Crowdfunding, or minimising risk?

[chris p bacon]

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

 

 

I fund all my own builds with no borrowing, so before starting I make a detailed budget of costs and identify where there might be issues or overruns. So far I've only been wrong once and that was due to neighbours (pensioners) that turned violent so we pulled off site for a few weeks. Looking back through the projects the rest have all been within 1% of target (I allow a 3% contingency so well within)

 I often think that because it's my money and not someone else's,  it makes you think a lot more about where you're spending it and therefore you plan to try to avoid mistakes and wastage.

Edited May 13, 2018 by chris p bacon

[Guest JoeHart2]

I fund all my own builds with no borrowing, so before starting I make a detailed budget of costs and identify where there might be issues or overruns. So far I've only been wrong once and that was due to neighbours (pensioners) that turned violent so we pulled off site for a few weeks. Looking back through the projects the rest have all been within 1% of target (I allow a 3% contingency so well within)

 I often think that because it's my money and not someone else's,  it makes you think a lot more about where you're spending it and therefore you plan to try to avoid mistakes and wastage.

 

Good for you... although somewhat off topic!  

 

But the 'violent pensioners' scenario causing you to pull off site did make me smile.  Just goes to show what can happen in business.

 

My comments, however,  relate to Stationmaster's house build analogy earlier in this thread, in which he did NOT appear to refer to or include self builds.

[jjb1970]

I often think that because it's my money and not someone else's,  it makes you think a lot more about where you're spending it and therefore you plan to try to avoid mistakes and wastage.

 

A good example of the risk/reward mechanism working. Money is like anything else, if it is freely available and cheap then it doesn't really encourage people to spend it sensibly and to keep a tight control of costs. Years ago I used to attend cross industry forums where other attendees were employed at privateer power plants (for example, owned by venture capitalist funds) and their whole attitude to spending was completely different. Working for one of the big six I was under pressure budget wise but if I needed extra money and could demonstrate why it was necessary then usually it'd be made available, for some of the other guys their answer would be to the effect of "decide who you're going to get rid of or what you're stripping out of the work plan to free up the money you want" and they'd have to just find the money from internal savings. That drives a very different attitude to spending, not all of it good but it drives efficiency.

[The Stationmaster]

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.

 

 

 

In which case I would not employ them.

 

Just the same as crowdfunding really - would you pay somebody to do (manage) a job if they hadn't got a track record, couldn't produce a project plan, couldn't produce the necessary progress and cash flow estimates and so on including hiring sub-contractors with a similar record who can be checked out.  If a builder doing a job for me couldn't give an estimate, with detail breakdown, for each stage of work they would not be hired and they wouldn't survive long in a trade where their competitors can do exactly that.  

 

No different at all from crowdfunding in that you surely wouldn't put any money with people whose competency you cannot assess or test and who can't even give you an estimate of what it will cost at each payment point in the overall contract.  The only difference is going to be the size of the sums of money involved and the relative rankings of the importance of having a roof over your head or a model to run or your layout (which might happen to be under that roof).

[jjb1970]

The company managing the project should be able to do a robust cost estimate, especially if the cost of the model to their customers is fixed up front. Since the end price of the product is fixed then that price will incorporate a margin for risk and inflation. That should be a pretty good incentive to stay on top of costs and schedule.

[Andy Y]

Let's keep the focus more relevant please.

[jjb1970]

I think that if you have statutory protection as a buyer of crowd funded models then it alleviates much of the risk. The question then becomes more one of whether you are happy to commit to buying a model unseen and to pay in stages before delivery. I tend to think that in some ways it is no different to pre-ordering if you have consumer protection, probably the most important aspect then becomes whether you have sufficient trust in the producer to supply a model which meets your expectations. Still not my thing but at least it seems it is nothing like as risky as we might have thought.

[Tricky-CRS]

Indeed it isn't all skullduggery but I'm left with a very distinct impression that in some instances it is simply seen as a way of avoiding financial commitment through somebody investing their own money in their business plan or proposition for a particular model rather than the Revolution trains approach.  Undoubtedly the 'Lococraft' scheme sounds more than a little dodgy and there is also the recent failure of the DJM Class 74 where it appears that little tangible has happened despite the commitment of money to the project plus somebody other than DJM is being left with the potentially considerable cost of refunding previously committed funds. 

