost of the protection through Escrow?

 

The reason for my post was that there are ways of "holding money" that don't rely on the like of Kernow financially. Perhaps somebody like Kernow* (as a well respected company) would, however, be happy to be the authority to release or return money, but only  if it was not going to cost them anything.

Roy

 

*I know that it is very unlikely to be Kernow after the Class 74 story.

[Hal Nail]

16 hours ago, Phil Parker said:

 

This would suggest some official body to regulate crowd-funding for the model railway world.

 

Why not have some regulation? You do for many other aspects of life where people take your money eg for financial advice etc.

If nothing else some clarification of the legal position of any such monies paid over would clearly help everyone given the amount of discussion it is generating?!

[billbedford]

1 hour ago, Roy Langridge said:

 

You are quite right and I believe the comments made that those investing should cover some/all of that cost is sensible. Personally I agree that the supplier should be showing some financial commitment and not just relying on other to cover all costs. Perhaps an arrangement whereby the supplier and funder equally cover the estate of the protection through Escrow?

 

2

 

C'mon now, just about every estate agent and solicitor knows how to write small print so that they don't lose out when handling other people's money.

[Roy Langridge]

2 minutes ago, billbedford said:

 

C'mon now, just about every estate agent and solicitor knows how to write small print so that they don't lose out when handling other people's money.

 

Yes, but we don't want small print. One of the big wants from crowdfunding, as discussed above, is transparency.

 

Aside from that, I am not sure what you comment has to do with the text quoted? Are you unhappy with both parties to the transaction funding the cost of protecting investment if the venture does not proceed?

Roy

[rue_d_etropal]

14 hours ago, jjb1970 said:

I think there is something to be said for crowd funding platforms such as Kickstarter. They do not eliminate risk, but by imposing certain barriers in terms of requiring money to be pledged and a time limit they do seem to filter out the complete dreamers and no hopers.

This is how it changed after 2008. There were similar schemes before, including those to create cooperatives, but it is the way they built in increased security that makes it easier and safer for others to use. One important part of the Kickstarter model, was incentives. Getting people to back any project is always difficult(as we found when setting up a cooperative), but if you can offer some type of reward then people are more willing. There are still risks, but up till the point when target is reached then the way Kickstarter works(and others should use) means than people will get their money back if that target is not reached.

Anyone who asks for money without these safeguards should be avoided. They might succeed, but there is a very high rish that they won't. Even if it is someone you know.

[billbedford]

18 minutes ago, Roy Langridge said:

 

Yes, but we don't want small print. One of the big wants from crowdfunding, as discussed above, is transparency.

1

 

Crowdfunding is still a contract, so what happens in any foreseeable eventuality should be defined before it is offered to potential investors.

 

18 minutes ago, Roy Langridge said:

 

Aside from that, I am not sure what you comment has to do with the text quoted? Are you unhappy with both parties to the transaction funding the cost of protecting investment if the venture does not proceed?

 

 

I see crowdfunding as a way of an entrepreneur being able to know in advance the number of certain sales they will have for the proposed product. Knowing the sales will allow them to make a decision on whether they will be able to make a return on their investment. Of course, this still means that the entrepreneur has access to enough capital to fund the manufacturing. 

 

In other words, crowdfunding should be seen as no more than market research for niche markets.

[Roy Langridge]

1 minute ago, billbedford said:

 

Crowdfunding is still a contract, so what happens in any foreseeable eventuality should be defined before it is offered to potential investors.

 

 

I see crowdfunding as a way of an entrepreneur being able to know in advance the number of certain sales they will have for the proposed product. Knowing the sales will allow them to make a decision on whether they will be able to make a return on their investment. Of course, this still means that the entrepreneur has access to enough capital to fund the manufacturing. 

 

In other words, crowdfunding should be seen as no more than market research for niche markets. 

