I haven’t been much of a cleantech bull in the past, at least when it comes to venture capital investing. I think it’s a huge market, and there’s clearly a pressing social need. I just don’t quite think the science, government cooperation and economics are there yet for it to be a great opportunity for classic venture investing.
Sure there’s low-hanging fruit, and the outliers like Elon Musk who had the cojones to invest $70 million of his own money into building an electric car company. But a huge boom producing several multi-billion winners? Not yet, IMHO.
But Vinod Khosla greatly disagrees with me, and, frankly, you should listen to him, because he’s a lot smarter. That came across last week during a rare-sit down with Khosla, the famed venture investor and Sun Microsystems co-founder. It was for my Yahoo show, TechTicker, and I’d lobbied—nay, harassed—Khosla and his poor assistant for about eight months to get the meeting.
I’d initially intended to talk a lot about investing in India, since I’m going there in November, and it’s a cause close to Khosla’s heart. But we spent most the time talking about cleantech. Khosla Ventures arguably has the largest cleantech portfolio in the business. I counted more than 30 companies from the Web site alone. And, in many cases these are ambitious, science-heavy, swing-for-the-fences type plays. He is one of the only VCs I know who likes to do “science projects” – usually that’s a derogatory term in the industry, even for biotech VCs.
Here’s a link to our segment where Khosla explains why he believes ethanol—not hybrids and plug ins—are the answer to getting us off oil for good and here’s a link to the broader segment we did where he rebuts all my arguments about why cleantech won’t be the next big driver of Valley returns. He says that “clearly” ten Googles will be created from this opportunity, because it’s not really about solar, wind or biofuels, it’s about totally re-architecting the infrastructure of society.
Sounds ambitious, huh? I’m still not sure about cleantech as the next big Valley wave, but that ambition was what I liked about Khosla. Because I just don’t hear enough ambitious investment ideas these days in the Valley. Facebook apps, Twitter apps and iPhone apps are all great for consumers and for developers who want nice thriving businesses. And certainly, they’re great for Facebook, Twitter and Apple. But with the possible exceptions of Slide, Zynga and one or two others, they’re not the next companies that are going to drive the economy of Silicon Valley, mint millionaires, generate fees to support all those attorneys and accountants, and of course generate enough returns so that institutions want to keep investing in this asset class.
The fact that Facebook is considered risky scares me a little for the future of the Valley. This is a company that’s not necessarily doing something new; social networks have been around a while. It’s a company that mostly always been run at break-even. It’s a company that’s generating upwards of $500 million in revenue a year without really “figuring out” its business model. It’s a company that has no problem still raising money at nosebleed valuations. And most importantly, it’s still growing in almost every user metric that matters. That is not a particularly risky start-up.
Guess what? Twitter isn’t either. If you can’t look at the growth and usage patterns on Twitter and come up with several ideas to monetize it, you’re not very creative. Google built a great monetization engine because it knew intent—in other words, what you were searching for. Twitter knows way more about what’s going on at your head at any given moment, and that’s ripe for advertising and premium research/customer service products for companies. Is it a slam-dunk? Of course not. The crew still needs to execute, and the Twitter natives are getting restless to see some new features. But it’s all execution risk at this point, I’d argue.
Compare that to a company that’s making liquid biofuels out of bark or switchgrass. Khosla spoke right to this fact in the third segment of our interview, which I’ve embedded below. I started out by asking him if he’d turned his back on IT, which is after all where he made his fame and fortune. He gave a few examples of investments he’d snapped up in seemingly “over-invested areas.” One strong one was Aliph, the company who makes the Jawbone. It did $500k in 2006 to $140 million in 2008, and it’s still growing amid the downturn. (He says this at the 2:15 mark below.)
At minute 3:55, he talks about the venture capital business, and its troubling new aversion to risk. As he puts it the business is more about “capital” these days and less about “venture.” “There are too many people trying to avoid risk; too many people trying to deploy capital as opposed to invest in risk and invest in breakthroughs,” he said. You tell ‘em, Khosla.
what a spread sheet sarah. Nicely done
bitly.com/scompare
Most of this post was well thought out except for this one line. If you had to pick two companies beyond Facebook, etc. that could generate massive amounts of cash in the next five years Slide and Zynga would not be on that list.