 

One thing putting committed funds into a ring fenced account, soemthing differeent having to deal with the cost of putting that money in there and getting it back out in the event of a scheme coming to nought - back to my point about the business plan and financial management of such a scheme.

 

You are also missing the point that the individual that wants to make said loco or wagon may not actually have the money, so turns to crowdfunding to raise funds. It is practically impossible to get a business loan from a high street bank, I know I tried. I successfully ran the first funded N gauge Kickstarter for wagon kits, my first port of call was the bank, then peer to peer, but my plans were to small or risky for these guys. My Mermaids in RTR on Kickstarter failed after DJM announced his, or I would have carried on down that route.

 

It is not a simple case of not having the confidence or being skullduggery it is about not being rich and having loads of cash, but having some ambition.

[PMP]

The company managing the project should be able to do a robust cost estimate, especially if the cost of the model to their customers is fixed up front. Since the end price of the product is fixed then that price will incorporate a margin for risk and inflation. That should be a pretty good incentive to stay on top of costs and schedule.

^^ Wot he said! ^^

 

I’m not sure the buyer needs to know the full cost breakdown of each product or project, but the commissioner should do, and be able to explain and demonstrate where the money has been spent, in the event of a shortfall such as a significant exchange rate rise. The costs of those projects should be individually ring fenced, so that no cross subsidy or confusion can arise over what payment, covers which project.

[JSpencer]

^^ Wot he said! ^^

 

I’m not sure the buyer needs to know the full cost breakdown of each product or project, but the commissioner should do, and be able to explain and demonstrate where the money has been spent, in the event of a shortfall such as a significant exchange rate rise. The costs of those projects should be individually ring fenced, so that no cross subsidy or confusion can arise over what payment, covers which project.

 

At a practical business level, how do you ring fence the money for that? 

 

Do you open a bank account for each project and put into place a process to direct money for that project into that just that account?

[Talltim]

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.

I’ve read it and most of his other books, and live his work as an author. However I’m not sure that the R100/R101 debacle really shows that private works better than public. After all, R100 might not have caught fire and killed people, but neither did it actually develop into a viable product...

[chris p bacon]

At a practical business level, how do you ring fence the money for that? 

 

Do you open a bank account for each project and put into place a process to direct money for that project into that just that account?

 

 

I would guess that a supplier could hold an account in the same way that solicitors do  (Client Account) but that would mean a layer of accountancy to ring fence monies so that if one project was affected and brought the supplier to the point of liquidation/bancruptcy then other funds wouldn't be affected.  

[Giles]

I’ve read it and most of his other books, and live his work as an author. However I’m not sure that the R100/R101 debacle really shows that private works better than public. After all, R100 might not have caught fire and killed people, but neither did it actually develop into a viable product...

No it didn't - but it was a cost-effective build (relatively) with the R100 team able to quickly adapt strategies to changing circumstances, which the R101 team were unable to do (being stuck with the heavy diesel engines, for instance). Also the R101s lack of truly independent inspection and certification, and being subject to political pressures. These were some of the lessons that Nevil Shute was imparting. I seem to recall that he also agreed that the time of the airship was perhaps rightly over....

 

A book very well worth reading.

[PMP]

At a practical business level, how do you ring fence the money for that?

 

Do you open a bank account for each project and put into place a process to direct money for that project into that just that account?

I’d think an escrow type of account would work, we used them when dealing with African customers in particular when providing product support for aircraft. The customers were notoriously unreliable in paying with conventional invoice T&C’s, so escrow accounts were set up that allowed us to draw down payment for spares when required. It worked really well and was transparent for both us as suppliers and the client aircraft operators, which included private and government contracts.

Presumably with the multiple thousand pound sections of crowdfunding funding stages, this would allow tighter budgetary control across multiple and concurrent projects. Those would be the sort of systems I’d look at.

[The Stationmaster]

At a practical business level, how do you ring fence the money for that? 

 

Do you open a bank account for each project and put into place a process to direct money for that project into that just that account?

