How One VC Navigates Today’s Volatility

Kara Miller:

Welcome to Instigators of Change, a Khosla Ventures podcast, where we take a look at innovative ideas, the people who come up with them and those who invest in them. I'm Kara Miller and this week, whether you run a Fortune 500 company, your own startup or your own household, the economy right now is a little bit scary. So, today the wisdom of a guy who's been scared before, but tells us why this time he's a bit calmer.

Samir Kaul:

Like in 2001, I thought the world was going to end. In 2008, I thought the whole financial system was going to collapse. When Cleantech imploded, I thought my career in Venture Capital was over. And when COVID started, I thought we were all going to die.

Kara Miller:

Samir Kaul a founding partner and managing director at Khosla Ventures explains why it's probably going to be okay, where he sees real opportunity to invest now. And why has life changed when he met the biology pioneer Craig Venter. Join us on Instigators of Change for a look at the economy, venture capital and a little lab work.

Kara Miller:

We sit at a strange moment financially, gas prices feel stratospheric, house prices are right up there with them. Half the stuff you want is back ordered. And yet, if you look at the numbers, Americans feel pretty good about their own financial situation. Close to 80% of people say in polls, they feel at least okay. But if you ask them about the national economy, three quarters of Americans, think it's doing terribly. Many folks worry we're headed into the jaws of a recession. What's going on? Well, we went looking for somebody who's seen a downturn or two.

Samir Kaul:

Look, it's a question we all grapple with on a daily basis.

Kara Miller:

Samir Kaul was part of Khosla Venture's founding team, 17 years ago, along with Vinod Khosla and David Weiden. He had worked in Venture before and he tries to put what he's seeing in context.

Samir Kaul:

The specifics to the macro, look, we have inflation. Do I believe inflation's the 8% or so that's reported? No, I'm sure it's higher. But we don't have the natural tried and true tools of the fed, print money or drop interest rates to fight it. And so you have to think that a recession is the most likely, and we most likely are priority in a recession, but a recession is the most likely antidote for inflation to constrain demand.

Kara Miller:

Which I know may not sound or feel good. A recession never does. But Kaul says, "This is really substantively different from the 2008 downturn."

Samir Kaul:

This is tech led. So, this isn't a housing crisis or a real estate crisis, or people being overlevered. This is lots of free money, no interest rates and causing people to look for high yields.

Kara Miller:

He says in seeking those yields, the value of tech companies has skyrocketed. Sometimes by an order of magnitude. Still, if you're thinking, so then this is like the 2000 crash, Kaul says, "Not really."

Samir Kaul:

It's different than that in that these are real businesses. And these enterprise software companies that have had 80% or so haircuts on their valuation, they are real businesses. They have real customers. They have recurring revenue. They have products that if you just removed them from people's everyday work life would be really problematic. And they're still growing. Like Salesforce just talked about ambitious growth and nobody's going to GitLab or Okta. And these are essential software platforms, same thing on the Consumer or FinTech side, DoorDash, Instacart, Stripe, Square. These are essential companies to everyday life that are robust.

Which doesn't mean there won't be some revaluing. But under the hood, he believes there's a lot of there, there, which wasn't always true before the 2000 crash.

Now these companies will pivot to get to free cash flow. And that's fine. They've got the balance sheet, they've got the demand. They can raise money. Now the valuation may be less, but I think that these companies, we're long term shareholders. So, these companies aren't, like in 2001, there are a lot of companies that didn't deserve to be companies. They just were never going to be profitable. They never were going to have sustainable growth. This isn't the case. These companies move to high growth, because that's how they were meant to be valued and can just as easily move to more sustainable growth and still grow by the way, 30, 40, 50% a year.

Kara Miller:

Kaul says, "To be honest, he came to his feeling of relative calm after navigating through a lot of choppy waters."

Samir Kaul:

Like in 2001, I thought the world was going to end. In 2008, I thought the whole financial system was going to collapse. When Cleantech imploded, I thought my career in Venture capital was over. And when COVID started, I thought we were all going to die. So, in that backdrop I'm okay.

Kara Miller:

Yeah. You've gone from the extreme reaction to something a little less extreme.

