Crowdfunding, or minimising risk?

[Nearholmer]

There was an interesting case explored on a bbc consumer programme last year, about another hobby, tropical fish keeping, where a crowd funded initiative, to produce fancy fish tanks, had gone horribly wrong.

 

Bother the supplier and the subscribers were left deeply out of pocket and grumpy, and from what I recall it hinged on product development gobbling up ever more money, leaving no funds for actual production, despite additional ‘calls’ on the founders. The supplier was miserable due to being harassed about problems that he couldn’t control, and the subscribers were miserable because they’d paid a lot of money, effectively for nothing.

 

The issue waiting to bite for model trains is, I suspect, a factory failure in the car east. If a factory either folds, or gets into a production difficulty that fatally compromises quality, the chances of a UK ‘supplier’, who is really a value-adding-middleman, being able to recover costs from across the globe must be tiny. I know of one relatively small outfit in the UK who fund from their own resources/earnings, who took a nasty knock when the Chinese factory seriously messed-up on a batch of coaches ...... the outfit simply couldn’t get their money back, and had to write it off.

 

So, my gut feel is that we will have a thunderstorm before the air becomes clear around this topic.

[PMP]

Having had a few minutes to spare since my last post, I did stumble across this article...

 

https://www.theregister.co.uk/2018/01/31/crowdfunding_court_case_refund_retro_computers_zx_vega_plus/

 

Thanks for that, in conjunction with that link this piece gives the more detailed backstory to the case

https://www.theregister.co.uk/2017/03/16/retro_computer_ltd_vega_plus_indiegogo_saga/

[jjb1970]

There was an interesting case explored on a bbc consumer programme last year, about another hobby, tropical fish keeping, where a crowd funded initiative, to produce fancy fish tanks, had gone horribly wrong.

 

Bother the supplier and the subscribers were left deeply out of pocket and grumpy, and from what I recall it hinged on product development gobbling up ever more money, leaving no funds for actual production, despite additional ‘calls’ on the founders. The supplier was miserable due to being harassed about problems that he couldn’t control, and the subscribers were miserable because they’d paid a lot of money, effectively for nothing.

 

The issue waiting to bite for model trains is, I suspect, a factory failure in the car east. If a factory either folds, or gets into a production difficulty that fatally compromises quality, the chances of a UK ‘supplier’, who is really a value-adding-middleman, being able to recover costs from across the globe must be tiny. I know of one relatively small outfit in the UK who fund from their own resources/earnings, who took a nasty knock when the Chinese factory seriously messed-up on a batch of coaches ...... the outfit simply couldn’t get their money back, and had to write it off.

 

So, my gut feel is that we will have a thunderstorm before the air becomes clear around this topic.

 

There are certainly risks in doing business with the factories in China, as claiming your legal rights in China will be more difficult than if the applicable legal jurisdiction was the UK. That said, I sometimes think it is too easy for some companies to point fingers at Chinese factories. I've done a lot of work with Chinese companies and acted on behalf of companies building ships in China and while there are issues it isn't the sort of wild west lawless frontier of business sometimes presented.

[Nearholmer]

It almost wouldn’t matter if the factory was in Beijing or Bognor if it folded, because, in a bad case, the distribution of assets to creditors could still leave the ‘middleman’ and the subscribers with a halfpenny in the pound.

 

I’m in awe of small suppliers in the UK who commission on our behalf from far away. The work involved in getting the right product out of a well intention factory on your doorstep is non-trivial, so must be huge when the factory is on the other side of the world, with language and cultural challenges to be overcome as well as technical ones, and the inevitable misinterpretations that occur in even the best relationship.

[Guest JoeHart2]

It almost wouldn’t matter if the factory was in Beijing or Bognor if it folded, because, in a bad case, the distribution of assets to creditors could still leave the ‘middleman’ and the subscribers with a halfpenny in the pound.

 

I’m in awe of small suppliers in the UK who commission on our behalf from far away. The work involved in getting the right product out of a well intention factory on your doorstep is non-trivial, so must be huge when the factory is on the other side of the world, with language and cultural challenges to be overcome as well as technical ones, and the inevitable misinterpretations that occur in even the best relationship.

