[ Content | View menu ]

Leprechaun Funding

Mark Mzyk | October 28, 2009

When an investor puts their own money into a startup in return for a stake in the company it’s know as angel funding. It’s the lowest level of formal funding there is, excluding bank loans and borrowed family and friends money.

Why not go lower?

Leprechaun funding is giving an entrepreneur enough money to get a single, simple application built and launched. It is finding a pot of gold at the end of the rainbow, as opposed to discovering a savior from the heavens. A pot of gold is good, but it doesn’t go as far as a savior.

Why leprechaun funding?

The cost of starting a business continues to fall. It’s at the point that a viable business can be built around making small applications. Leprechaun funding would allow entrepreneurs access to a small pool of cash to build and launch small applications, primarily for the iPhone and Android, but it could be any small application.

The investor gives the entrepreneur anywhere from one hundred to five thousand dollars. The point is to give just enough money to launch a single application that can then start generating revenue.  It’s not enough money for the entrepreneur to live off of, but it isn’t meant to be.  It is meant to give the entrepreneur money to cover development costs to get an application launched. The entrepreneur handles the creation, running, and other costs of the business on their own.

What does the entrepreneur give up? A portion of any revenue generated from the application up to, but no more than, 50%. Leprechaun funding doesn’t suck the entrepreneur dry or wrestle control away from them, but allows them to be creative and try out new ideas.

Any leprechaun contract would also include a buyout clause. At any point, the entrepreneur can buyout the investor and stop splitting revenue. The buyout level would be from one to two times the initial investment. The investor doesn’t lose their money if the entrepreneur wants out and the entrepreneur isn’t bankrupted getting out. The main risk to the investor is that the application fails to generate any revenue, leaving the investor at a loss.

No ownership of the startup is ever given to the investor. For funding this small, that’s a price too high to ask. Leprechaun funding should encourage innovation and risk taking while not drowning the entrepreneur with overbearing terms, but still being worthwhile for the investor. This isn’t a game of home runs, but a game of singles.

Leprechaun funding won’t generate returns like those sought by angel investors and venture capitalists. However, it could provide a decent stream of returns to an investor patient enough to give it a try. The returns aren’t as large, but neither are the risks as great.

Is this an idea worth experimenting on, or would someone be better off just sticking with mutual funds?


http://www.flickr.com/photos/sblackley/ / CC BY-ND 2.0