Samir Kaul:

But it's important because a lot of these young entrepreneurs and-

Kara Miller:

Yes, I was going to ask you, do people come to you and say like-

Samir Kaul:

Oh, yeah.

Kara Miller:

Oh my God, what is happening?

Samir Kaul:

Oh, I'm like the coolest kid in school right now, Kara. This is actually pretty fun for me. Is because before I was at 48, which isn't even that old, I was kind of the old guy they'd laugh at me because I ... Whatever. I didn't understand all the hip emojis in my texts and all these things like that. Or all the acronyms. And just wanted to explain it to me. Now, all of a sudden they want people, I'm talking to my CEOs more in the last three months than I have in the last years because they're coming to me. It's not because I don't want to talk to them. I love talking to them. That's why I do this job.

Samir Kaul:

But they want help. And they're calling like, oh my God, what do we do now? What do we do now? What do you think? Because they haven't experienced this. So, they're probably at the extremes I was as I just kind of laid out for you. And I think so are a lot of the first or second time funds that haven't had to retrench, or do layoffs, or pivot to more profitable growth. They don't understand that. They don't know how to do that. And they're asking for, to their credit though, they're asking for help, which is all you can do. And all you can ask for.

Kara Miller:

From the perspective of people funding companies. Do you think that there's been a big mental shift in the last several months or no, you pretty much are where you were a year ago?

Samir Kaul:

No, look. We don't do a lot of the growth late stage investing unless it's an existing portfolio company. So, that obviously has shifted dramatically. And there was an announcement or an article recently that Tiger Global was down 50 odd percent. So, I think a lot of the growth funds if they're taking that kind of hit, there might be some decrease in that funding activity. For us we tend to be primarily early seed series A or incubation stage. We haven't seen a lot of reduction at those stages. And those companies that we're competing with are still highly competitive. We haven't seen a lot of compression and valuation, so that's been good.

I think the other thing that I would note is that fortunately, because we've had this level of experience in the past, a lot of, we look at our companies, every one or two quarters and we look at which are the companies that could potentially be fund returners or major returners. And we felt pretty fortunate when we did the review recently that the vast majority of our "fund returners" have large balance sheets, raise money strategically and have the ability to not have to think about fundraising unless something's opportunistic for the next six to eight quarters, which I think puts them in a very strong position.

Kara Miller:

When you think, this is less of a question about sort of the turmoil and the economy, but when you think about a sector of the economy in which you feel, I mean, I know you're always thinking about where do you invest money? What do you stick with? What's working? What's not working? And when you think about a sector of the economy in which individual companies and venture investment can make a whole bunch of difference right now, can really move the needle. Is there like a sector or two that stands out to you?

Samir Kaul:

So, the short answer is we pride ourselves on almost not on almost being vertical agnostic. And we look at, okay, where are there large markets yet to be disrupted where technology can do that. And so that's why we've invested probably in the broadest set of verticals of any other Venture front. We were first investors in food, in space and 3D printing, all these different markets. We've been very, very early in. And it wasn't like we went, we just found technologies and then said, okay, these are these large markets that can get addressed. I think where I'm really, really enthusiastic is in the deep frontier sustainability tech type markets, because that's less discretionary consumer spending and we're seeing a real tidal wave of talent leaving the big tech type companies or graduating from university who want to work in those sectors.

Mainspring Energy, a company we incubated about a decade or so ago recently announced a large financing, well over 150 million dollars at a great valuation that it is doing distributed power using all kinds of inputs. Can use ammonia, can use hydrogen, natural gas, diesel, biogas, et cetera, et cetera. Just by changing software, you can put a different input in and you can generate reliable, clean, sustainable, cheap energy. So, I actually think, and these highly differentiated large technology bets that often do take a decade or so to come to fruition are going to really thrive in this market. And so I'm super excited about that.

Kara Miller:

Let me follow up on the kind of sustainability. You mentioned sustainability and climate change. And we talked recently on this show to Patrick Brown who left his lab at Stanford basically to make burgers right. Started Impossible Foods. Obviously the way that he thinks about taking on sustainability and climate change is different in a lot of ways, from the idea of like, turn your lights off. I mean, he thinks about like, I'm going to invent a technology that's better that can supplant the existing technology. How do you think about the kind of technologies, the advances that it's going to take to deal with climate change?

