The Twenty Minute VC with Vinod Khosla

Harry Stebbings:

This is The Twenty Minute VC with me, Harry Stebbings. I’ve wanted to do this episode ever since I started the show over five years ago. He's a legend of the industry and a true pioneer and I couldn't be more honored to welcome Vinod Khosla to the show today. Vinod is the founder at Khosla Ventures, one of the Valley's most renowned firms of the last decade with a portfolio including the likes of Square, Affirm, DoorDash, Impossible Foods and Opendoor, just to name a few. 

Vinod started his career as a founder, founding Daisy Systems, a company that went on to IPO. Then in 1982 Vinod founded Sun Microsystems, where he pioneered open systems and commercial risk processes. In 1986 Vinod then joined his longtime friend John Doerr and became a general partner at Kleiner Perkins or KPCB, where he helped incubate Juniper Networks and help transform the telecommunications business with Cerent Corporation, which was ultimately acquired by Cisco Systems in 1999 for $7.2 billion.

So now I'm very, very honored to hand it over to Vinod Khosla, founder at Khosla Ventures.

Vinod, what many do not know is that when I started 20VC four years ago, I wrote a list of three people that I most wanted to have on this show and your name was absolutely one of them. So I couldn't be more excited to have you on the show today.

Vinod Khosla:

Well, it's exciting to be here. I was wondering what took you 2,800 episodes to get here.

Harry Stebbings:

Vinod, I'm going to be honest. I wanted to ensure that A, we had a substantial enough audience and I wanted to ensure that you would do it. And so I'm thrilled that you have agreed to do it, but I do want to start today on a little bit of context about you. So tell me, how did you make your way into the wonderful world of venture?

Vinod Khosla:

Well, I was 15 or 16. I'm 65 now, but I was 15 when I first read about Andy Grove, a Hungarian immigrant moving to the US and starting a company and I fell in love with that idea. I'd never known anybody in business, anybody in technology, didn't own a TV or a telephone at home, but fell in love with the idea. And interestingly, I read about it in the pre-internet days in a two year old issue of Electronic Engineering Times and it's been my mission since to really be and only work with entrepreneurs in the entrepreneurial world.

Harry Stebbings:

When it comes to working with those founders and venture assistance, what does this really mean to you and how does this differ from other funds?

Vinod Khosla:

There's investing, which most firms do and they make good, sensible decisions about rates of return and financial projection. Our firm and I am much more focused on how you build a company, not on returns. If we build the big successful company, then the returns take care of itself. So returns come second. Building something of significance comes first. I think that's absolutely key.

The other thing is that attitude with which we approach companies. Our motto, which you may have heard, is bold, early and impactful, and all those matter, mostly high technical risks that most others are afraid to take with really large impact. So impact really matters to us as a firm because of our value system.

Harry Stebbings:

With that kind of venture assistance, the companies that you like to work with being those hugely impactful companies, how does that mean you spend your time and allocate your day to help the best entrepreneurs that you do?

Vinod Khosla:

Well, let me go back first to what venture assistance for us means. We have a brilliant engineer or technologist or somebody with a business model insight that's unique and different. They usually are fairly uni-dimensional, really how they manage people or run marketing or being a CFO. So entrepreneurs really need help in directions that they're not familiar with themselves, where their background isn't. They usually fail not because of what they are strong at, but what they might be weak at. And that's what venture assistance means, surrounding them with the support they need. And it's fairly unique about us, but when we started the firm in 2004, our tagline said, venture assistance, and that's still the first thing we focus on. How can we help an entrepreneur build a much bigger company? From my point of view, a few small nudges left or right can change the trajectory of a company by hundreds of percent. Happens more often than not. A bias in a decision left or right, a little more conservative, a little more aggressive, when to be aggressive, when to be conservative in a startup.

