One hundred million dollars buys a lot of iPhones, probably about two hundred and fifty thousand or so. A hundred million also buy a lot of iPhone software development. Just how much will be up to Kleiner Perkins Caufield and Byers (KPCB). As part of Apple’s iPhone Road Map Day on Thursday the Sand Hill Road venture capital firm took the stage to announce the organization of a $100m investment initiative earmarked for developing applications and services for use with the phone.
$100m is a lot of money. Pledging it all to software and services built around a single product sounds significant. But while there is no question it is a strong endorsement of the iPhone’s potential, beneath the headlines the allocation may be less significant than it seems. It comes down how venture funds work and a distinction in phrasing between a fund and a focus area.
New Focus versus New Fund
In a typical venture fund, investment managers raise capital to invest in a specific strategic area, or some combination. Biotech, Green Tech. Web 2.0 Semiconductors. etc. The partnership structure is then built around capital pledged from institutional investors (e.g. Limited Partners) who have accepted the strategy.
The institutional money comprising the “Fund” becomes available “on-call” when the VC Firm’s investment committee (e.g. managing partners) needs it. In the standard scenario, that works by a call. After the firm and the startup agree on a term sheet, the firm requests the funds and the Limited Partners have a short window (often in the range of 48 hrs to a week) to pay up.
This process of calling in capital works well when there is enough deal flow. But If deal flow is lacking and there isn’t sufficient opportunity to invest the fund, the capital sitting undeployed can pose troubles for both the fund and LP. Setting up a new focus area with an existing fund can be a way of managing some of the issues. It’s kind of like telling the limited partners “we’re looking to invest your money. We’ve got a plan.” At the same time, it also tells the world “we believe there is opportunity in this space.” It’s a two pronged marketing message designed to reassure investors and stoke the fires of new innovation.
For KPCB, the firm is sitting on a $600m fund that was raised February 2006. The initial focus area was set up to include info tech, life sciences and “other fast growing industries.” Mobile applications and web services were a part of this too. The plan for KBCP Fund XII was to invest the capital over a three year period. KPCB is now two years into their allocation cycle.
KPCB has already invested in a handful of mobile services. Mobilygen, Digital Chocolate, Pelago to name a few, but (by rough estimate) they still have plenty of capital to invest. At a rate of 10 deals a year, that would require $20m per investment. Few deals can warrant that kind of capital. (And even accounting for a hold back of as much as half of the fund for follow-on rounds, the scale is still to large for many financings). The iFund as a focus area puts mobile into a brighter spotlight and creates an opportunity for them to look at smaller transactions.
Some details about the iFund
•There are few limitations governing the size and stage of companies that will receive funding.
•Focus areas include location-based services, social networking, mCommerce (including advertising and payments), communication, and entertainment.
•The iFund will invest anywhere from $100K of seed capital to $15M of expansion capital in mobile application and services companies.
•Apple is providing KPCB with market insights and support.
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