The new Melbourne Super 15 franchise is in disarray with investors pulling out after failing to agree to terms with the Australian Rugby Union over funding.

Members of the VicSuper15 group, who were involved in the winning bid for the new licence in the expanded 2011 competition, have "ceased negotiations" with the ARU, according to spokesman Ray Evans.

He said the group had European Cup-winning Australian coach Michael Cheika, who is currently with Irish side Leinster, lined up to coach Melbourne, and "possibly (Wallaby skipper) Rocky Elsom" but was unsure if that would now eventuate.

Mining magnate Kevin Maloney, one of the main backers of the franchise, is among investors to walk away saying the operation isn't viable.

The parties reached an impasse over funding, with the ARU unwilling to match an annual grant of $4.2m to the existing Australian Super sides.

They initially offered $2.1m which was upped to $3m but members of VicSuper15 say it's insufficient.

The Melbourne side was set to be the first privately-funded franchise in a departure from traditional state-owned Super rugby teams, however if the ARU runs the team it will put it in a position of conflict of interest with the other state-run sides.

"They won't provide parity so we've basically said it's not commercial," Evans said.

"They're going to set it up now and hope that somebody's going to pay for it and make money out of it, I don't know how they're going to make it work.

"That's the major sticking point, that they weren't prepared to provide the same amount of TV rights as the other states."

Another investor, media buyer Harold Mitchell, is also said to be disillusioned with the ARU offering but is attempting to continue negotiations.

While the ARU will give the franchise a dispensation on the number of foreign players it can recruit, allowing up to 10, it's understood investors are concerned how they will pay for such players.

They are also wary of other costs such as marketing a new rugby franchise in the AFL heartland.

Evans said the ARU should look at the AFL, who are providing hefty financial and player concessions for the start-up of new franchises Gold Coast and Western Sydney.

"The ARU are trying to get us to start it up without any start-up costs and at a reduced income stream," Evans said.

Another VicSuper15 spokesman Travis Atkins said investors could be lured back if the ARU came to the table.

"Starting up a new team obviously makes it important that there's enough funding to do it in terms of support from the governing body as well as private equity, it's a commercial venture not philanthropy," he said.

"We want to move forward but under reasonable and rational terms."

Joining the competition in 2011, the window of opportunity to recruit a top-level coach and first-class players is quickly closing.

"We had a coach lined up, we had Michael Cheika lined up to come from Leinster and probably Rocky Elsom, I don't know what's going to happen now," Evans said.

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