Crowdfunding, or minimising risk?

[woodenhead]

Does anyone know what became of the O Gauge Twins cash only proposal?

[The Stationmaster]

Never having been involved in a crowdfunding scheme I have a question which those who have might be able to answer?

 

It is my understanding that each 'stage payment' would be to cover the cost of work carried out, or possibly upcoming on the development to a certain point in the process.  Presumably this would have been budgetted in the financial plan for the project?  I also presume - maybe incorrectly? - that such a cost would be spread equally across all contributing crowdfunders involved in the project.  If that wasn't the case maybe some of those funding are in a slightly different payment plan where they pay more than the others at some stages but would know that in advance in order to plan their own cashflow accordingly.

 

Perhaps somebody (Ben A without wishing to be too presumptive) could explain this for me?

[Revolution Mike]

Typically in terms of a project's outgoings you tend to have: CAD; tooling (deposit and balance - though sometimes split into 3); production (deposit and balance).

 

In terms of a project's income we've tried three different schemes (some projects will give customers a choice): pay in full, pay 50% deposit and 50% balance and split payment plans (bespoke to the project but we've tried a small deposit followed by two larger equal payments for tooling and production).  Anything that involves getting balances can soon lead to a lot of chasing and admin!

 

We budget on having received the necessary % of income from all crowdfunders at the necessary stages to make sure the cashflow is OK and that we have sufficient sales to justify tooling as the two criteria are not necessarily the same - for example if everyone paid 100% up front we could have sufficient cash to justify tooling across a relatively small number of orders which if we spent it all on tooling would mean we couldn't afford production.  So it is a combination of cash at the right time and sufficient orders at the right points to make the project viable - making that decision correctly at the point of tooling is crucial. 

 

Although we try to de-risk where feasible there is always a small chance that something goes wrong and for whatever reason a project failed after tooling and production had been paid for (or at any stage, though you can mitigate most things with staged payments and careful project management) then ultimately we would treat all customers the same ie if you paid 100% then you were owed 100% of your cash, if you paid 50% then you were owed 50% - ie no one would be liable or owed depending on when they paid.

 

Hopefully that is clear!

 

Cheers, Mike

[jjb1970]

Thanks for that, very informative. I guess it demonstrates the importance of keeping on top of accounts and information . Those aspects may seem prosaic and uninteresting to some but they are essential to success.

[Joseph_Pestell]

I had the opportunity to discuss this with a friend who runs a finance company when I was visiting him a couple of weeks ago.

 

He thinks that the financing could be possible but, of course, would come at a cost. To make myself clear, a finance company would stand behind the project and guarantee the funds invested. One needs to take a view on the chances of a project failing and that is not easy to assess when working in China. But let's say that 10% might cover it if only 1 in 20 projects gets into difficulties.

 

The element that I am struggling with is that which jjb mentions above - the admin. A guarantor company is not going to be confident leaving the admin wholly in control of the commissioning model company. So admin costs could rapidly escalate. I am still working my head around a cost-effective solution to that.

[The Stationmaster]

Thanks for that, very informative. I guess it demonstrates the importance of keeping on top of accounts and information . Those aspects may seem prosaic and uninteresting to some but they are essential to success.

 

Agree absolutely. 'Red Death's' answer was very much exactly what I hoped we would be told about any well run and financially well managed crowdfunding scheme - one where any lack of success is hardly likely to be down to financial shortcomings.  Quite a stark difference perhaps from one where the 'owner' of the scheme might not even keep readily verifiable accounts or where their own business accounts might be in such a state of confusion that it is difficult to identify the course of the crowdfunding money through a project.

 

It comes back to much of what has been said earlier in this thread and perhaps means that we should  enter any crowdfunding scheme with considerable care even if it appears to be offering our particular model railway holy grail?

[The Stationmaster]

I had the opportunity to discuss this with a friend who runs a finance company when I was visiting him a couple of weeks ago.

 

He thinks that the financing could be possible but, of course, would come at a cost. To make myself clear, a finance company would stand behind the project and guarantee the funds invested. One needs to take a view on the chances of a project failing and that is not easy to assess when working in China. But let's say that 10% might cover it if only 1 in 20 projects gets into difficulties.

