The KP/Apple iFund

On Thursday (March 6^th), Kleiner Perkins announced their new iFund initiative. $100M dedicated to invest in the iPhone and iPod Touch platforms. Clearly, the iFund is a nice marketing initiative, but it also highlights the fact that KP and Apple expect the iPhone/iTouch to be game changing platform (Check out the Matt Murphy's interview on CNET).

Not everyone believe in this new initiative (Check out Om Malik). I am actually quite supportive of this (Not that someone asked me...). It is a game changing platform, but I thought to do some analysis to understand this initiative a bit better.

With a $100M fund, especially when managed by KP, you should expect at least a 5x return - $500M. Assuming KP will hold about 25% equity in these companies (on average), it means the iFund companies should reach a total market cap of $2bn.

$2bn Market cap? Nokia acquired Navteq for $8bn, with Navteq running at $200M revenues per quarter. Taking this as a comparable (10x on revenues - a bit optimistic), a $2bn iFund market cap value should mean at least $200M net revenues on top of the iPhone/iTouch platform, $300M gross revenues (Apple takes 33%). With 5M phones sold, that is ~$100 revenue per phone.

$100 revenue per phone? That doesn't look like a big number at all, especially if you compare that to the $50 mobile ARPU in North America (must smaller in rest of world).

Is that enough to create a fund? It's probably important to look at the iPhone and iFund as the initial step in building the next-generation smart phones/mobile phones. The "iPhone like" devices won't the the only ones in the market, and KP won't invest in iPhone only companies (As Apple won't work in KP backed companies only). In other words, the $100-revenues-per-user is a nice short term opportunity, but the reality is that KP it trying to lead the investment world into Mobile Phones 2.0.

Finally, a word about 700 Mhz. I am not a communication expert, and I don't have a real opinion in regards to pros & cons of the current 700 Mhz auction. The reality is that 700 Mhz is supposed to unlock the iPhone and enable it to be legally available for the entire world (700 Mhz is tied to openness). Soon, the market will be much larger.

I am a big believer in the iPhone/iTouch potential. Over the weekend I made 2 important decisions:

1. I have no iFund, but will be happy to look at relevant deal flow. Michael Eisenberg already invested in an Israeli company (Stealth mode), but I am sure there are many more opportunities (Israel is the real capital of mobile phone innovations).
   
2. I am buying an iTouch. It's called Due Diligence.

Comments

[Aner]

Quick comment - Mobile ARPU is about the same in most of Western Europe and higher in Japan

I too agree that the iPhone is a game changing play. The critical tipping point is with public trust. The general public sentiment used to be negative when it came to mobile internet (experience, pricing, content) and Apple is changing that. The iPhone comparables will probably enjoy a much better starting point. In any case, mobile internet is definitely here to stay.