This article was originally published by Outlook Business.
He’s outspoken, irreverent and completely unapologetic. And Silicon Valley can’t get enough of him. Entrepreneur-turned-venture capitalist Vinod Khosla is known as much for his often-controversial views on just about everything as he is for his fervent championing of socially relevant innovation, especially in cleantech, healthcare and education. Khosla Ventures, the company the 58-year-old founded in 2004 with family funds, currently has a portfolio of approximately 50 companies in the sustainability space, and nearly 70 in the infotech space, from wearable computing and social media to payment solutions and enterprise and cloud. In a freewheeling conversation, Khosla discusses entrepreneurship, innovation and the culture in Silicon Valley. Excerpts:
How has the Valley changed since you came here?
The biggest change is that the culture of experimentation has become very accepted. In fact, if someone has been at a big company such as Hewlett-Packard or Cisco for very long, we consider that a negative. Nobody wants to hire somebody who has worked with big companies. Here, it’s all about trying new things. Failure has become a badge of honor. Generally, people are afraid to fail. Here, people are afraid not to try new things and, usually, if you try things that are hard, you will fail. There was a small fringe of this culture 30 years ago. Today, it’s maintstream.
So everyone wants to be an entrepreneur?
If you look at the best students from Stanford, I don’t think any of them wants to work at Cisco or IBM anymore. Why would you? There’s so much else going on. In the old days, people wanted to participate in the past by working for successful companies. Today, they want to invent the future they want. They think, “This is what the world should be and I will go out and change it.” And everybody — male, female, any age — is trying to do this.
I tell my investors to look at the positive side: you can only lose 1 times your money and you can only lose once.
Silicon Valley is now a state of mind. It’s not just a place anymore, it’s become a culture that other places are experimenting to replicate. I see bits and pieces of it in India. My favourite example is of a young entrepreneur called Vivek Ravisankar. He grew up in India, went to a second-tier engineering college in India — not one of the IITs. And he was frustrated that even if he was the best programmer, people would assign value to the IITs. He started this company — InterviewStreet — that tested people like him on the same scale as people from the IITs and if they were better, it showed. He’s now moved here and he told me yesterday that he’s going to do this for the rest of his life. That [entrepreneurship] as a lifestyle versus the bureaucracy of getting an MBA, working in a company, getting a promotion every couple of years.. that’s the culture difference in Silicon Valley. And what started as a seed here has been exported as a culture and become a global phenomenon.
How does that influence investing?
There are multiple types of investing. Wall Street investing is a bunch of greedy people who bounce between the walls of greed and fear. I don’t even think we’re in that business. This is risk-taking investing — when you invest, the chances are you will lose your money first and that’s the best of 50/50. When I talk to investors, I tell them, you have to treat the world differently. Look at the positive side: you can only lose 1 times your money and you can only lose once. If you invested $1 million, you can only lose $1 million. If you assume on day one that you’ve lost it, then everything is upside. So, play for the big upside.
Isn’t that too simple an approach?
Most investors spend most of their time trying not to lose money and then spend some time trying to make money. I don’t mind losing at all, but if I succeed, it had better be a big success. I don’t care if I get twice my money — that’s not interesting. I want to either lose my money or make 10 times my money. The math there works, but it takes a lot more guts and lot more conviction.
Also, if you invest in what everyone else is investing, you’re going to get a normal rate of return. If you do things nobody else is doing, then you can get either zero or very high returns. It depends on how good you are. You can invest with the herd and get normalised return, which is how hedge funds are measured, or you can do it the way we do, where you can test how good you are all the time. I’ve never calculated IRR when I’ve made an investment. People might call that odd for an investor but I’m not really investing. I just try and help great entrepreneurs make great companies. And if I do, the money takes care of itself. The returns, someone else can calculate.
What explains your interest in healthcare and cleantech?
I am interested in anything where technology can disrupt economics. Business is about economics but technology is about new ways of doing things and I am interested in the intersection where a new technology completely disrupts economics in a business. Google made the economics of information free, to lots of people’s regret. Intel made IBM’s mainframes much cheaper. That’s disruptive.
It’s about how technology affects real life, real business, real products, real utility. I think the same is possible in healthcare. You can dramatically reduce the cost of healthcare while improving the quality. Every mobile phone in India should have a doctor built in. It would probably be better than the doctor you would have access to if you went to the next village or the next small town. That’s a problem that can be solved through technology.
Many companies in the US are working on healthcare innovation. Do you see the potential for them to go to India as well? What about your portfolio companies?
Absolutely. It will be much easier to do healthcare innovation in India. If you cut the cost of healthcare in half in this country, you will be cutting the revenue of some company in half. In India, you’re creating an opportunity because most people don’t have access to healthcare; so it’s all upside. Here, cost cutting is downside for some business. Companies in our portfolio going to India? Almost everything we do is global. I don’t view any business as local.
You have spoken frequently of embracing failure, your website has a quote on failure by Michael Jordan…
I have never met anyone who has failed more than me. But think about it another way, I’ve never met someone who’s tried as many things as me. The odd thing is people mostly remember my successes, but there were many more failures than successes. I’m a true believer in failure, of failing intelligently, which is about experimentation that can lead to large successes. It’s very counter-culture, especially in a country like India where people are afraid to talk about their failures.
I’m not. I love talking about my failures. Honest to God, there are so many I could talk for four hours. But I always talk of the lessons I learnt from each. I know what I know because I learnt from what went wrong. Every time something goes wrong, I do lots of analysis of what I did stupid. When something goes right, you don’t do analysis. You think, hey, I’m so smart. Smart people when they fail, they analyse and hopefully they’re smart enough not to repeat those mistakes.