Those are things that entrepreneurs usually aren't familiar with, definitely not first time entrepreneurs, and that's where they need the most help to turn a good idea into a great idea and to evolve it over time. These things are very counterintuitive, very different than what business school might teach you. They're very unusual. Where does that cause me to spend my time? The single most important thing I spend time on, probably more than any other single thing in my calendar, is helping our companies recruit a great team. It's unusual for me to not have hundreds of resumes sitting on my desk. Hundreds that I've sorted through personally, looked around on LinkedIn, interviewed these people. I probably interview eight to 10 people a week, even now, mostly for our companies.

Then comes challenging them about their conventional wisdom. The key in a startup is to remove risk and challenge them on what they are not thinking about, where risks might lie, hidden obstacles may lie. That's an important part of venture assistance and that's where I spend my time. So doing a session where instead of sitting in a board meeting where you're polite with everybody, just working one-on-one, challenging a team to think about the hard parts of their business, where things may fail, where they might find extra leverage or build a much bigger company if they steered left a little bit. These are nuanced questions and very seldom do people help entrepreneurs with these.

Harry Stebbings:

I have a couple of things to unpack from that. You mentioned those core questions where you can really add hundreds of percent to a business with answering them. Entrepreneurs always get a lot of advice though. How do you advise entrepreneurs to determine which advice to take versus which not to, given that they receive so much advice today?

Vinod Khosla:

So I often say, whose advice to take on what topic is the single most difficult thing an entrepreneur does. Because there's plenty of advice. The number of people qualified to advise an entrepreneur is really, really limited. In fact, I would suggest that most board members, just because they went to business school and joined a venture firm, are not qualified to advise an entrepreneur. They're not qualified to challenge an entrepreneur. They're not even qualified to help them judge who they need on the team. So that is a very, very difficult question to answer.

Harry Stebbings:

The other element you mentioned was about risk and risk is a fascinating topic for me. How do you think about acceptable versus unacceptable risk within companies?

Vinod Khosla:

One of the problems I have in many startups that have initial traction is you suddenly have something to lose. And most board members advise the startups to reduce risk in a way where you can increase the probability of success of the startups, but make the consequences of that success inconsequential. So there's a big difference between going for a much bigger play or a safer more conservative play. We tend to do the first, which is go for the bigger vision. It's perfectly reasonable to go build reliable, safe companies that have good financial returns, but that's not building a large business. And we are very clear on what we do and we don't think it's bad to do the other thing, but our mission is very, very clear.

So risk is absolutely one of those things. You have to decide what profile you want. Then comes the issue of there's different kinds of risks. If you raise a lot more money, you might reduce other risks. If you have a small amount of money, you might increase say a product completion risk. If you spend more time developing a product, you reduce your engineering risk or product risk, but you might increase market risk. There's always trade offs. So risk management is the other hard thing an entrepreneur does.

Harry Stebbings:

You mentioned time there how raising more money can allow you to execute faster or whatever that may be, but often time is cited as the main reason that kills startups. What are some of those really tough situations that you think is super helpful for you to advise founders on and also, do you agree that time is the biggest killer of startups?

Vinod Khosla:

Time is a bigger killer, but you can increase the time you'll have. I always say, if you survive long enough you might get lucky, or try and survive long enough to get lucky. So being careful about things like burn rate matter. Sometimes you just have to try different things. One of the things I tell entrepreneurs in general is don't make a plan but plan to plan. Most startups that are big successes went through a number of iterations in their business plan. Take something like Square. What it is today wasn't part of the plan when we originally invested. It was a hardware dongle. So one has to evolve their plan as they learn. And evolution of a plan is a powerful force in every area in which it operates and good entrepreneurs use it very, very well.

I think that's a key part of being a good entrepreneur, evolving your plans, managing your burn rate, managing risk of various sorts, yet taking the right kinds of risks to go for the bigger vision or the bolder vision, if that's what your goal is.

Harry Stebbings:

Why do startups innovate so well, while bigger companies or incumbents maybe don't? Why do you think that is?