 

The element that I am struggling with is that which jjb mentions above - the admin. A guarantor company is not going to be confident leaving the admin wholly in control of the commissioning model company. So admin costs could rapidly escalate. I am still working my head around a cost-effective solution to that.

Revolution seem to have found one - maybe that is because they are not involving any of their business interests in running a crowdfunding scheme but are doing it as ;informed and competent' (in project management) hobbyists?   Or am I going right back to my opening question in this thread and the need to possibly distinguish between a hobby or start up project using crowdfunding to get something made and an established business using crowdfunding as a form of capitalisation?

[woodenhead]

RevolutioN are in an interesting position, as hobbyists first they need less personal return from the commissions that say a Dave Jones whose main business is producing trains and a hobbyist second.

 

I think at some point though they might have to bite the bullet and bring in a third party to handle the final delivery as clearly the final Pendolino delivery took up a lot of personal time for what return?

[Clearwater]

I had the opportunity to discuss this with a friend who runs a finance company when I was visiting him a couple of weeks ago.

 

He thinks that the financing could be possible but, of course, would come at a cost. To make myself clear, a finance company would stand behind the project and guarantee the funds invested. One needs to take a view on the chances of a project failing and that is not easy to assess when working in China. But let's say that 10% might cover it if only 1 in 20 projects gets into difficulties.

 

The element that I am struggling with is that which jjb mentions above - the admin. A guarantor company is not going to be confident leaving the admin wholly in control of the commissioning model company. So admin costs could rapidly escalate. I am still working my head around a cost-effective solution to that.

I think it depends by what you mean by finance. There's no way a bank is going to lend money up front, against the prospect of future sales. That's a non-starter. The only way such finance *might* be available is if someone is prepared to offer alternative security (in all probability their house, and without another mortgage on it). Equally, a bank might take a different view against making a relatively small loan against a larger trading business - eg a model shop with turnover in the £5-10m+ area. There the bank is not lending specifically against the project but against the generality of the business and realises that it will recover its funds from the trading business. The third alternative is where banks can see there's cash held, in a secure "escrow" arrangement (eg https://www.barclayscorporate.com/products-and-solutions/cash-management/escrow-services.html) whereby the bank can see crowdfunders have paid in and can draw that cash in certain circumstances to repay. If I was the bank officer, I'd only lend a proportion of what there is in the escrow.

 

To take your example of 1 in 10 projects failing, that's not a financeable proposition. Let's say you have 10 projects each of £200k. Total cash out of £2m. You charge a 10% margin (btw an equity rate in the current market) which means you might make total interest income of £200k. If one project fails, you've lost your entire margin on your portfolio. That's a quick way to end your lending business and is not economic. In any event, I'm sure any credit officer would argue that there's multiple scope for correlation risk (same commissioner, same end market, same factories) meaning that any if one project fails, the probability of other projects failing increases. Also, I doubt there are enough crowdfunded schemes to get a true portfolio effect.

 

As I've argued before, crowdfunders are providing a loan. They are not taking equity upside but like a loan they have the downside risk that they could still lose all their cash.

 

David

[jjb1970]

I think something which is apparent is that the skills and capability of managing a project and running a small business are a pre-requisite, regardless of whatever knowledge of trains and models a person might have. If I look at Rapido, I see a company that makes tremendous models to an extraordinarily high standard, but I also see a proprietor who is as sharp as a tack with his head very firmly screwed on and his feet firmly grounded despite all the silliness and humour.

[dpgibbons]

RevolutioN are in an interesting position, as hobbyists first they need less personal return from the commissions that say a Dave Jones whose main business is producing trains and a hobbyist second.

 

 

Yet it seems to me that Dave acts more like a hobbyist than a businessman in his enthusiasm for new projects. I think he would do well to follow Revolution's lead by keeping the active project list short and decision deadlines tight.    

[The Stationmaster]

RevolutioN are in an interesting position, as hobbyists first they need less personal return from the commissions that say a Dave Jones whose main business is producing trains and a hobbyist second.

