Forbes has a story today that Vinod Khosla is closing on $1 billion in new venture funds, $250 million for seed stage deals and $750 million for larger deals. There’s concern that these larger deals will largely go towards bailing out Khosla’s investments from the last fund that are struggling.
That’s highly unorthodox in venture capital circles– VCs usually reserve at least half of their fund for follow on investments because new LPs frown on their money bailing out deals that didn’t work the first time around. Khosla got around this by proposing a review committee for any follow on investments done out of the new fund. But there’s a better reason Khosla’s LPs shouldn’t worry: This is Vinod Khosla we’re talking about.
I don’t say that because he’s Vinod Khosla. I’m a big believer that picking winners in the 1990s, when information technology and the Internet were exploding with greenfield opportunties, doesn’t exactly make you a great investor today. Rather, as we’ve written before, it’s precisely Khosla’s willingness to be unorthodox that makes him such a good venture capitalist in these times.
In case you’ve missed it– the industry is in serious danger of 10-year returns dipping below the S&P 500 once stellar returns from 1999 and early 2000 fall off. What do most industries do when they’re under that kind of threat? Play it safe and hope they do just well enough to slip under the radar. Good deals are almost never made out of survival mode, especially in a business like venture capital where it’s the insane homeruns not the basehits that repay your investors. Simply put: Too many VCs are investing like they have too much to lose.
Khosla invests like a guy who has nothing to lose. Khosla runs his own firm so he doesn’t have to kowtow to partners, and he already donates 100% of his general partner profits to charity. So he’s not working for someone else, and he’s certainly not playing for money. What does still motivate him? Maybe it’s ego, maybe it’s legacy or maybe it’s just the intellectual thrill of proving he can still build another Sun Microsystems or Juniper Networks. But each of those things incents him to take huge risks.
As a result Khosla is one of the few people in the hightech foodchain that is unabashedly investing in unproven science. Big companies certainly aren’t. Even in the biotech space, big pharmaceutical companies mostly snap up smaller companies’ research on the cheap and usually only for drugs that can become huge blockbusters. The government has greatly curtailed research for the sake of research, although Barack Obama has talked a good game about getting that going again. And in the board rooms of Sand Hill Road, nothing can kill a partner’s deal faster than calling it “a science project.”
So what does that mean for Khosla Ventures? It’ll have spectacular flame outs, particularly amid the 30-or-so risky cleantech deals. But those flame outs will get it closer to finding a scientific breakthrough that does work. And in the venture business, it only takes one big home run to make everyone rich.
Great article! Would love to know what drives guys like Vinod Khosla.
Best part is that he is still one of the most humble and insightful guys you will meet in the silicon valley.
if you met him, you might conclude otherwise…
I met him; that was my exact conclusion.
what, the first or the second comment?
I have nothing but respect and admiration for Vinod.
But, as the the motto goes: “what have you done for me lately”.
Also, another blog is reporting that CalPERS is putting up $250M into these new funds. Amazing considering that CalPERS is reporting a loss of $55 BILLION. YES, that is BILLION.
I could not agree more. This guy knows how to play the game and he has an instinct that is amongst the sharpest in the business.
Seems like a way cool guy. It must be nice to be in his shoes. Unorthodox is always a good trait in my book.
I meet Vinod briefly and he seemed somewhat cool I doubt he would ever fund any project of mine since I’m not an Indian. Finally reverse discrimination for white people.
He went to Stanford GSB. It is not exactly the most diverse school in the state. I do not think your lack of pigment has anything to do with it. If you have something give him a try.
Just because its a pet peeve of mine: ‘incent’ is not a word. It is ‘incentivize.’
hey business-brain, your site is down.
Wow, I totally forgot about Vinod Khosla. All I’m going to say is this: “you have to take risks”.
what if you had to say more?
There are only a few in the VC world with an ability to take long-term risks on something else than “the immediate next step”. Vinod is amongst those; there are a few others chaps around at Intel Capital and elsewhere.
As someone who has worked for a Vinod-backed company and who has presented to him on numerous occasions, I have a lot of respect for him.
No doubt, when Vinod invests in your company, you’re opening yourself up to a force of nature. However, while some of his ideas and actions can be distracting the net benefit he brings to the table greatly outweighs it. Or at least that’s how it was in the late 1990’s.
If Vinod knows anything, it’s pushing companies and entrepreneurs to stretch beyond their safety zone and take risks. I’m curious to see how he does in this new environment.
I heard him trying to sell one of his ‘green’ concepts, and the economics as he described them were unconvincing at the time and, I subsequently found out, wrong. His analytical trump card appeared to be ‘because I’m Vinod Khosla and you’re not’. I think he knew what he was talking about in IT, and has no clue in cleantech and alternative energy. If I’m right then he may well be on track to lose his investors this time around as much as he made them earlier in his career. It’s happened before.
I might approach Vinod atleast once
blah blah blah, cult of personality, blah blah so and so is so great and they don’t even work for money, blah blah blah…
is there any real news here? or just a bunch of felating the egos of the rich?
newsflash: donating gp profits to charity doesn’t mean you can’t diddle people. and the vc game is 50% diddling, 50% timing.
Bernie M was donating a whole bunch of his net proceeds