She wasn’t comparing slide with facebook, but comparing it with other unamed facbook and iphone App star ups.t
Just wanted to see Facebook Connect in action I’ll delete it in a minute
Slide is driving Silicon Valley’s economy? Please explain.
Location aware mobile apps to for alternative transportation is where IT can help save gas, money, and the environment.
Risk junkie? How about risk averse. Investing other people’s money in enterprises whose economics need to be subsidized by the government doesn’t sound too risky — if you have the right connections.
I was actually kind of happy to see this – most people talk about the things that are “hot” and while that’s for a reason, it makes it expensive to compete in. As an investor, isn’t it better to get involved with things just the opposite of hot – places that most people don’t realize have a large opportunity and so it’s cheaper to invest in?
We seriously need some old school large impact innovation which climbs to the top. All these stupid messaging and twittering and slideshow bs with absolutely ZERO technological value need to go. Seriously, are we going to have our economy driven by something which enables me to send and receives messages ?
Better be cleanfuel or something equally challenging which saves our earth as well.
I’m not sure those are services of zero value… communication is a key component of our lives.
All I really meant to say was that there’s value to be had in places outside of what is “hot” at the moment, and that investors will probably have a better return if they avoid whatever is “hot.”
The killer start ups of today , do they have any other method of monetization except ad revenues ? So who is the winner ..Google
Listen to this guy Khosla. We are foreggting clean energy because gas is close to $2.5 but he is looking at real problems and practical solutions.
VC’s are being risk averse because of the first bubble, just as in the early 1900’s investors were burned when they invested in steam and the railroad. Then came gasoline. Well dial-up was our steam and broadband is our gasoline.
Tractors, cars, were correct in early 1900’s but what they ran on wasn’t efficient or manageable, by the everyday man.
i am an admirer of khosla, but i do not agree with him pushing bio fuels as an energy alternative, since it creates a trade off between land for energy and land for growing food.
I do believed that the valley is too focused on social media innovation and not energy innovation, which is a more valuable market. Its probably because the barriers of entry are so low for social media and high for the latter.
you had me until you mentioned twitter.
Good interview. I love it when a girl talk tech. That’s hot.
cool… u must be a big time fan of Randy Zuckerberg then?
Here’s the issue: every Silicon Valley home run has resulted in a brand being built.
That’s possible in areas where consumers (individual or enterprise) ascribe greater value to innovation than they do to reliability.
But when consumers start to allocate more value to reliability than innovation, then the brands in that industry are built: people would prefer to buy from a trusted brand rather than an innovative newcomer. Which in turn means that VC-backed startups in that industry are simply outsourced R&D, and therefore that “home run” returns are not available to venture investors.
So here’s 100 points to allocate. When it comes to energy, how many do you allocate to reliability? 90? 95? 99?
Right. The energy brands are built. So no VC home runs to be had here.
Your mileage may vary.
next billion…trillion dollar market is space…its 10 years away….but it’s sure is the exciting thing for human kind for next few centuries
Sarah,
Can’t wait to meet, when you come to India.
Good article.
I would also reference the talk Vinod Khosla gave at Stanford’s Entrepreneurial Thought Leaders Seminar.
http://ecorner....o.html?mid=2051
Vinod–
I have always thought he was a good guy. Even in the beginning!
Sarah,
So an India visit in November? What’s the agenda?
This was an informative article until Sarah started pumping Facebook, Twitter and Slide… What do they have to do with Vinod Khosla and cleantech? Oh, they’re used to criticize the valley’s appetite for risk as the “prime” examples of how VCs are getting it wrong. Unfortunately, it’s just an example of how shallow Sarah’s knowledge base of venture funded companies is. A two year-old could’ve come up with these three companies (and s/he wouldn’t be correct either).
C’mon Sarah, you need to step up your game. Let’s not give ammo to people that want to shoot at your comfortable fit into the “I use my looks to get access” female journalist stereotype shall we?