Samir Kaul:

So, I don't think betting on consumers to consume less or pay more is a good strategy. That strategy was tried and failed. And I'd say the first wave of Cleantech where people thought solar panels that were more expensive than natural gas or biofuels that were more expensive than oil were going to lead the way. That just isn't going to happen in my opinion. And certainly not at scale. You might find pockets of adherence to that, but you're not going to find it at scale. So, you have to replace the incumbent technology on cost and reliability when it comes to things that are just always going to be a commodity, which power and fuel for your car will be. And so that's why we're big, big supporters of nuclear. We have two nuclear investments, most notably Commonwealth Fusion, which we helped spin out of MIT a while ago.

And just, I think the company raised well north of a billion dollars, demonstrated a 20 Tesla magnet and their ability to keep that magnet and then cool. And the fusion plasma that was inside that reactor, I think got to like a hundred million degrees or something. Pretty hot. And the magnet was able to contain it. So, that to me is great. The engine company Mainspring I talked about is great. It's an engine. It takes all kinds of fuels and it provides reliable 24/7 dispatchable cheap power. Those kind of things make sense, Impossible burgers taste as good, convenient to get, same cost or better. Yes, you need that type of product in order to really have an impact on climate change. Having people pay more, you don't get enough penetration where you scale. And then you don't have impact if you don't scale.

Kara Miller:

And it's interesting because it's a paradigm shift too, because I feel like since I was a kid and this is probably true of you too, you would hear reduce, reuse, recycle. Turn the lights off. Obviously should do all those things, but this is a paradigm shift in terms of how are you going to really make the very, very big leaps that we probably need to really mitigate a lot of the change that's already baked in.

Samir Kaul:

Yeah. And you see it, right. If someone says here's a Patagonia jacket and here's another branded jacket and they're the same cost, the same quality, the same level of warmth, same design. And you know that Patagonia gives X percent to preserve ocean reefs and this other jacket doesn't, you'll take the Patagonia one. You'll buy Tom's shoes because you know if you buy one pair of shoes, a free pairs of shoes is sent to Argentina or somewhere in south America for a poor child to wear, you'll do that. But not if the shoe isn't comfortable and not if the shoe is more expensive, or not if the shoe looks terrible. But if they look the same cost the same and are as comfortable, of course, people will do that.

Kara Miller:

Well. And I mean, I'm sure there are people who would pay a premium, but a lot of people wouldn't or feel like they couldn't. You've got different parts of the market, obviously.

Samir Kaul:

Well, you can also go to the market initially premium to kind of recoup the ... Because a lot of times you can't price where you want to price until you get to a certain amount of scale. And so certain things like early on with Impossible, we only served at high end restaurants because we never wanted to sell a product at negative gross margin. And then as we got to scale, we could go to White Castle and Burger King and Costco, where obviously prices is a predominant feature. Because we're very committed to that. So, even pre this current setback in the markets, we were very committed at Impossible that we are going to make a great product available to the masses. But we were not going to sacrifice the overall viability of the business by selling at negative gross margins.

Kara Miller:

Let me ask you a little bit about your own career. I know you did research with Craig Venter early on, who became famous to lot people for helping sequence the human genome. How did working with him change how you think, how you approach problems? Tell me a little bit about that experience and how it kind of shaped who you are.

Samir Kaul:

So, Craig was, many people are confrontation averse. Craig was confrontation seeking.

Kara Miller:

Which is a nice change. I mean, you know.

Samir Kaul:

Yeah. Which was interesting growing up as like a family of immigrants and kind of bring my head down and working as hard as I could. It was a interesting change to see someone who was just so bold and brazen. And he sat at my parents' table at my wedding, so we were very close. And I learned a lot from him on ... He would just keep asking the question, why not? Why can't we beat the public genome project? I ran the largest project at the center at Arabidopsis, which is the first plant genome. And I won't bore you with the details there. But I was like, okay, well, we're more efficient than the other genome sequencing centers.