 

I think at some point though they might have to bite the bullet and bring in a third party to handle the final delivery as clearly the final Pendolino delivery took up a lot of personal time for what return?

 

I think the distribution task is one which could - clearly at a price - be sensibly farmed out to an experienced professional concern in just the same way that 'Model Rail'  have put their  'exclusive models' distribution in the hands of Kernow which certainly seems to work well from an end customer viewpoint.  DJM of course did exactly the same with the J94 and Class 71.

 

There is obviously a difference between hobbyists running a crowdfunding scheme and one where a business operates one although I would certainly expect the latter to be 100% transparent in disclosing what percentage they will be taking out as 'project profit' for what of a better term.  One can readily understand admin fees being deducted by anybody be it a hobby group or a business  (again it ought to be quite transparent and is probably a very small percentage), but running a crowdfunding venture for personal/business profit is rather different from charging to administer things.

[dpgibbons]

You surprise me. Customers don't usually expect to know what profits their suppliers are making and it's no different in the professional crowdfunding business. 

[Clearwater]

You surprise me. Customers don't usually expect to know what profits their suppliers are making and it's no different in the professional crowdfunding business.

 

But they're not just customers. They are providing finance for someone to make money. They are a direct creditor of the business. It's not unreasonable if you are providing credit to understand the level of profit being made (indeed a full understanding of the cost base and business plan should be required to ensure that you believe its realistic). Not least, if the profit sum is large,that creates an incentive for them to get the project finished. If it's unrealistically small, then a) what contingency is there and b) the incentive on the project manager to do the work may evaporate. Edited July 26, 2018 by Clearwater

[dpgibbons]

As I think we established quite a few posts ago, as a crowdfunder you are legally a customer and not a shareholder, lender or any other form of financier. 

 

A credible financial forecast would require accountants and lawyers which would bump up the cost (and legal hazards) of a crowdfunded project considerably. And few of us would be able to judge the accuracy or adequacy of forecast profits. I very much doubt that these complications would be justified by the marginal reduction in risk they might confer on the individual customer. 

[jjb1970]

I think this almost completes another circle and we are back to considering just what crowdfunding is. I am with Clearwater in that I see it as a form of credit and not as an investment (there are other forms of crowdfunding which I would consider to be investment). Whether you are extending a loan or investing then the financial performance of the company requesting the money is germane to the decision making process.

Although in itself very limited the information which is freely available on the Companies House website is very useful as an initial high level indicator. The info which is freely available is very limited and not enough to assess the health of a company but there are certain red flag indicators that should give people reasons to pause and ask more questions before parting with any money.

[Clearwater]

As I think we established quite a few posts ago, as a crowdfunder you are legally a customer and not a shareholder, lender or any other form of financier. 

 

A credible financial forecast would require accountants and lawyers which would bump up the cost (and legal hazards) of a crowdfunded project considerably. And few of us would be able to judge the accuracy or adequacy of forecast profits. I very much doubt that these complications would be justified by the marginal reduction in risk they might confer on the individual customer.

 

I recall some of those posts. The legalities depend on what documentation you sign / is implied. However, there is a difference between the legal position and the effective commercial position. If you give cash in advance of receiving goods, you are a creditor of that business. It's either accounted for as a loan or, if you are a customer, a prepayment. In accounting terms, both sit on the same side of the balance sheet. In financing terms, both a loan and a prepayment have the same effect. You get cash in ahead of when you have to pay out to your customer. The customer has funded the working capital of the entity producing the model. Therefore, you should do your due diligence as if you are a financier. Commercially that's what you are.

 

Let's ask a question - would people be comfortable with making a prepayment of c£1000 to Hornby at present for a model due in 2 years? Most I think would look at the reports on Hornby's finances and wonder whether the model will ever appear and they will lose their money.

