Why Big Money Makes Big Bets

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, well, it's our big debut.

Vinod Khosla:

This is a very exciting time, but I think it'll get even more exciting.

Kara Miller:

And amid a world in tumult. We look at what it takes to unlock the future.

Vinod Khosla:

No large innovations we talk about comes from people who are experts in the area.

Kara Miller:

Today, venture capitalist, Vinod Khosla, who's going to share with us his view of the current tech landscape.

Vinod Khosla:

Let's shoot for the moon, how high we go doesn't matter if in the end, the rocket is going to crash back to earth. Only time it matters is if it achieves orbital velocity.

Kara Miller:

And over the next few weeks and months, we're going to hear from the scientists, the investors, and the journalists grappling with new ideas.

Angela Belcher:

We're using yeast, the same kind of yeast, you use to make beer or bread, and we've been engineering them to specifically transport in toxic materials like mercury or cadmium or lead and separate it out as a water purification system.

Sebastian Mallaby:

I mean, there's no earnings in a early stage startup, which is just two-legged mammals, walking into your office with a dream.

Vinod Khosla:

I made stupid decisions so often through the 40 years I've been in the venture capital business. I couldn't even begin to tell you in a one hour podcast.

Kara Miller:

We'll also look at what's hype, what's real, and what the heck is going on behind the scenes. First though, a story. And even though it's one story of one day, in just one particular meeting, you might argue, it can tell you a lot about how and why new ideas achieve lift-off.

Vinod Khosla:

When Pat Brown came to me, he rode up on a bicycle from Stanford. He didn't say he wanted to build a burger. He said, "I want to change animal husbandry on the planet because it takes 30 to 50% of the planet's usable land area."

Kara Miller:

Patrick Brown, then a renowned scientist at Stanford, would become famous for building a burger, the Impossible Burger, which you can now get it, among other places, Burger King, where it comes with tomato, lettuce, mayo, ketchup, pickles, and onions. But back in 2010, when he biked to that meeting with Khosla, the Impossible Whopper, as it's called, would've been hard to imagine. Khosla remembers that Brown had no deck, no company, no product, and no sample. Though, he certainly did notice as the journalist Sebastian Mallaby would later write, that Brown seemed like he was all in.

Sebastian Mallaby:

So he has this sort of slightly weird, certainly unusual obsessive determination; which is one thing that, of course, venture capitalists love when they meet people like that. Because that is going to be channeled into the determination you need to make a startup. Where you're going to suffer setbacks, both scientific and in other ways, business setbacks, along the way before you have a chance of hitting success.

Kara Miller:

Khosla knew that he was in the presence of a smart man with a real drive. But when Brown told him he wanted to remake animal husbandry on planet Earth, well, a certain amount of skepticism kicked in.

Vinod Khosla:

Now, that's ridiculous. One guy, he'd never worked at a job other than being a professor, and only at one place, Stanford. And you sort of say, oh, this is too important. Now you could have said, this is ridiculous. He's never done anything practical. How could he do this? And it's not even possible, conceivable.

Kara Miller:

Khosla, though, had long been in the business of supporting things that were seemingly inconceivable. So the question was, what might the ramifications be if it took off?

Sebastian Mallaby:

Okay, supposing this improbable, but not impossible idea can actually be made to work by this obsessive and unusual person. How big is the payout going to be? Because it's all very well backing a long shot and to back plenty of long shots, knowing that nine out of 10 might go to zero, but if you're going to do that, you need the 10th one to make back more than 10 times your original investment. Otherwise, you're going to be losing money in your overall portfolio and you'll soon be an ex-venture capitalist. And so Khosla thought about the size of the market for a delicious meat-free hamburger. He realized that that was actually massive. Brown said to him, "It's a trillion and a half dollar global market being served by a pre-historic technology." And that was enough to push Khosla over the edge and bet $3 million on this startup.

Kara Miller:

But once the check was written, Patrick Brown about to exit his professorship at Stanford faced an enormous task.

Vinod Khosla:

And so he took on a dream that was very, very, large and is still pursuing it. It's far from successful yet, but it's a very successful business and a very successful company today. But my answer to him was, what you're talking about is too important to not try no matter what the probability of success.

Kara Miller:

Radical innovation, Khosla insists, takes a big leap of faith, whether it's in the area of reinventing food, reinventing cars, or reinventing energy. And sometimes those big leaps won't work out for any number of reasons.

