In a highly risky strategy of piggy-backing on other carriers’ networks, Kajeet has raised $36.8 million in a second round of financing to offer cellphone services to tweens and teens.
The Bethesda, Maryland company is brushing aside the grim evidence provided by string of disasters at other companies trying something similar. Amp’d Mobile was the most high-profile recent case of a so-called MVNO (or Mobile Virtual Network Operator) for youth that saw its business fall part because of high costs. Firefly, a venture-backed company that served teens and younger kids with a phone, also struggled. It was forced to restart again when its original investors bailed on the company.
Founded in 2003, but launching nationally six months ago, Kajeet is a pay-as-you-go service. The company charges 35 cents a day, 10 cents a minute and 5 cents per text message. The phones are available at Best Buy, Limited Too and Longs Drugs Stores and at the company’s Web site. It is not saying anything about its sales traction so far.
It operates on the Sprint PCS network.
Draper Fisher Jurvetson Growth Fund (DFJ Growth Fund) led the financing. Existing investors, including Bessemer Venture Partners, Fidelity Ventures, Gabriel Venture Partners and InterWest Partners, also participated in this financing.
Here are the reasons that Firefly faced, but only some of them will haunt Kajeet:
The premise that kids need specialty phones is flawed. They only get a phone for a year or two until they want the real thing. So there’s a very short lifecycle, and correspondingly weak lifetime revenue — given the cost of acquisition. Kids tend to break phones quickly or lose them, at which point the parents are not too happy. Third, the carriers tend to add a cheap but good phone for kids for say, only $10 a month. Firefly managed to get traffic in the carrier store, but then suddenly salespeople in the stores started switched customers over to the carriers’ own cheaper phone. So then the only sales model is to sell through stories or its own site, which is what Kajeet is doing.
However, Kajeet isn’t selling special phones, like Firefly. It is using normal phones, said Daniel Neal, chief executive and founder, in an interview, and so its model is vastly different from Kajeet’s, he says. The company is targeting the “sweet spot” of 11 to 14 year olds, he said.
And Neal reminds us that the MVNO record isn’t all bad. TracFone and Virgin Mobile are examples of MVNO services that have done well in the US, he said.
Kajeet previously raised a $27 million first round.