Vinod Khosla:

About a decade ago I looked at all the large innovations that have really been material in society, not the incremental innovation. And incremental innovation would be Intel going from say a 16 nanometers semiconductor process, to 10 nanometers or below. Those are incremental. But talk about recreating media, Fox and CBS didn't do that. It was YouTube and Twitter and Facebook that reinvented media. Pharmaceuticals weren't reinvented by the pharmaceutical companies. A startup called Genentech in the '80s did biotechnology. Space wasn't reinvented by Lockheed or Boeing, it was reinvented by people like SpaceX and Rocket Labs, one of our companies. In the case of automotive, you'd think VW or GM would do interesting things, it was Tesla and Waymo that did the most radical things in automotive, and changed the trajectory of automotive. So I was hard pressed over 40 years to find one area where a large company was willing to take the risk and innovate in a big way.

If there’s too large a step, there's plenty of experts who tell you why radically new things won't work. I will say experts are experts in a previous version of the world, not the world you're trying to create. And so relying on experts leads to conservatism and incrementalism. And that's a perfectly good thing for a General Motors, or a General Electric to do. It's not how startups build big companies like Google, or Facebook, or pick your favorite Guardant Health, or Impossible Foods, or Square, or Stripe. I could go on.

Nobody in the financial services industry innovated in finance. It was Square, Stripe, Affirm, Fundbox. So big companies don't take the large risk. They also, when they run into problems, they avoid the problems, or change direction, or get conservative, or move on to something different. A startup has to survive, and survival, which is necessity, this is the mother of invention as you've heard before. It's what works really, really well. So that's what is so great about the startup world. Almost all large innovations I could think of over the last 40 years came from startups. One came in the last 40 years from a big company.

Harry Stebbings:

When we look at tolerance of failure in Silicon Valley, you mentioned a difference of yours being the willingness to take such technical risks. And I’ve absolutely seen it in some of your investments and across the portfolio. I guess my question is, why has tolerance of failure gone down in Silicon Valley, and do you agree that maybe it has?

Vinod Khosla:

Well, I always say my willingness to fail is what has allowed me to succeed. And not being embarrassed about large failures I've had, has given me the courage to keep going. But Silicon Valley, which was mostly in the '80s and '90s about building companies, became a financial tool in investment class. Then you had financial investors, who then have to spreadsheet things out. We don't allow IRR calculations in our firm when making an investment, which is pretty unusual for an investment firm. We never look at them. We don't focus on them, because we want to take the large risk, which you couldn't put numbers in a spreadsheet, and if you did, they'd look ridiculous. But when people take a financial investing approach to venture, you end up with much less risk, and much more pragmatic and sensible decisions, but they exclude the really large breakthrough ideas.

Harry Stebbings:

Do values fundamentally matter in startups? And a subsequent question, do VCs really care about the values in general, given now it's an institutional asset class unlike any other financial product?

Vinod Khosla:

This is a hard thing, and Ben Horowitz recently wrote a very good book on the values in venture firms and startups. I would say two things matter, and they're different. One is the mission for a company. Many startups have that, many don't. I'd say 50/50. And I always tell entrepreneurs be obstinate about your vision, be flexible about your tactics. But that doesn't speak to the values a company has. Values is focusing on, caring about impact, whether it's positive or negative. And I think very few investment firms focus on that, we do. We will not make an investment that's negative for society. We might make some neutral ones. And there's real situations where we passed on hundreds of millions of dollars of profit, because we didn't want to do the wrong thing. Because it conflicted with our values. Maybe another day we can go into that. That's fairly rare, but we are very, very proud that we will not make negative things.