 

Ideally it might be an answer but as an absolute minimum I think there would have to be a separate set of accounts for each project with the necessary information (e.g number of funders in that project, invoices for work ordered or finished) to clearly identify money coming into the fund balanced against the purpose for which it has gone out of the fund.  And I would have also thought that such information should be readily available to people who are putting money into the fund although that does come back to a matter of trust in those running a project funded in this way.  

 

In fact I can't really see how it could be done otherwise without people running several crowdfunding schemes not only possibly getting into a financial tangle but potentially laying themselves open to accusations of sharp practice, or worse if, say, any particular project collapses.

[JSpencer]

We have project finance controllers but don,t set up different bank accounts. But small companies doing crowd funding would/should be more transparent.

[Andy Y]

I’d think an escrow type of account would work,

There's normally costs somewhere in that process but self-discipline, honesty, transparency, trustworthiness and a track record of achievement should underpin it all whether it's an internal process or an external service.

[Clearwater]

There are specialist providers of escrow accounts however I suspect the sums involved here are way below those seem om corporate transactions. That’s not to say that a low cost version could not be created. Eg an account held at a bank, administered by a retailer (ie payments in/lists of whose entitled etc) but independent trustees to release monies to the supplier. Etc etc. There’s be some set up costs but if the product was repeatable then there’d be a model, pardon the pun to follow.

[dpgibbons]

Full financial disclosure, trustee supervision and escrow accounts would be costly and unwieldy and I think such measures would be unrealistic for the sort of projects we are discussing here. Separate project bank accounts add no protection as customer claims are made on the company, not on individual accounts. And of course none of these measures would guarantee that you get your money back if things go wrong.

 

The best way of ensuring customer money is protected is surely to offer payment by credit card and build the modest cost of it into the purchase price.

[Junctionmad]

I really think people are over thinking this

 

Crowdfunding is just a method of providing funding that essentially distributes risk.

Its primarily considered where conventional funding is hard to source , expensive or has associated collateral or personal guarantees.

Many individuals starting a business have little capital and hence find it hard to raise conventional finance

 

Many companies see crowdfunding as a way to simply distribute risk

 

That’s the size of it

 

From the perspective of the person joining a crowdfunding , you evaluate the risks and you decide

 

Thankfully we live in an era where you arnt fully protected from stupid decisions , so if you get it wrong , you potentially loose your money , despite certain protections in law, the fact remains if the business model fails you are very unlikely to see any money back.

 

 

Most of the people here arguing against crowdfunding simply wouldn’t ever participate in one , there views are therefore largely irrelevant , it’s a sort of “down with that sort of thing “argument

 

Caveat emptor always applies

Edited May 14, 2018 by Junctionmad

[dpgibbons]

An important revelation from this thread is that under UK consumer law, crowdfunding does not distribute the risk to customers - see post 35.

[Junctionmad]

An important revelation from this thread is that under UK consumer law, crowdfunding does not distribute the risk to customers - see post 35.

My understanding is that outside of mis representation , and wrapped in a limited company , the chances of criminal sanction are negligible as is the return of monies legitimately spent but lost as a result of business failure . Hence in practice it does distribute risk

The practical outcome is the punter looses. His or her money , the crowdfunder also looses money of course

Edited May 15, 2018 by Junctionmad

[LBRJ]

My understanding is that outside of mis representation , and wrapped in a limited company , the chances of criminal sanction are negligible as is the return of monies legitimately spent but lost as a result of business failure . Hence in practice it does distribute risk

The practical outcome is the punter looses. His or her money , the crowdfunder also looses money of course

 

Not the best advert copy for some hare brained schemes is it?

[dpgibbons]

What you describe is the situation whenever a company takes payment in advance of delivery. The point here is that under UK law a supplier cannot reduce its risk or pass it on to customers by setting up a project as a rewards crowdfunding rather than as a pre-order. So we should probably be talking about "customer-funded projects" instead.

 

Greater risk-sharing could be achieved by use of an overseas crowdfunding platform or setting up a separate company for each project but of course you would get fewer customers for that kind of proposition. 

Edited May 15, 2018 by dpgibbons

[jjb1970]

I find the concept adds complexity to something that is meant to be enjoyable. If I want to invest money I'll invest money, this is a hobby. I worry that some schemes seem to be ending up trying to design models by committee and just don't seem viable.