Why can't I take some of their allocation and say we started with just sequencing one chromosome and we ended up getting a piece of almost every chromosome in that plant because we were running a more efficient ship and I would go to DC and to the National Science Foundation, I'd be like, look who we're funding it. And I said, well, we should take some from Stanford or take some from Washington University or St. Louis or take some from Cold Spring Harbor. They didn't like it. But we ended up in four out of the five chromosomes because ... And I would never have done that before. I would've stayed in my lane and been like, well, this is what we've been allocated. Let's do a great job at that. And so I learned that be bold, be audacious.

And if you can deliver, don't be shy about asking for more. But the reason why I elaborate on that is that it's shaped my entire career. Then I went to work for Noubar at Flagship. And similar, like he said, well, why can't we as a Venture firm, take a science paper from Caltech or MIT or Harvard and build a great company around it? Why can't we build our own incubation factory? Why can't we build a company like Moderna. Which I'm the recipient of multiple shots on my arm. And then Vinod is also incredibly bold and audacious in his goals. And so I think that early experience and positive experience with Craig shaped the next 25 years of my career, is if you look at the three people I've worked for and with Craig Venter, Noubar Afeyan and Vinod Khosla have a lot of similarities and I'm different than all of them. But I've been able to extract a lot of what makes them great. And hopefully put that as part of my mosaic as I built my career.

Kara Miller:

I mean, I know Craig Venter wasn't a Venture capitalist, but as you've gone through Venture Capital, and you've met different people who've done things in different ways, have you seen the whole landscape change in terms of what people look for now, in terms of their involvement in companies. You've been in the VC world for a while. And I wonder how you've seen, what kind of evolution that looks like to you?

Samir Kaul:

I think you've seen firms more the other way. They've gotten bigger. So, when we raise our first outside fund in '08, '09, we were the first billion dollar fund then came Andreessen. And now a billion dollars is barely enough to get a ticket to the party. Now, the funds are getting bigger and bigger and you're seeing them also become like organizations, large marketing groups, large finance groups, large recruiting groups. But that's pretty much the biggest difference I've seen in the last decade is funds getting larger, both in terms of size of fund. And in terms of number of people in the fund.

Kara Miller:

I want to ask you about a specific sector. I know that over time you've thought about healthcare in different ways. Obviously like the amount that the US spends on healthcare has just gotten huge in the last several decades. Give me a sense of, when you think about healthcare, is that an area that's ripe for disruption? What's going wrong? How do you think through that sort of problem?

Samir Kaul:

Well, healthcare is a mess.

Kara Miller:

I agree with that.

Samir Kaul:

I mean, I think that's obvious. Now how to address it is another set of things. I think you have to look at it pretty tactically. So, one is, I think consumers are going to want more control of their healthcare. So, where does that lead to opportunities to invest? We've got a number of companies in what we'd call digital health. So, Sword health for Musculoskeletal issues, Headspace for mental health, and Hello Heart for cardiovascular. We've got a number of companies in that space that allow consumers, primarily frankly, through their employers purchase these, or use these products to take more control of their own healthcare. Where they're not just like calling their doctor waiting three weeks for an appointment, getting six minutes with the doctor, who's just read their file because the way they get paid nowadays they're incentive to take on way too many patients, then they can actually help manage well.

And then just kind of like with education, the wealthier going to concierge, just like they go to private school and those that can't afford it are stuck waiting weeks and weeks for appointments and God forbid you have to do an emergency surgery, good luck getting an appointment.

And so I think that's a real thing. So, preventative health where consumers can take more control of it. We're seeing a lot of traction. So, that's like at the digital health side, it's also in things like most people are wearing some kind of wearable, whether it's a Fitbit or a Whoop or an Apple watch to be able to track, or we have a company called Eight Sleep, the mattress where you get better sleep and it measures your resting heart rate, your HRV and a bunch of different things at night. And it's ... I use both, I use a Whoop and an Eight Sleep and you do your own like hacking point. Did I drink enough water? Did I get enough rest? Did I have a glass of wine that maybe I shouldn't have? And you can kind of sort that out as opposed to the traditional way of once a year, getting your blood work done.