Even when we were doing Cleantech, we were very focused on values. When we did Impossible, we were very clear we would pass up on profit and not sell Impossible to a food company that might divert its mission. For example, we've chosen not to invest in some areas like gambling or encouraging drinking. That was a recent example that came up. Or debt collection, things like that. We basically don't invest in advertising tools now, which I think are being used fairly negatively. Just to cite some very specific examples, and a broad range of them. And the only time you can test your values is when there's something you have to give up to practice your values. And I think we've been tested, and we're very proud of what we've done internally on that front.

Harry Stebbings:

Can I ask for your advice, actually? I think a lot of people go into venture with the value-driven mindset that you have, and the optimism of making the world a better place through technology. And then it almost gets beaten out of them with the financial nature of the asset class, the pressure of LPs, and the inherent pressure of constantly climbing the partner ladder to GP in your own firm and having the best returns in the industry. What would you advise me starting my career in terms of retaining those values of the goodness the technology can bring?

Vinod Khosla:

Well, what I'd say to leaders in firms, be clear what your values are, be explicit about them, and stick with them when the going gets hard, when it's hard to practice those values. If you're a young VC just entering the business, it's easy to move around between firms and pick the set of values you believe in or care about. And to be fair, I feel like the better you do, the more luxury you have to indulge in your values, and I'll call it an indulgence, because you get the privilege or indulgence to do it. But I do think both young people in VC, firm leaders, or investment firm leaders can decide what to do and what not to do. And I think a good example at a very large scale is BlackRock. Their value system has been very clear, very explicit, and very vocal. And I appreciate things like that from other firms.

Harry Stebbings:

I think one really interesting thing that a lot of founders struggle with, especially first time founders understandably, is how do they run an effective board meeting? Having sat through many boards both on the operator and the investor side of the table, how do you advise founders on running a truly effective board meeting today, if they're not?

Vinod Khosla:

The first question you have to ask as a founder is, what's the purpose of a board meeting? If you have a perfunctory board, a set of investors who just want reports, you walk through your slides, but that's really not helpful to a founder. To me the right way is send all the materials out, have everybody do their homework, and if they have questions they can ask questions. If they haven't done their homework, read the materials, then they have no right to take up other people's time and ask questions. What's really useful to a founder if you have a good board, is focus on the two or three questions that you most need feedback on. In private company boards, I don't think the role of a board is as much fiduciary as it is in public companies, it's much more advisory.

So ask the board the questions you’re most struggling with, the questions where you’re most uncertain, where you want a different point of view. And if you have a good board and most boards aren’t very good, that’s what you should do. If your board isn’t very good, fire your board members and get a good board. A board that won’t be just hypocritically polite with you. They can be brutally honest, hopefully in a nice way, but yet challenge your thinking, give you different points of view, address the concerns or risks or opportunities you’re struggling with. I personally try and do this one-on-one with founders. I don’t go to a lot of board meetings now. I focus on this, because I find most boards don’t operate this way, and are a waste of time for the founders.

Harry Stebbings:

Why do you think most boards aren't as effective as they should be, and as optimal for the founders as they should be? What can we do to make them better?

Vinod Khosla:

Well, for starters, entrepreneurship is really hard. There's a presentation on our website called The Entrepreneurial Roller Coaster, where the highs are high and the lows are low. Any entrepreneur knows this. And I first wrote this title in this presentation in 1986. It's stayed constant mostly since then. If you haven't gone through this roller coaster, it's very easy as a board member to give advice that's perfunctory, sounds like good business school advice, but isn't based on the reality of how hard it is to be a founder. How stressful, how taxing, how conflicting it is. If you haven't gone through that, you've not earned the right to advise an entrepreneur in my view. And I don't think most board members have gone through it. The other thing that's important is, your goals as a founder may not align with your board's. If they're looking for a good 3x on their money as quickly as possible, that may be very different than the entity you're trying to build, the mission you're on. And unless those things align, you as a founder will get the wrong advice.

Harry Stebbings:

Do you think risk is actually aligned between founders and VCs? And what I mean by that is, VCs have large portfolios, and it's in their interest for you to take as much risk as possible, to get the huge outcome that they need to make fund returns work. But then for the founder, a 400 million exit is a fantastic exit in anyone's books and will make them very financially comfortable. Do you think that actually risk is aligned between founders and VCs?