 

Your second statement doesn't stand scrutiny. A business plan does not need an accountant or lawyer review in order that it might be credible. If we were talking many millions of pounds, having an accountant audit it might be helpful. However, the reason why you ask an accountant to review and sign off on a project's cash flows is part of the diligence process. The bank/investor will ask the accountant to verify the accuracy of any calculations and the accountant will provide a letter, back by their professional indemnity insurance to say that the model is correctly put together etc. It will not surprise anyone to learn that the accountant's letter will be so full of caveats as to limit its scope massively. I'm not sure what you envisage a lawyer doing but they'd only usually look at whether any contracts are properly structured and are enforceable. Given some of the sums involved, we might be getting into the territory where this is helpful in any event. I'm generally of the view that involving lawyers is helpful and reduces risk not increases legal hazards.

 

Can people judge the accuracy of forecasts? Yes, I think they can. It's a peculiar position to take to say "well no one will understand it so we won't say." Think through how it will work - someone produces a plan. That plan will get dissected and discussed on a forum such as this. Those who can interpret will do so and give their views. Those who don;t follow it (and it's no more complex than how you'd budget an extension or a kitchen/bathroom replacement which I'd think most people have done) will read the posts and form their own view. I'd reckon that's more effective due diligence than an accoutant's review. There's a benefit to the producer as if there is an error, its more likely to get found than by an accountant who probably understands less of the industry than people on rmweb.

 

It comes back to jjb1970's point on project management. A competent project manager should be able to produce a relatively straight forward income /cost statement and budget for the job. That doesn't need an external accountant. It won't increase the cost. It will increase transparency and should allow potential investors (or customers if your prefer) to take a more nuanced view as to the risks they are assumed by putting their hard earned pennies into the hands of a producer.

 

David

[The Stationmaster]

As I think we established quite a few posts ago, as a crowdfunder you are legally a customer and not a shareholder, lender or any other form of financier. 

 

A credible financial forecast would require accountants and lawyers which would bump up the cost (and legal hazards) of a crowdfunded project considerably. And few of us would be able to judge the accuracy or adequacy of forecast profits. I very much doubt that these complications would be justified by the marginal reduction in risk they might confer on the individual customer. 

 

Very different I think because as 'Clearwater' makes very plain you are in fact lending money to a business although you do have some protection under consumer law.  However if I wished to lend money to a business, as say a peer-to-peer lender or even more so as a direct loan/investment I would like to know the level of risk I am taking on against the likely return on my money.  If the return happens to be a trainset etc then that is the value I could assess the risk against.  And of course as far as consumer protection is concerned while you have rights that doesn't mean you'll necessarily get your money back, that can only happen if the company you are lending to has the wherewithal to pay.

 

Thus it is surely important to be wholly aware of the probity of the concern you are offering to finance.  If it happens to be a group of hobbyists you have to go on their track record and at least know the pace at which your money will be spent and that is how you measure the risk involved.  If you are providing finance to a business it is a very different situation but you can still, hopefully,  have or obtain at least some information about that business be it financial if they are limited company with up-to-date records in the public arena or their past performance in bringing projects of a comparable size to completion within a particular timescale.  If you have doubts in either respect then you will have some knowledge of the extent to which you might be taking a risk.  Equally if they have sound financial information and a consistent record of delivering what they promise to deliver at a realistic rate you might consider your money to be less at risk when placing it with them.

 

And incidentally if an experienced business manager, or experienced hobbyist crowdfunder, cannot supply a project plan with financial projections and at least an outline timescale surely you'd be wondering how on earth they are quoting the monetary amounts they are asking for or how they run their businessj?  While Post 203 above does not quote numbers (for obvious reasons) it does at least make clear how things work and no doubt when applied to an actual project things like timescales and numbers can be added. 

[Vistisen]

I’ve been reading these posts with some interest.

 

Here’s my tuppence worth.

 

4 years ago I really wanted an N Gauge Pendolino, but nobody was making one.

 

We tried a Kickstarter with Revolution Trains and it failed.

 

But there was enough interest garnered for Rapido to step in and offer to produce the model.

 

As I live in the US I gave Rapido a 50% deposit for each model, But this was 50% of the cost of the model, not its retail value

 

We got very regular updates on progress and eventually I received my models in April this year.