So, I think you'll also see devices, diagnostic devices, fitness wearable devices, things like Ultima, where you can sequence your genome for a hundred dollars. I get my blood checked every quarter. I'd get my genome checked every quarter. Why not? It's a hundred bucks. So, I think you'll see a lot of things like that, and those preventative things should reduce the number of times you're running to the hospital or running to your primary care physician. So, that's one area. And then I think you'll see more companies using AI for primary healthcare, or you'll see more companies like the one medicals in Ford Health, which are kind of pseudo concierge type approaches for ailments. And we're excited about that. Other things are, why does it take 10 years and a billion dollars to get a drug through clinical trials?

Why does it take that long? So, we've got a company called Lightship, which is doing direct to consumer clinical trials. And hopefully we'll get clinical trial enrollment much faster. That's usually the long poll in the tent is enrolling these patients. And again, that's an industry that hasn't been disrupted. If you're a pharma company and you want to do a clinical trial, you pay companies like Inovia or Parexel or PPG, you pay them anywhere from 10 to a hundred thousand a patient they enroll. That should be able to be disruptive with technology and social media and things like that. And we're trying to do that.

Kara Miller:

Your answer here may have something to do with healthcare, or it may not. But you talked before about investing for the long term. Very often the things that affect our lives, I think about like cell phones, Zoom meetings. Very often 10 years before they existed, they would've been essentially unfathomable to people. I can't imagine I'd walk around with a touchscreen and people didn't even know what a touchscreen was probably in 1997. So, these were kinds of new categories of things. Do you think of categories in which you think this is where the real revolution is likely to surface, let's say over the next decade or two?

Samir Kaul:

So, I love that you asked that question. We do that a lot. So, because I invest in a lot of these what look like space age technologies. 12 years ago with Impossible Foods, people thought it was crazy. Once we get to a certain point, which let's say is like year five of the journey, when I feel like I have inside information on these private companies that it's going to work, I then start to ask other questions. So, I've been pretty confident for some time that Ultima would get to a hundred dollar genome. So, then I asked my healthcare team, I said, "If in five years Ultima is pounding out a hundred dollars genomes, what kind of technologies or companies would we have wished we started now?" And let's say it's a given.

It's not an if that Ultima is going to get to a hundred dollar genome. And it's not even kind of a when, but let's say we're in a world where a hundred dollars genome in a couple hours is feasible. What kind of things will emerge that are unobvious today, but obvious then. And let's start looking for those now. It could be a science paper, it could be one entrepreneur, he or she, and working on ... And so I'll give you an example of this thought exercise and how it led to a really exciting company. So, when I saw Google Glass came out, I was like, wow, that's super cool. I think after the iPhone, augmented reality will be the next big platform. And I was convinced of it, but I didn't think anyone would want to look like a cyborg.

So, the Google Glass form factor that didn't work for me. And then you saw Magic Leap with like their swim goggles. I was like, that's even worse. That's definitely not going to work for me. And so we invested in a company that's now come out of stealth called Mojo Vision, which is doing all of that, but in contact lenses. So, you can't know.

Kara Miller:

Oh.

Samir Kaul:

Super cool, right? And we've invested in the entrepreneur, Drew Perkins multiple times before. He's really just best in class, optics, physicist kind of engineer. And has launched multiple companies, multiple products. I knew that he knew what he was doing. And so once it got to the point where I was like, okay, like he's got dynamic motion, he's got multicolor. Like this is going to work. I asked myself, I said, "Hey, if augmented reality is really going to get widespread used, because it's going to be contact lens where I'd wear them what's going to happen?"

And so the consensus was like, well, things like gaming and e-sports will be even bigger. So, a couple years ago I realized that after the Super Bowl, the most watched live event was one of these Valorant or Fortnite type battles. And that there were gamers who were massive influencers, like a guy called the Ninja was like this amazing influencer that made million dollars a year being a gamer. And people would just sit on Steam and stream, people watching other people play video. So, besides some more than the NCAA final four, more than like the NBA finals, more than Wimbledon's finals.

It was an unfathomable to me that people would sit around and watch other people play video games, but it's happening. So, then I was like, okay, well, I don't want to invest in an eSports team because people move around too much. But how about we find approaches that will make people better gamers, because if it's through AR you could do that. And that's where we found a company called State Space that are really terrific entrepreneur named Wayne Mackey, who basically almost dropped out of high school, became a professional MMA fighter and then realized he wasn't really good at it. And he ended up doing a PhD at NYU in neurobiology.