Vinod Khosla:

As a founder, I always say in this presentation I wrote in 1986 there's a slide that says, "Know why you want to be a founder." And by the way, in those days, slides were overhead projections on acetate. But know why you want to be a founder. You could be a founder because you want to make lots of money. You could be a founder because you have a mission you really care about. It's the kind of founder we like. Like Pat Brown, at Impossible Foods, or Jack Dorsey at Square, or Patrick Collison and John Collison at Stripe. People with a mission and not in a hurry to get out. But you could also want to start a company just because you want to work with friends, and not have a boss and to have a lower stress environment. There's lots of good valid reasons to be a founder. And as a founder you have to find a VC that matches your goals.

If you're looking for a quick exit, great. Find somebody who wants that. If you're looking to build a mission, find somebody who's aligned with that. So it is important founders pick not just names, but VCs who really care about what they care about. We were just looking at something in an area that's of extreme interest to us, the brain. It was clear the founder had a 10, 15, 20 year vision of what they wanted to build. And that was perfectly aligned with what we want to do, which is very much what Impossible Foods wants to do. That works great. But if somebody talks about exits or IPOs in the first few slides, I almost never go beyond that. I say, "If that's your focus, we are not a good fit for you, the founder."

Harry Stebbings:

We've spoken a lot about founders, but there's also the difference in certain cases between founders and CEOs. How do you think about the founder versus CEO, and what's your approach to that?

Vinod Khosla:

So almost always, if a founder grows to be a good CEO, they will build a bigger, better company. What's needed to lead a company is vision and passion and unreasonableness about your mission. Most managers are too pragmatic to be unreasonable, to be visionary, to be bold enough. So whenever possible, you want a founder to lead the company. Now, that only happens if the founders who need all these other functions, good management, good process, taking the right risks, hiring the right teams, leading the right teams, some founders will do it naturally, but often the best founders hire the people who can do these things that they don't understand.

So the quality of hiring is the most important thing. I always say the team you build is the company you build, not the business plan you make. So some founders do this really, really well. Patrick Collison, college dropout, very, very young, inexperienced, built an incredible team. But Jack Dorsey did that at Square, both turned out great companies. I wrote a blog a long time ago about how to avoid needing a CEO as a founder, this was in TechCrunch probably 8-10 years ago. Then I wrote a blog on what to do if you need a CEO if you haven't grown as much.

Larry and Sergey at Google needed a CEO, got a CEO, then Larry came back in and then he's moved on to other things. That's also an acceptable sequence, but be clear about why you're starting a company and what you want to achieve and line up your decisions about this. But almost certainly, great founders have great vision, passion, unreasonableness, more ambition than most practical people would accept as possible or doable. And those are wonderful people to work with. They're really, really exciting, sometimes hard, but really, really exciting. If you get the right board and advisors who challenge you as you go on this mission, that's the right combination.

Harry Stebbings:

I do want to move into my favorite elements of any episode, being the quick fire round. So I say the short statements and then you give me your immediate thoughts in about 60 seconds or less.

What is the favorite book and why? I need to read more this year. What would you recommend?

Vinod Khosla:

I just put out my book recommendations from 2019, so I'll mention there were 20 plus books on it. It's on Medium.com, but my favorite technical book is Life On the Edge, which is about quantum biology. My favorite economics book is Third Pillar, which is about the need for community in capitalism, and how politics, capitalists and community need to play together. Uninhabited Earth, about the climate crisis, something I've been passionate about for a long time. Loonshots, about the culture of Silicon Valley, and my all time favorite is Lying by Sam Harris. This is where you really test yourself on whether you're honest, and I always say we prefer to be brutally honest than hypocritically polite. So my favorite all time book, Lying by Sam Harris.