 

Rapido have indicated that they may do another run with revised liveries and these models will be significanly more expensive as there will now be the usual retail uplifts.

 

I don’t care what Rapido or Revolution do as far as a rerun is concerned.

 

I have my 4 Pendolinos, if it weren’t for “Crowdfunding” I would probably still be waiting for some manufacturer to produce it.

 

That’s the benefit of crowdfunding.

 

Regards,

 

John P

but it wasn't strictly speaking crowd funded.

[chris p bacon]

but it wasn't strictly speaking crowd funded.

 

 

I agree,  The 'Crowdfunding' failed but Rapido made a commercial decision to produce  it based on the interest shown. 

[Revolution Ben]

but it wasn't strictly speaking crowd funded.

Hi there,

 

Just to be clear, the Kickstarter campaign failed, but the model WAS crowdfunded. Jason (Shron, of Rapido) realised that without the Kickstarter 10% commission the model would've reached its target, so offered to do it anyway.

 

We then contacted everyone who had pledged for the Kickstarter and offered them an alternative scheme - we called it Plan B - operated through a website/company we created and branded Revolution.

 

These pre-orders funded development and production of the model.

 

Cheers

 

Ben A.

Edited July 27, 2018 by Ben A

[Vistisen]

I stand corrected. I thought that there was a deposit up front. with the balance paid on delivery.

As always,there are now different types of 'crowd-funding'I understand that the original concept was that a project was that advertised on the understanding that if XXX people commit to paying £YYY. Then the project is started. The XXX times £YYY is paid at the start, and at the end everybody gets their product.

[jjb1970]

As has been noted several times, Revolution are a model for how to do crowd funding right. I don't think I have ever heard anything negative about them and they are held in very high regard.

[jjb1970]

I notice from another thread that it is now considered to be rabble rousing, stirring, winding up to raise questions with regards vendors and projects where there are issues such as late filing of accounts etc. If people want to extend credit and risk their money in a venture then of course that is their prerogative but to suggest that calling attention to known risk factors is rabble rousing is ridiculous and a particularly asinine comment. If people ignore those risk factors and make their own informed decision then fair enough, but I'd consider it to be only responsible to try and ensure that people are informed of the risks (and I wouldn't consider the standard small print disclaimer that their money is at risk as making sure people are informed). Not everybody knows that they can access certain basic company information freely on the Companies House website ( https://www.gov.uk/government/organisations/companies-house ), the information you can access doesn't tell you much but what it does provide is useful in terms of basic risk factors.

I think this comes back to some of the points raised by Clearwater and the Stationmaster. If you were investing in a business or offering a loan then you'd expect certain information to be available to inform that decision and although identified risk factors might not prevent you investing or making the loan they would influence the rate of return or interest you'd expect (money has a cost like anything else, and that cost is heavily influenced by risk).

[jjb1970]

An interesting variation on a bottom up approach to getting products is Massdrop. This is based on harnessing the purchasing power of getting a bulk order together and minimising distribution and profit centre costs;

 

www.massdrop.com

 

I am a member of the hifi community there and they get some superb products. Sometimes the price is not much lower than what you can find for shopping about for similar products online from regular channels, often the 20% VAT and handling charge means you don't save anything or much, but sometimes they offer drops which are remarkable value. In the hifi bit they work with very highly respected suppliers such asFostex, MrSpeakers, HiFiMan, Sennheiser, Beyerdynamic, AKG, Grace Design etc. They also work with manufacturers to provide special versions which are sometimes better than the main range versions. I'm not sure whether it'd work with model trains as hifi gear is nothing like as diverse as model trains (it's hard enough trying to get two people to agree on a number for the same locomotive and livery let alone agree on prototypes, eras etc....) but it appears to have been very successful for some goods. That said Autoart supply some nice model cars to Massdrop. I think another fundamental difference is they seem to work with actual manufacturers in control of their own processes, which nowadays very few model railway companies are. I much prefer the concept to crowdfunding, it offers some of the advantages (consumer influence on the product, attractive pricing) with less of the disadvantages. I've used them for audio gear and am very satisfied.