Very often, people so want to not fail that they don’t try. Those people had zero probability of achieving their goal because they didn’t even try. I would rather try and fail than fail to try.
What do you count as your most stand-out failure?
That depends on how you measure failure. If you ask me when did I lose a lot of money, we lost a lot in a company called Range Fuel. But to me, it was a very smart bet. We were developing four technologies to do the same thing [create biofuel] in parallel. The KiOR technology worked and so we said, “Why would we invest in the 2nd or 3rd best technology; we already own the best technology, so let’s stop funding the alternatives.” It was a race and we knew when we started that only one would win. But it was hard to tell which would work and we lost a lot of money because we kept investing until it was clear one was going to win.
Where did things go wrong?
Range Fuel was a logical, almost planned failure. The ones I regret the most are the ones that could have been big, the ones that failed to achieve their potential. And there have been quite a few of them. Sometimes they failed because I didn’t pay enough attention, sometimes they did the wrong thing or we didn’t bring the right team on board, and sometimes I gave the wrong advice. But all those are a necessary part of operating in uncertainty.
How would you describe your investment philosophy? What do you look for in companies and entrepreneurs?
I never call myself an investor. I say my job is to be an assistant to entrepreneurs. I’m a venture assistant — in the last 30 years I’ve never once called myself a venture capitalist or investor. My job is to be the assistant, mentor and coach to people trying to build great companies and if we do that successfully, the money takes care of itself.
We never invest — no matter how much money we are likely to make — in things we are not proud to be associated with. So you’ll never see us invest in dirty technologies or in gambling start-ups. We just don’t invest in things that we don’t like. I don’t deal with anything I don’t want to deal with. I know it’s a luxury, an indulgence and a privilege and I treat it like that.
Range Fuel was a logical failure. The ones I regret are those that could have been big, the ones that failed to achieve their potential
We take bets that have high probability of failure but also high probability of success. They are across lots of industries but with one common factor: they’re all technology-based innovations. And the innovation is designed to either create a new product or service or to completely disrupt the economics of the existing products. And that can happen only through technology. If you’re not going to invent something, you’re not going to achieve those goals.
But are there that many ideas to invest in?
There just aren’t enough people comfortable thinking out of the box, who have the courage to try new things. Lots of people can tell you how things should be done but they won’t step out and do it themselves. I have no patience for pundits. I love do-ers.
Vivek of InterviewStreet is my favourite kind of entrepreneur. He’s energetic, has lots of opinions and he’s willing to take risks. He listens to what I say only about a third of the time; the rest of the time he does what he wants. And that’s how it should be. He spends almost 80 hours a week on one thing. I spend one hour a week. I can’t know more than him about his business. But it doesn’t matter to him that I have more experience or that I am older than him.
Is that a good thing?
You don’t want entrepreneurs to do what you tell them to do. You want them to think, take your opinion, question and even challenge it. I like people who have that kind of guts and chutzpah.
Gurjeet Singh of Ayasdi is the same way. He was a PhD student in mathematics at Stanford. As it is, you don’t find too many sardars in Stanford, studying mathematics, but this guy is absolutely brilliant. He with two professors came up with this whole new mathematical technique. We’ve been funding him — data science is one of the hot new areas and Ayasdi is one of the most interesting companies in data science. We are helping them take this brilliant mathematical idea into drug research for breast cancer, new sources of oil and gas… all kinds of breakthroughs using mathematical models.
How involved are you in companies that you invest?
In the areas I care about, I’m very involved. But strategically. What they should do, who they should hire, what kinds of technical breakthroughs, what products to build… Most of my time, I’m either a product manager or I’m a recruiter. I never look at spreadsheets or IRRs — they are uninteresting. I do care about what a company’s product looks like, what its logo looks like, who is the chief architect. I interview individual engineers all the time.
What do you see as the most promising areas for innovation in the coming years?
Maybe I’m just naïve, but I have found, no matter which area I look at, I can come up with some technology innovation that is disruptive. So, I can find room for innovation in almost everything I look at. We have a factory that produces a new kind of glass — it switches from clear to dark automatically. Think of the saving in blinds, air conditioning… Who would have thought you could make a new kind of glass? We’re making new kinds of meat, better hamburgers. We’re innovating in agriculture, in candy. Square is possibly the most popular payment system but everybody told me it would take 10-15 years when we did it. We’re doing farm work; in New Zealand we have a rocket launching company.
It’s Halloween today, and imagine candy with half the sugar. Or imagine a device on your watch that could measure your blood sugar. That’s a real breakthrough. One, it’s a really valuable contribution and two, you’ll make a lot of money. Those are really interesting problems, to solve the education problem, the healthcare problem or the energy problem. You could make a lot of money and make a difference.
Do you worry about potential bubbles in any specific area?
Bubbles always happen. Investors are either in greed mode or fear mode. And there’s a follow the herd instinct. So, when you have a positive cycle, everybody jumps on board and there’s a bubble. Then everybody starts to lose and jumps off the train, so you have a depression. Everybody talks of the dotcom bubble. I call that the niche reality of a few people. If you care about Wall Street and stock prices, yeah, that was a bubble. If you care about reality, what did the dotcom bubble mean to most people? How much internet did they use? I challenge you to look at the graph of internet traffic and tell me where the bubble was. If real people were using the internet more and more every year, and there was no dip as you saw in stock prices, then what is real — actual usage or stock prices? Stock prices are a series of perceptions that have nothing to do with reality. I don’t care about that. I look at stock prices once a month. I don’t read research reports. I just worry about the reality of building great products, having technology breakthroughs, working with great people and making fun things happen. Candy can be really fun.