Advice for Apple iPhone start-ups

CNET News.com talks to Matt Murphy of Kleiner Perkins Caufield & Byers about the firm's $100 million fund to invest in game-changing applications for the mobile Internet.

Updated at 10:05 a.m. PST with full interview.

High-flying venture capitalist firm Kleiner Perkins Caufield & Byers placed a $100 million bet on Apple's iPhone on Thursday by creating the iFund.

KPCB partner Matt Murphy will manage that gamble, by heading up a team that will invest in game-changing applications for the mobile Internet. His group will include KCPB co-founder John Doerr and Sun Microsystems co-founder Bill Joy, along with high-ranking advisers from Apple.

Matt Murphy
Matt Murphy is heading up the new iFund at Kleiner Perkins Caufield & Byers. KPCB

Murphy joined KPCB in 1999 after stints at Sun Microsystems and semiconductor start-up Netboost, which was acquired by Intel. His investment focus has long been on the mobile Internet, working closely with digital-map company Autonavi; traffic-data device maker Dash; and mobile software firm Pelago. He was previously a board observer at Google during its early days, and a director at server software company Peakstream, which was acquired by Google.

CNET News.com talked to Murphy late Thursday about his new charge and the significance of the iFund.

Can you tell me the back story of how this fund got started? And why you were chosen to lead it?
Murphy: We've been investors in mobile and wireless for a while. We've got over 20 ventures in that general market sector. More and more as we'd been seeing some of the trends evolve around mobile Internet usage, and post the launch of the iPhone--really seeing how that platform was driving leadership around usage and early Web app innovation--we started to believe that that would be the springboard for a lot of innovation on mobile networks. And that's where users who are looking for a differentiated experience would go.

Internally, somewhere on the order of three or four months ago, we started talking about...looking for entrepreneurs focused on the iPhone . And that led to a decision to approach Steve (Jobs) and Apple. They decided that they were very excited about it. I guess it firmed up about four to six weeks ago. We decided that it was a great idea for both sides.

Is this a novel fund for KCPB?
Murphy: Essentially, it's a big signal from us that we want to allocate dollars and a lot of resource to an area like this and the reason why is that platforms don't come around that often. The PC, the Internet, Java. Thinking about how enormous the mobile Internet can become, we felt we wanted to do more to signal to entrepreneurs that we wanted to work with them. And (we wanted to) do it with a company with by far the biggest platform for the mobile Internet right now.

How will you choose and vet companies?
Murphy: On the Apple Web site, there's a button for developers to submit business plans. We've done that in a structured way. Generally, when people submit plans to Kleiner, they send us an e-mail and it might include a PowerPoint. But with this one, we're trying to make it more structured with a link from Apple or from KPCB home page and those will come in. And there's a team of partners here led by me that will go through them, and we've got a lot of resource that will take these plans and get back to entrepreneurs as fast as we can.

What do you look for in a mobile application developer? What makes them fund-worthy?
Murphy: We're not looking for fun-ware or widgets we don't feel like have the potential to be a standalone application or standalone company. We're looking for the next big ideas. If we view this as the next big platform, like we viewed the Internet, the kind of foundational companies that came out of the Internet were Amazon, Google, Netscape, etc. We want to find opportunities of that scale and magnitude. Obviously, when you invest in start-ups you never know whether they will reach those heights. But the point is to find companies that really have the potential to be a pillar company on the mobile Internet.

What do you think the average size of investments will be?
Murphy: From a stage standpoint, we'll...invest in everything from a very early seed investment to a later stage investment that has some traction and customers, maybe a little revenue, and is aligned with our thinking around the iFund.

Areas that we're looking at--the main thesis there is around finding applications that are differentiated on the mobile experience and the iPhone. (We're) not looking for things that take what's on the Internet and port it over to what's on the mobile phone, but really taking into account that it's a different device.

When I'm on my mobile phone, I'm out and about, and I might want to look for something, buy something, share something, and (we're looking for) applications that take advantage of that serendipitous, in-the-moment behavior. That could be across social networking, mobile commerce, entertainment, or gaming. And even communications tools.