 

That is not crowdfunding, what you describe there is no more than expressions of interest or pre-orders with no financial commitment. Crowdfunding, as we have seen it for model railways,  is a means to raise the capital from your customers. Strictly, it does not have to be from customers and can be from people who get a return on their investment, but don't have shares per se.

 

Roy

 

 

[The Stationmaster]

25 minutes ago, 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. Crowdfunding, as we have seen it for model railways,  is a means to raise the capital from your customers. Strictly, it does not have to be from customers and can be from people who get a return on their investment, but don't have shares per se.

 

Roy

 

 

Exactly so. There is in many instances a drop out rate between 'expressions of interest' and even pre-orders when it comes to actually putting your hand in your pocket.  A sensibly managed business - with ideally experience of how taht tends to work - can plan on a basis of experience as indeed could a well organised crowdfunding scheme which doesn't start collecting money until a project is wholly subscribed (or even slightly over-subscribed?).  the gung ho merchant who goes charging ahead on 'promises' which aren't backed by hard cash or don't even add up to the needed total is hardly safe hands for anyone to put their money into.

 

All the potential crowdfunders need to do is ask a few questions.  But they do of course need to know what questions to ask - hopefully various things in this thread will have helped them in that respect.

[Roy Langridge]

24 minutes ago, The Stationmaster said:

Exactly so. There is in many instances a drop out rate between 'expressions of interest' and even pre-orders when it comes to actually putting your hand in your pocket.  A sensibly managed business - with ideally experience of how taht tends to work - can plan on a basis of experience as indeed could a well organised crowdfunding scheme which doesn't start collecting money until a project is wholly subscribed (or even slightly over-subscribed?).  the gung ho merchant who goes charging ahead on 'promises' which aren't backed by hard cash or don't even add up to the needed total is hardly safe hands for anyone to put their money into.

 

All the potential crowdfunders need to do is ask a few questions.  But they do of course need to know what questions to ask - hopefully various things in this thread will have helped them in that respect. 

 

I think you have hit the nail on the head there, and highlighted a problem straight away "... well organised crowdfunding scheme which doesn't start collecting money until a project is wholly subscribed"

 

We are now in the position where people are starting crowdfund ventures  without the capital to demonstrate that they are viable and a desire from potential crowdfunders to see something tangible before committing. the two do not sit together.

 

I foresee we will see a few more ventures go to the wall yet. Hopefully those that are left will be the viable ones with sufficient financial backing behind them to be viable*.

 

Roy

 

* By that I mean that their capital invested in one scheme is recouped from the crowdfunders to then be ploughed into another scheme, demonstrating that to be viable before asking for funding.

 

Edited June 8, 2019 by Roy Langridge

[adb968008]

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.

Edited June 9, 2019 by adb968008

[rue_d_etropal]

Quote

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.

I think some might be doing this, but when Kickstarter started their operation, they set it up with safeguards to reduce risk. The finance industry had shown that it could not be trusted as it was too willing to give out money at too high a risk. Since then many big companies and projects have either failed or have gone way over budget, so I don't think those traditional finance companies have learned from previous mistakes.

The term 'crowdfunding' is now being banded around as if all schemes which use that name are the same. In effect badly run schemes are being marketed as 'crowdfunding' to cover up their mismanagement .

I have only taken part in one crowdfunding scheme and that was under the Kickstarter umbrella. I would recommend only supporting those who use Kickstarter or similar.

[Phil Parker]

On 07/06/2019 at 18:46, The Stationmaster said:

But the instant you start giving out such detail - and neither of those projects happened due to lack of support although Hornby subsequently released something which almost met one of the ideas (freight brakevan) - the detail could reveal how much you are taking for running the project, especially if you are the 'manufacturer'.  And that might put off a lot of people when they see those figures - how for example do you value the 'project manager's' time and how do you know if he has actually spent the time claimed working on that project, how much goes into overheads (surely something must?), how much goes on things within the business which might have no obvious connection with the project and model you are paying for? 

 

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.