Bill Flagg’s post is very much in line with my thinking here. I certainly don’t think this is a new idea, but he’s right that this approach seems to have dropped from most people’s radar. I think we get caught up in the celebrity that is created by startups making it big with venture capital and then forget there are other ways to achieve the same goal.

You, along with TJ, have now both suggested I prototype this. I think I might have to go that route and see what develops. At the very least, it could prove if the idea is viable and how much work it might take to implement.

I don’t think the Y Combinator model drowns entrepreneurs with overbearing terms – if they stop there. Y Combinator does only take a small portion of ownership in the companies they fund. However, the goal is usually to then make those companies attractive to venture capital funding, so therefore the contractual terms and obligations add up, while ownership in the company is continually diluted.

Leprechaun funding provides a small level of funding without any transfer of ownership in the company. Simpler than traditional funding, but also smaller. You’re right that many investors want to invest in home run companies and make large returns. If that’s what an investor wants, then leprechaun funding isn’t for them. It’s not designed to be. However, to counterpoint the part about wanting huge returns: to get huge returns investors have to take huge risks. The numbers I’ve heard repeated is that for every ten companies invested in with venture capital, nine fail, so the tenth has to bring in huge returns to cover the other nine. I don’t know if these numbers are accurate, but I think there is some truth to them. With leprechaun funding, the risk is so much smaller than with angel or venture capital funding that investors should be able to have a higher success rate.

As for being a the mutual fund for startups, I didn’t actually say that. I only referenced mutual funds in the last line to ask if this strategy would be better than mutual funds, or instead should we all just stick with mutual funds. However, I want to follow your line of thought: how is liquidity achieved with leprechaun funding? Traditionally, liquidity, or an exit, is achieved with someone either buys the startup or the startup goes public. That obviously doesn’t happen with leprechaun funding. The investor gets their return in two ways: from revenue generated by the applications, which is small but hopefully a continues stream of money over time, and when the entrepreneur buys the investor out.

Leprechaun funding is different from traditional funding. There’s no way leprechaun funding replaces traditional forms of funding: it’s just an idea for another way to fund companies, so that more ideas can enter the marketplace and more risk can be taken, hopefully resulting in more innovation and some returns for those investors willing to try it.

You could try to prototype this: come up with a specific application idea and funding request, and see if you can attract some interest in it…

How does the Ycombinator model drown the entrepreneur with overbearing terms? And if this were to be a “mutual fund of start-ups” for the average person, how would they get liquidity?

This differs from Y Combinator in several ways. One is that it is intended to operate on a smaller scale than even Y Combinator or TechStars. The other is that those programs look at the entire startup. The point of leprechaun funding is just to fund the creation of small applications, one application at a time.

An example might be a startup that wants to create flash based online games. If they received leprechaun funding, they would get funding for either one application at a time, or they would receive multiple contracts to fund several apps. They would then build the app or apps, release them, and then the investor gets part of the revenue that comes in.

This allows the startup to get small amounts of funding as they need it to build applications, but they don’t slowly transfer ownership away. The investor gets revenue from the app as their return for investing in it.

I think what I’ve proposed is very muck like Kickstarter – which I had not previously heard of. The difference with my proposal is I structured it more like a formal investment and I didn’t imagine there being investors pooling their money, but instead a single investor providing funds.

Does that clarify things for you? What is your opinion now? The more angles this is viewed from, the better it can become.