A company developing a location-based search app has become the first firm to sip from Kleiner Perkins Caufield & Byers' $100 million iPhone venture capital cup. Pelago's Whrrl program helps the user search for restaurants, stores or events going on close by. Programs like Whrrl will soon become available to iPhone users through Apple's AppStore.
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Apple (Nasdaq: AAPL) 
won't crank up the hype machine about all the new things an iPhone can do until its Worldwide Developers Conference on June 9, but here's a small taste of what's in store: finding things to do in the neighborhood when you're at a loss.
That's the idea behind Pelago, the first company funded by Kleiner Perkins Caufield & Byers as part of the US$100 million iFund the venture capital firm announced in March at Apple's last big iPhone event. Pelago's software 
, called "Whrrl," ties the mapping capabilities of the iPhone and other smartphones with the ability to find information about places where you, your friends, or anyone has been. Say you're lost in Las Vegas and need a restaurant recommendation. With iPhone in hand, you can scan the locations of nearby restaurants, just Italian restaurants, or just those recommended by foodie friends. Or you could search for the highest-rated bars or kid-friendly activities recommended by friends from your social network . There's going to be a "what's going on around me right now" button, says Kleiner Perkins partner Matt Murphy. "You're always one button away from that immediate context."
Given the iPhone's unique capabilities and the flexible software tools that Apple released for the device in March, it could be difficult for any Web 2.0 startup to stand out from the crowd of applications on the way. For example, the iPhone's accelerometer means programmers have been free to dream up interesting ways to take advantage of the iPhone's ability to respond to motion, much like Nintendo's Wii video game console. Cisco Systems (Nasdaq: CSCO) , for example, recently demonstrated a vision for one possible use during an annual conference for business partners: the ability to transfer a call from an iPhone to another device, such as a laptop or one of Cisco's Internet-based office phones, with a flick of the wrist.
Creating applications for smartphones has always been a difficult, time-consuming process. Typically, developers have to be expert in the geeky tools required to build software for a particular device, then work out details to make them work with a particular carrier's service. But Apple's approach was to make it easy for any Mac developer -- and there are millions of them -- to create iPhone applications. While Kleiner Perkins is encouraging its iFund companies to create apps that run on many kinds of smartphones, Murphy says Apple holds a huge advantage in this regard. "Good luck finding a platform that has the same rabid developer base," he says. Better yet, Apple will distribute developer's creations to the iPhone-owning public via the soon-to-open AppStore. While Apple will keep 30 percent of every dollar in sales, that's a better deal than many carriers give, with far less hassle and expense in landing one-off deals.
Location, Location, Location
Murphy thinks that, among the many iPhone application possibilities, location-based services may be "the biggest breakout opportunity." The venture firm has received submissions from 1,700 startups that hope to raise money via the iFund. So far, it has only funded Pelago and iControl, which makes a home automation application that would give iPhone users remote control over air conditioners, lighting, window shades and so on. He says the venture firm has extended an offer to one more startup, and is seriously considering another 10.
Location-based services have long been a holy grail in the wireless industry. But the rise of social networking and the addition of GPS (global positioning system) satellite receivers in cell phones as a standard feature means the quest may finally be getting somewhere, says Charlene Li, an Internet analyst with Forrester Research. "As more phones become GPS-enabled, more and more people are going to want these services. People want information when and where they need it. Today I was stuck in Sunnyvale [Calif.], and I needed a place to eat lunch. A service like [Whrrl] could have been really useful."
Li points out that Whrrl may appeal to more than just users. Handset makers want a reason to charge more for their devices by making the GPS more useful. Mobile carriers want to be able to charge for premium location services, or at least to garner the fees that come with downloading more content over their wireless networks. In fact, Pelago is expected to announce that Deutsche Telecom's T-Mobile Venture Fund and Reliance Communications, the Indian phone company, are contributing to a new $15 million round of financing.
Pelago CEO Jeff Holden says the company has already signed deals with four big U.S. carriers. AT&T (NYSE: T) , the exclusive U.S. carrier for the iPhone, isn't one of them, sources say, so Whrrl won't work with other AT&T phones. While Deutsche Telecom and Reliance haven't said they'll offer Pelago's service to their users, Holden hints that may come when Pelago starts focusing on international expansion later this year.
Individual User Tracking
To make money, Pelago hopes to create a more effective marketing platform for advertisers. By mining data on users' wanderings, Pelago could let advertisers target people based not on what they say they want, but on what they actually do. "It's voting with your feet," says Holden. If a coffee shop finds out that you go to Starbucks (Nasdaq: SBUX) every morning, it might offer you a week of free Joe. If a restaurant knows you've checked out its menu several times, it could offer you a free dinner. Over time, instead of paying a nominal amount whenever someone clicks on their ads, advertisers might agree to pay far more -- but only if the person actually comes to their store.
Of course, there are privacy issues. Li points out that many people will not be comfortable letting Pelago track their every move. While there are ways to make the software "cloak" certain activities -- say, a visit to a strip club or a job interview at a rival company's office -- that may not be enough reassurance. "Do I really want Walgreen's to know I just went to another store?," says Li. "Do I want anyone to know if I go to a certain person's house?"
Holden, who once worked with Jeff Bezos at the Wall Street firm D.E. Shaw, has dealt with complex problems before. Holden followed Bezos to Amazon.com (Nasdaq: AMZN) , where he led development of a revolutionary inventory management system to provide fast, dependable delivery of books. After that, he ran Amazon's Web sites for a time.
The Apple Bump
Pelago is certainly not alone in looking at location-based services. Loopt, for example, offers software that lets you see the proximity of your friends. Loopt already has hundreds of thousands of users that pay $2.99 a month for the service through deals with Verizon Wireless and Sprint Nextel (NYSE: S) . CEO Sam Altman says the company will announce deals with more mobile providers at "an upcoming event" -- clearly, Apple's developer conference. And the service will move beyond people-finding to providing more information on places, similar to Pelago's approach. Altman envisions folding in information on hundreds of categories of information that might be useful when you're out and about -- apartments for rent on Craigslist or the whereabouts of clean bathrooms, for example.
Apple clearly has the ability to lift particular iPhone developers above the crowd. If Apple CEO Steve Jobs is as impressed as Murphy, look for him to feature Whrrl in his June 9 keynote. In fact, Holden is hopeful that Apple may even include Pelago preloaded on the new iPhone that's expected to be unveiled that day. Although Pelago is based in Seattle, a group of its programmers have set up shop near Apple's headquarters in Cupertino, Calif., to work closely with Apple. "We hope to become a featured app. There's no commitment on that, but we think we have a good chance," he says.
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