 

So are we now to deduce that crowdfunding is a financially acceptable way of bringing a new model to the market place and the risk of failure hinges more upon the choice of Chinese factory(ies) chosen to produce the model.

 

I say this also with the knowledge of the delay we are currently witnessing for Hornby's non-crowdfunded Class 87 models...

[Nearholmer]

I’d say it’s like any project: there are multiple things that could go wrong or, to put it another way, multiple things that have to be carefully taken care of in order to maximise the probability of it going right. Making sure that the factory used is financially stable, and is technically competent, are but two things to tick-off the list.

[jjb1970]

Dealing with the factory should be the bread and butter bit for the supplier really. There will be a commercial relationship between the Chinese manufacturer and UK based company, and then it is down to that relationship to define work scope, responsibilities, deliverables, payment schedules, acceptance criteria etc etc. Something to keep in mind is that in the case of the factory it will be a case of rubbish in = rubbish out, if there are errors in research, colour specification, drawings etc then a Chinese factory is likely to make whatever the specification they receive specifies. Similarly with QC there should be requirements in the contract for the level of QA to be applied. The factories make mistakes, but then I'm just as sure some of the "factory mistakes" are actually down to what the factory has been asked to make. No doubt there are Chinese factories that are naughty with money and sharp practices, I'm equally sure not all of these things are down to the factories. I wish I had a pound for every time I've politely pointed out to people whinging about Chinese quality that they'd received what was in the contract to the agreed specification and gotten what they paid for. Still, it helped pay my mortgage.

[Nearholmer]

JJB

 

I’m not whingeing about Chinese quality, or ‘dissing’ Chinese factories.

 

All I’m doing is pointing out two areas of potential risk, which exist in any specifier-to-factory relationship, financial stability and quality, which I think have the potential to ‘blow up’ in the face of subscribers in a crowd-funding situation ....... subscribers are at least partially exposed to these risks, in a way that ordinary purchasers from a more-typically funded vendor aren’t.

 

The ‘Chinese angle’, and it could be any country that has significantly different legal codes from the U.K., comes in simply because it will prove far harder to recover money from a factory there than in Bognor Regis.

 

I’ve personal experience, as specifier, of seriously hard to resolve quality issues with a factory in Stafford, and one in Sweden, both of which were English speaking and a couple of hours from London. Distance, language and culture don’t necessarily create such issues, they simply conspire to make it harder to resolve themshould they arise.

 

There are a stack of other risks to be managed, of course and, from the subscribers’ point of view, possibly the one to focus on is, as others have hinted, the competence of the ‘middleman’. If they are NBG, let alone corrupt, things are likely to go badly wrong. And, the range of competences they need is wide ....... it’s not as if we are talking about big companies, with a range of talents at their disposal. Some of these crowdfunded operations funnel through one man and a dog, which is fine if said man and said dog really know their onions, and don’t overreach themselves, but ......

 

Again, I think that sometime, probably soon, there will be tears before bedtime in one of these arrangements. Sadly, it could be one where everyone is acting in very good faith, but don’t quite have their finger on all the risks.

 

Kevin

Edited May 10, 2018 by Nearholmer

[Guest JoeHart2]

No doubt there are Chinese factories that are naughty with money and sharp practices, I'm equally sure not all of these things are down to the factories.

 

What point(s) are you making here?  Is there a relationship to the veiled point(s) you are making and crowdfunding in particular?

[jjb1970]

Sorry, I thought my comments were quite clear as being general observations on some of the challenges of outsourcing manufacture to China and the fact that the thread had moved on to discussing outsourced manufacture in general. Ever since production was outsourced to China we have seen a general tendency to blame the factories for issues with products and various claims of nefarious practices. I think in some cases this blame was probably well apportioned to factories, in other cases not so. I’ve no idea whether any of it is relevant to any particular cases.

[jjb1970]

JJB

 

I’m not whingeing about Chinese quality, or ‘dissing’ Chinese factories.

 

All I’m doing is pointing out two areas of potential risk, which exist in any specifier-to-factory relationship, financial stability and quality, which I think have the potential to ‘blow up’ in the face of subscribers in a crowd-funding situation ....... subscribers are at least partially exposed to these risks, in a way that ordinary purchasers from a more-typically funded vendor aren’t.

