Why the Kleiner Perkins sFund really matters

Kleiner Perkins yesterday unveiled its sFund, a $250 million investment initiative focused on "social applications and services."

Right on cue, most of the tech media responded with a collective gush. It was perhaps best summed up by this headline from ITWorld: "Got a great social web idea? John Doerr wants to talk."

Let's be perfectly clear: There is nothing noteworthy in a VC firm saying that it plans to invest in social web (a.k.a. the startup world's hottest sector). More to the point, there is nothing noteworthy in a VC firm that already invests in social web saying that it plans to invest in social web.

But that is not to say that the sFund announcement was just a masterful PR stunt (as was its "doubling" of the iFund this past spring). It's just that the signal got lost in the headline noise.

Let's focus on that $250 million, which KP said includes commitments from Amazon.com (AMZN), Facebook, Zynga, Comcast (CMSCA), Liberty Media and Allen & Co.

The firm would not specify how much its "strategic partners" were investing, but an LP source tells me that it's around $50 million. The rest, my source says, will be allocated from a new general fund that Kleiner expects to close next month (presumably KPCB XIV).

In one sense, such an arrangement means that other VC firms have become indirect LPs in Kleiner Perkins. For example, Accel Partners and Greylock are shareholders in Facebook, which now is an LP with Kleiner. Ditto for all the VC backers of Zynga, including Foundry Group and Union Square Ventures. And therein lies the potential problem.

I'm not arguing that folks like Jim Breyer (Accel), David Sze (Greylock) or Brad Feld (Foundry) are going to have inappropriate access to Kleiner's quarterly reports. My assumption is that Kleiner set up some sort of firewalls to prevent that.

Instead, I'm suggesting that those other VC firms have effectively ceded the foreground to Kleiner among social web entrepreneurs. Getting into hot social web deals can be a competitive business, and Kleiner has suddenly become everyone's first call.

Not only have the "strategic partners" endorsed Kleiner as the VC firm of choice for social web, but those companies now have an explicit financial interest in Kleiner's success. That means, presumably, that Facebook, et al. will roll out a redder carpet for sFund-backed startups than they would for portfolio companies of their own (non-Kleiner) board members.

There certainly will be plenty of social web startups that continue to get their money from VC firms other than Kleiner. The real question, however, is if such companies will feel like they're settling for second or third-best.