Kara Miller:

Wow. That's a shift from MMA to neurobiology.

Samir Kaul:

Yeah. And so he started this company State Space that's become kind of the leading trainer for gamers to make them better and you can look them up and they've done deals with Riot and Epic and all these large gaming platforms. And they're awesome. And they've raised a bunch of money. They're doing great. But I would never, because I'm not a gamer. I haven't played video games since Sega hockey when I was a freshman in college. Looks like the stone ages. And my kids really aren't gamers. That's more my wife and my's influence. They probably love to play more video games, but we kind of keep them off from that. But that instinct came because we take these huge leaps in technology that we do, those thought experiments all the time. And this business is so hard you have to take every advantage you can.

And so if we believe that technology is going to work, then we have to kind of capitalize on that. Not just get one win out of it, hopefully get multiple wins. So, I'll bend your ear on one more example. So, we were the seed investors in a company called Rocket Lab. That's now public, that just did a really cool launch where they caught their vessel with a hook on a helicopter, as it was reentering orbit. It's super cool. It was out of New Zealand. So, there were a lot of strange things about it. It was a company out of New Zealand, launching rockets. But again, as that started to work, we realized that boy, if launching stuff into space is effectively going to be free or not a cost prohibitive thing. What are some other things you can do in space? And then we realized that there are a lot, that even though you don't feel gravity on earth and you don't feel the earth rotating though.

There was a small earthquake recently in the bay area that woke me and my wife up. You don't feel these things, that little gravitational pull actually can affect how you make products, their yield, what you can make, the distribution of what you make. And so we found a company based in LA called Varda Space. And what they're doing is they're leveraging cheap transport, like basically an Uber to space, like a Rocket Lab who they're partnering with. And they're putting manufacturing capsules into space to make stuff that you would use on earth because making them in space makes it better.

Kara Miller:

Crazy. Making them in space makes them better.

Samir Kaul:

Because you're at zero G. You have no gravitational pull. And it's amazing when you're making things like fiber optics for underwater cable or you're doing certain pharmaceuticals, just that little perturbation can change both the yield and also change the distribution of what you manufacture such that you can't make the most highly optimized products. And even launching these suckers into space making them there, bringing them back into orbit and recovering them, the benefit in manufacturing product and quality absorbs that cost.

Kara Miller:

Wow. And so this must be some sort of, it's like on autopilot, like it manufactures it without a person, obviously.

Samir Kaul:

Yeah. You'll have robotics. And then maybe you have someone up there, maybe you don't. But it's going to be primarily yes. Primarily robotic and unmanned.

Kara Miller:

I know you've incubated a bunch of companies at KV. Why do that? That's like not the general venture capital approach.

Samir Kaul:

So, I think one is because we're constantly looking for, we're finding and we gave a couple examples where you find areas where innovation is needed. We look in parallel. So, we'll look for interesting people doing work there. And if there's not an existing company, we'll create it. We've all been entrepreneurs. We've all done it before. And again, it's a competitive advantage. You get a lot of ownership, you get a lot of direction of hiring the right people into the company from ground zero.

And frankly, it's something we all really enjoy doing. Pat came to my office and it was just me and Pat with Impossible on day one. And like, it's awesome to see it served everywhere. So, you get that job fulfillment. You can build the company on the right principles from day one. You can hire the right people from day one. You get terrific ownership, which again, we have to have these fund returners, which you need at least one or two per fund to keep the lights on. And the incubations often are the ones that do that just because of the disproportionate ownership we get.

Kara Miller:

Samir Kaul is a founding partner and managing director at Khosla Ventures. Samir, thanks for being here.

Samir Kaul:

Well thank you for having me. It was a pleasure.

Kara Miller:

And thanks so much as always to you for being here. That's it for this week's show. We welcome your comments, your ratings. Leave us a review on apple podcasts if you're so inclined, we would love to hear what you think. And if you want to know more about Venture Capital, check out our episode, why big money makes big bets? I chatted with the journalist Sebastian Mallaby about what VCs across the spectrum are worried about right now. How California won out over the Boston area when Venture Capital was young and why the rise of China could change the landscape. I'm Kara Miller. This show is produced by Matt Purdy. Talk to you next week.