 

The ‘Chinese angle’, and it could be any country that has significantly different legal codes from the U.K., comes in simply because it will prove far harder to recover money from a factory there than in Bognor Regis.

 

I’ve personal experience, as specifier, of seriously hard to resolve quality issues with a factory in Stafford, and one in Sweden, both of which were English speaking and a couple of hours from London. Distance, language and culture don’t necessarily create such issues, they simply conspire to make it harder to resolve themshould they arise.

 

There are a stack of other risks to be managed, of course and, from the subscribers’ point of view, possibly the one to focus on is, as others have hinted, the competence of the ‘middleman’. If they are NBG, let alone corrupt, things are likely to go badly wrong. And, the range of competences they need is wide ....... it’s not as if we are talking about big companies, with a range of talents at their disposal. Some of these crowdfunded operations funnel through one man and a dog, which is fine if said man and said dog really know their onions, and don’t overreach themselves, but ......

 

Again, I think that sometime, probably soon, there will be tears before bedtime in one of these arrangements. Sadly, it could be one where everyone is acting in very good faith, but don’t quite have their finger on all the risks.

 

Kevin

There is almost an art is writing good contracts, and another one in successful project management. These days project management almost seems to have morphed into what used to be called a project control function in that people manage the analytics and spread sheets etc but not product realisation, quality etc. Project control is an essential component of good project management, but it is only one of many. I sometimes wonder how many of the high profile major project failures we see are because project control has replaced project management. Ultimately it all hinges on both the buyer and seller being informed and understanding what they’ve agreed to buy/supply and for both of those understandings to be aligned. Quite often the seller knows what they’ve been contracted to supply, but it isn’t quite what the buyer thinks they’ve contracted to buy. Hence disputes.

[Nearholmer]

“These days project management almost seems to have morphed into what used to be called a project control function ......”

 

At its worst, very much so.

 

But, we’ve wandered a bit OT.

[PMP]

“These days project management almost seems to have morphed into what used to be called a project control function ......”

At its worst, very much so.

But, we’ve wandered a bit OT.

 

Not really, a key element of a crowd funded project is surely accurate and effective project management. If that's lacking and there's no cohesive strategy, it clear that problems are likely to occur.

[Nearholmer]

which is pretty much the point I made earlier, causing us to go a bit OT.

 

I really can’t imagine small, crowdfunded business swamping themselves in over-sophisticated project control instrumentation in the way that big business and government departments sometimes do.

 

If you are driving a ford transit, having a cockpit with enough dials and knobs for a VC10 can be positively distracting (you can tell that I keep up to date with airliner developments).

Edited May 11, 2018 by Nearholmer

[jjb1970]

I think it is one of the curses of the modern age that there has been an unfortunate tendency to import quality systems, project management tools and productivity tracking mechanisms developed for huge multi-national businesses and multi-billion pound programs into small and medium sized businesses and projects with the result that the actual business of an organisation becomes overwhelmed by it all. I worked for a large organisation (about 14,000 staff, global presence) and some of the projects they were engaged with were huge (for example the Queen Elizabeth class aircraft carriers, the Shell Prelude FLNG) and clearly they needed good tools however they applied a one size fits all approach to the extent that for some of the regular bread and butter jobs ended up spending more time completing project control stuff than doing productive work. They adopted PRINCE2, which was developed for large government projects, now call me a cynic but if I was looking for inspiration and good practices for how to manage large projects successfully I wouldn't be looking to the UK (or many other) governments for it. So to use one of those splendid managementese words that is used so freely these days project management tools need to be "scalable" and appropriate for the application. That does not necessarily mean less rigorous but it does mean that spending more hours completing project control work than you do making something is pretty messed up (a concept I believe Police officers are very familiar with with the proliferation of paperwork and procedures they have to deal with).

 

Something I think the VC10 demonstrates is the value of training and competence. To most of us that cockpit is just an overwhelming mass of dials, for a trained pilot it all makes perfect sense and they understand what each of those dials is for and how to interpret and use the information it provides.

[34theletterbetweenB&D]

... They adopted PRINCE2, which was developed for large government projects, now call me a cynic but if I was looking for inspiration and good practices for how to manage large projects successfully I wouldn't be looking to the UK (or many other) governments for it...