What about enterprise?
Murphy: It's definitely interesting. The enterprise outside of e-mail has lagged in terms of getting broader application adoption. The fact that the iPhone is now going to sync seamlessly with Exchange makes it even more important of a business tool. It's going to be very easy for people to add rich applications for the enterprise on top of that.

So you will be looking at funding enterprise companies?
Murphy: For sure. We're looking at companies that solve the largest addressable consumer need, and that's consumers as individuals and in enterprises.

Doerr joked at the announcement that $100 million would fund like four Google's, but how many investments do you realistically plan to make?
Murphy: It's hard to say. Some of it depends on the stage and how much money each of the investments take. But the other important point John made is that if $100 million isn't enough, we can allocate more capital to the initiative. There's not really a hard stop on it.

It's hard to say between doing seed investments as small as $500,000 to $1 million up to doing investments that could be more than $10 million. We're so enthusiastic about the area that I don't think the fund size will be the limit to stuff we can do.

We're primarily Series A investors at Kleiner and that still remains our sweet spot, but the aperture is more wide open to find the best applications companies irrespective of stage in this initiative.

How much input will Apple have into iFund awards?
Basically, we want their strategic and marketing insight on what they think their users will find interesting. We'll all be able to see data around what's taking off and what's not ... and where they see demand from their customer set. Then when companies are in the iFund, making sure that they're taking advantage of the collaborative relationship we have with Apple to be successful in terms of technical and marketing support.

Will you have Jobs' input?
Murphy: (Laughs.) We've got really broad support at the key executive level around the iPhone and iPod Touch. All of the executives are very excited about doing this together.

Apple is notorious for being difficult to deal with. Some start-ups complain about trying to comply with their licensing programs, about getting shelf space in Apple stores. What does that mean for your iFund companies?
Murphy: The iFund is a collaborative initiative. I think it bodes well for iFund companies to have Apple's help and support. Given the relationship at the most senior of executive levels on their side and from a core set of partners here, it's going to be pretty easy to cut through what may be a typical frustrated (experience). I certainly don't know any cases of this.

Will you invest in existing mobile developers creating applications for other phones?
We're very focused on companies that are aligned with us around the iPhone. It's hard to imagine a company at this stage going after the mobile environment not wanting to develop to the iPhone platform. If someone is currently supporting a different platform yet is philosophically aligned with us on the importance of the iPhone and that that is a big priority for them, then yes.

There are funds that have emerged to just invest in Facebook application makers. I wonder how you think that compares to what you're doing with the iPhone?
Murphy: I understand that Facebook is a platform, although I don't think it's a platform that cuts across quite as broadly as the mobile Internet. That's 3 billion users on mobile phones, 1 billion on the Internet.

What we're focused on in the iFund is finding companies that are going to provide the best user experience, instead of just applications, on the best platform that ultimately will go after this 3 billion subscriber base. I view iPhone as the best platform of the mobile Internet.

The mobile Internet is going to be huge--and how many, many people are accessing the Internet all around the world. The early companies that establish leadership on the iPhone platform are well positioned to have a big impact on an enormous user base and not relegated to being a widget company. We're not interested in widget companies.

Why such a big bet on Apple, when there are other smartphone makers?
Murphy: The best way to look at that is that the best developers are going to go to the best platform...and address that user base first, and get deep and highly valued interaction going. And then later on they can branch out in all different ways, just like any company in any medium. If you're an enterprise company you might first address the financial services, but eventually you're going to sell to other verticals as those markets mature. What we have here is a differentiated platform in the iPhone that is the best place to do this.

Are there companies in your portfolio that make for good candidates for the iFund and Apple platform?
Murphy: There's four companies that will work closely with the iFund initiative. I call out Pelago specifically as an application that's going to launch in a couple of months that's very focused on the iPhone, and (which) we're really calling as part of the iFund.

The product name is called Whrrl (in beta now) and it's about social discovery--finding people, places, things, and events in the physical world through the eyes of your social network. And doing that with the power of the mobile phone, like having location enablement so it knows where you are.

That's the kind of app that's going to be amazing on the iPhone and it's really taking advantage of the behaviors of the mobile phone and optimizing that experience on the mobile phone.

 

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