Harry Stebbings:

I'm adding that as a reading list. I haven't read it yet. My next one is, on appearance, you've achieved all one could want to achieve both as an operator and as a venture investor. What motivates you today?

Vinod Khosla:

I want to have fun. So I turned 65 today and I have a plan for the next 20 years. I wrote it up about two years ago in a document on Medium called Reinventing Societal Infrastructure with Technology. There was a video I gave at our CEO summit called Awesome What All of You Are Doing. It's 100 companies doing very, very cool and highly impactful technology in our portfolio and companies that most venture firms would be afraid to invest in.

So I didn't include successes like Square or Stripe or Nutanix in that. I only covered the companies other venture firms would be afraid to invest in. It's an awesome list. I couldn't even reduce it below 100, that's what's really cool about it. It's from Rocket Lab to Impossible Foods to micro bots doing surgery to 3D printing houses to doing free primary care through AI. All kinds of cool stuff in a wide range of technology.

Personally, if I can have an impact, it's the most valuable thing, most rewarding thing I can do, and I'm always curious to learn about new technologies. I'm a techie nerd at heart.

Harry Stebbings:

What motto or quote do you most frequently revert back to and why does it hold resonance with you?

Vinod Khosla:

“Skeptics never do the impossible.” There's real doers, which are entrepreneurs and then pontificators, experts, gurus that always say why things can't be done. I always say, why not? Instead of why it can't be done. If there's a 90% chance of failure and there's a 10% chance of changing the world, that's a pretty good deal. So go for the 10%. Don't be scared by the 90% and that's really hard. It's challenging. Some days it's really depressing, but it's really, really rewarding and fun. So I could spend the rest of my life working just on those kinds of things.

Harry Stebbings:

How do you deal with the hard times when things don't go so well or as some may call it, say the shit hits the fan, so to speak?

Vinod Khosla:

Well, it's really, really hard in startups when shit hits the fan, when you're helpless. I think if you believe in a mission, you stick with it. You power through walls, bang your head against the wall until you break through. So I think that's the key. If you're not mission aligned, if you're looking at it financially, then when things get hard, you abandon it.

I do think mission-oriented founders make for much better companies, much bigger companies and much higher returns, even if they go through ups and downs.

Harry Stebbings:

What do you know now that you wish you'd known when you started Khosla all the way back in 2004?

Vinod Khosla:

More risk is a good thing, not a bad thing. More risk is something most people are afraid of, and it's where the larger opportunity lies. Naseem Taleb’s talked about it, nonlinear returns matter, and they really are nonlinear. Square's up 10x since the IPO or 8x or something like that.

We were not afraid to stand there and really go build the bigger entity. We didn't sell many of our companies, we stuck with them to go really for the big things. So nonlinear risk, and don't be afraid of it because other people are in one place where markets aren't efficient.

Harry Stebbings:

Which is your most recent publicly announced investment, and why did you say yes and get so excited?

Vinod Khosla:

We like really large breakthroughs. As an aside, one of the things I love is three people I've invested in have won Nobel prizes after we invested, not before. So really big ideas really excite me. For a specific investment, OpenAI is going after a big, hairy, audacious goal of building an ADR. That to me is worth pursuing as an investment, but also for society. It may eliminate the need to work for society, lots of issues there, but it could be really, really exciting if it works. And I don't know what the probability of success is. Again, even if it's only 10% and there's a 90% chance of something less, that's fine with me. So that's very exciting.

Harry Stebbings:

Vinod, as I said at the beginning, and this is an episode that I've wanted to do for many years now. So I can't thank you enough for joining me and I also can't wait to see the next 10 years for Khosla and the incredible portfolio you've built.

Vinod Khosla:

Well, thank you. It's always fun to do this. As you can tell, I get excited and if I can excite one more person into being an entrepreneur on a mission that helps society, that has impact or does some very cool thing like micro bots, this hour is worth it.