 The lumbering dinosaur method. I too worked for a large multi which repeatedly developed successful commercial equipment - often with many physically distant teams participating - for global sale; that had to get to market on time, do the advertised job, and rapidly yield profit. We were asked to check out our project management process against Prince2 when this emerged, and the small team assigned to this task nearly died laughing at its unwieldiness. CYAIP cubed, essentially.

 

For those that have never read it, 'Slide Rule' by Nevil Shute tells you all you ever need to know about why private enterprise is always to be preferred over state project management.

[jjb1970]

A cynic might say that getting wrapped up in process is a good alternative to competence and understanding for those who struggle with those two concepts. Not that I'm a cynic obviously.

[Nearholmer]

Prince2 and all the very similar ‘big project’ methods are very good when used for what they are intended, by people who know what they are doing. In the wrong hands, on the wrong job, they are about as suitable as a chainsaw is for carving a toothpick.

 

Equally, a method-free, bumble-along with barely a thought, approach doesn’t work unless you are exceedingly lucky, even on tiny jobs.

 

The key necessary ingredient is genuine competence, to pick the right methods, as jjb says.

Edited May 12, 2018 by Nearholmer

[Guest JoeHart2]

[The Stationmaster]

“These days project management almost seems to have morphed into what used to be called a project control function ......”

 

At its worst, very much so.

 

But, we’ve wandered a bit OT.

 

Not at all Kevin - it comes back to the staring point of someone seeking crowdfunding making sure that the folk he is/they are asking for that money are made wholly aware of the business plan, financial aspects, progress reporting and all the rest of things that go into a project.  So, as a very simplistic example - Stage 1 Initial research and development of specification plus obtaining an estimate of costs from the factory;   Stage 2 Scan prototype, obtain drawings and dimensions etc and forward to whoever is producing the CAD; Stage 3a Initial CAD produced and received; Stage 3b CAD review and iteration as checks are made and changes take place;  Stage 3c CAD finalised;  Stage 4 EP prepared and agreed to advance to tooling development; Stage 5 Tooling development, various assembled prototypes to review and assess, changes made as necessary, pre-production assembly standards accepted (eventually) - then various stages involving decoration, agreement and any changes etc then finally sign-off for production and finally production packaging and so on.

 

Similarly actual time taken will vary against estimated time in the project plan but controlling the variance is part of project control and similarly 'waypoints' for progress payment will be known and identified - is it for each stage or a series of stages, is it on completion of stage etc or is it money upfront.  Clearly we will come back to that question of trust i.e. do you trust the project manager(s) to spend your money wisely and in a timely manner in relation to work achieved - have they given you an estimated cost for each of those stages so you can judge against budget (and managerial competence possibly??).

 

I come back to my housebuilding example - as the customer (in effect the sole crowd funder) I knew what the total estimate was for each stage payment before work had even started so i could, if necessary, manage the funds to meet each payment.  And when each payment was due I knew the actual cost and any variation against original estimate for each part of it.  i don't see that as any different from crowd funding a model railway item - if i commit my money I would like to know at what stage a call will be nmade and what that call will be, what it has been spent on wand if that spend was on budget.  Maybe that's just me but it does seem logical to me that should be the case.

[Guest JoeHart2]

I come back to my housebuilding example - as the customer (in effect the sole crowd funder) I knew what the total estimate was for each stage payment before work had even started so i could, if necessary, manage the funds to meet each payment.  And when each payment was due I knew the actual cost and any variation against original estimate for each part of it.  i don't see that as any different from crowd funding a model railway item - if i commit my money I would like to know at what stage a call will be nmade and what that call will be, what it has been spent on wand if that spend was on budget.  Maybe that's just me but it does seem logical to me that should be the case.

 

Building a house and producing a crowdfunded railway model are not really comparable examples, although both processes share many risks.

 

A single customer cannot be considered to be a solo crowdfunder/backer, as the single customer has complete control over the design and execution of his house build.

 

Backers would also know the total (not estimated) cost of the item they were backing.  They would also know the amount of each stage payment (if any) and when it was due.  Theoretically would be no unexpected cost variation to the backer, as the item would be fully funded before work began.

 

Many house builds falter because due to lack of funding and never get to completion on time and on budget.

 

Many builders could not produce a fully detailed and costed quote for a house build, as they are often not competent to do so.

 

Many builders would not agree to work to a rigid contract or agree to work under supervision (e.g. architect or surveyor), which they would consider to be restrictive and detrimental to their interests.

 

It is extremely unlikely you will know the background and competency of every subcontractor or tradesman working on your house build.  Nor will you know where all your building materials are sourced and purchased from in reality and what they cost.  It is doubtful you will know your builders profit margin.

 

Many people seeking to have building work carried out try to obtain several estimates/quotes, which may also vary by many £1000s.  Often the cheapest estimate/quote is taken by the customer, which can lead to the builder having insufficient monies to deliver the completed building to specification.  Even when the middle or higher estimate/quote is accepted, there is no guarantee of successful completion.

 

In truth, the customer will have minimal control of the time taken by the builder to complete the house build and may have to appoint further contractors to complete the build.

 

Statutory compliance may also hinder the house build, where builder or subcontractor competence is lower than expected.

 

Many house build customers are lay people and have a limited knowledge and/or understanding of building and are only able to picture the finished article.  They may appoint site supervisory staff (see below) or are equally likely to take a holiday abroad whilst the house build takes place, relying on their appointed specialist(s).  In truth, most house build customers wouldn't understand domestic house drainage; basement tanking or reinforced concrete rebar placement if they saw them on drawings or inspected such work in situ.  The same could also be said of many train non rivet counting crowdfunders/backers.

 

House building is every bit as risky if not more so than crowdfunding a model train, with a higher failure rate I would suggest... despite everything that is already known about builders.

 

I would be interested to know if you employed (or would employ) all the following personnel to ensure the success of your house build:-

a.  an accredited RIBA architectural practice to design your house and produce a Domestic Building Contract for use between client and contractor.

b.  a fully qualified Quantity Surveyor to measure up and price the materials and labour required to complete the work.

c.  a suitably qualified Clerk of the Works whose primary function is to ensure strict compliance with the contract from start to finish.

 

The salaries/costs of the above personnel would add a considerable sum to the overall build price but would not necessarily ensure a trouble free house build.

 

I would suggest the potential crowdfunder/backer is not too different from your average house build customer in terms of what they believe they need to know to achieve their desired outcome and certainly neither party dots all the 'i's or crosses all the 't's, as much will be carried out on a trust basis between supplier/builder and backer/customer.

 

There is always risk of failure/non delivery in any such venture and no amount of planning/decision making or advance knowledge can rule out that risk entirely.  As with many things in life- you pays your money and takes your choice!

[chris p bacon]

 

Many house builds falter because due to lack of funding and never get to completion on time and on budget.

 

Many builders could not produce a fully detailed and costed quote for a house build, as they are often not competent to do so.

 

Speak for yourself. Some of us have no problem. 

[JSpencer]

So if we get the crux of this thread. In the UK, even if a supplier/manufacturer says this model is crowd funded and your money is at risk, you are still technically protected by consumer law whereby you can ask for a refund up to 14 days after you have recieved the item.

 

Now I am sure that all people running these crowd funding projects all have good intentions to deliver the product they are crowd funding. However I do feel they are taking a huge personal risk in case of failure, as they almost certainly cannot escape the consumer laws on refunding in such a case, and failure to do so could mean 2 years in prison (this despite their very honest intentions and bad luck).

 

Secondly: you are protected for credit card purchases between £100 and £30000 by the credit card company providing the debit was between you and the supplier's credit card systems and did not use a 3rd payment system (such as paypal). There are then various insurances etc. And paypal has various reverse mechanisms as well (I used that once). But one should read the fine print first.

[Guest JoeHart2]

Speak for yourself. Some of us have no problem. 

 

I speak from experience.  Incompetency is not something you would admit to on here anyway...is it?  

[dpgibbons]

 

However I do feel they are taking a huge personal risk in case of failure, as they almost certainly cannot escape the consumer laws on refunding in such a case, and failure to do so could mean 2 years in prison (this despite their very honest intentions and bad luck).

 

Normally the project will be done via through a limited company so that the crowdfunder would not be personally liable. The 2 year penalty applies to misrepresentation and not to failure to make refunds, which might well be a consequence of a project failing and the company going bust.