Vinod Khosla:

People often complain about the Theranos' of the world, the big failures. Failures will happen. Fraud will happen. Things will go splat, but that's okay because if one out of 10 succeeds, even though most startups will fail, most startups will lose money. More money will be made than lost. And more value will be created than spent. Despite those flashy failures like Theranos. And that particularly is hard to avoid fraud in any area where money is involved, is hard to avoid

Kara Miller:

Khosla, a co-founder of Sun Microsystems started KV in 2004. And he says, "If you want to know where tech is headed and what the funding climate is like right now, it's worth paying attention to a curious trend that began a few years back."

Vinod Khosla:

15 years ago, you wouldn't have said tech could drive energy. Tech could drive construction. Tech could drive transportation, think Uber, or hotel, think Airbnb.

Kara Miller:

Right.

Vinod Khosla:

So tech used to be about tech businesses, mobile, internet, enterprise software, consumer applications. It's become much, much broader now and is starting to impact all parts of society now. And it's starting to affect most parts of non-governmental GDP. And the really exciting opportunity we have is we have hundreds of percent, maybe thousands of percent improvement in resource utilization that is now possible through technology multipliers. Technology is the only thing that can multiply resources. Everything else I've seen is about small, a few percent, five, 10, 20% improvement, and efficiency. So this is very exciting. Another way I think about it is 700 million people on the planet have a rich lifestyle today. They're rich in energy, rich in transportation, rich in housing, rich in education, rich in entertainment, financial services, medical services, you name it, seven billion people want it, and we have to do it without destroying the planet.

Kara Miller:

That's a big ask, Khosla says, and it's even more complicated when you start to think about the level of our dependence on natural resources.

Vinod Khosla:

So today, every single year society extracts a 100 billion tons of material from the environment to produce goods and services for seven billion people. So 15 tons of stuff for each one of you

Kara Miller:

Now, imagine moving from a world in which a fraction of us, about one out of 10, uses lots of stuff to a world in which three, four, or five out of every 10 people demands lots of resources. On this show, we're going to keep coming back to how you make that work, how you spread prosperity, in what the Harvard economist, Rebecca Henderson has called a world on fire. And how tech might be able to help get us there. In Khosla's view, it's actually the only thing that can bridge the gap.

Vinod Khosla:

There's two visions of the future. Those who say we have to consume less, spend less use less, and those who believe in abundance through better technology. I'm a believer in great abundance and bringing all seven billion people to today's lifestyle of the top 10% using technology as the multiplier. And that's, what's really, really exciting.

Kara Miller:

When you talk about technology bringing about already a lot of change and you think there's a potential for a lot more. I mean, in some ways, obviously, tech investors, aren't just investing in tech. They're investing at the intersection of tech and people, like how people use that tech. Do you worry that as things go really quickly, it's going to be a big adjustment for people to see how quickly tech changes?

Vinod Khosla:

Well, in some areas there will be adjustment. In the internet, the older generations were slower to come along, but they're fully up to speed now in most areas. Now, it's not equally accessible to everybody at the bottom of economic pyramid yet, but hopefully that will change also. In fact, it may be a great equalizing force. In some areas, it will take time for people to catch up. We'll leave some people behind. In others, it won't make a difference. If I can build a public transit system that is cheaper than today's public transit system, that is more schedulable than Uber, faster than owning a personal car, and reduces the number of cars in cities by 10X, that would be exciting. And I think that's possible within 20 years.

Kara Miller:

Give me a sense of a couple of the most interesting technologies to you right now. The ones that you think that if we were to have this conversation again in 10 or 20 years, that we'd look back and say, "Wow, that really changed our lives."

Vinod Khosla:

I think there will be many, many such areas. Obviously, if we don't solve the climate problem, we have a problem that will change our lives very dramatically. But the flip side of that is if we solve the problem with the right technologies, we'll have less pollution, less emissions, more sustainability, and, more importantly, abundant energy. So, it's very hard for me to pin an area because no matter where I look, I see room for great innovation where it would improve resource utilization by hundreds, if not thousands of percent, as I said before.

Vinod Khosla:

Let me give you a personal episode. After I turned 60, I asked myself, what problems should I work on? And I looked at US and global GDP, and I tried to ask myself, which societal problems are addressable by technology? And I was shocked, in almost every area, from education to entertainment, from building houses to building transportation. I could come up with ways to radically transform society with incremental approaches and incremental approaches to investment that could completely change society. So we have to imagine the possible. 15, 20 years ago, it was hard to imagine Airbnb having more hotel rooms than Hilton.

Kara Miller:

Right.

Vinod Khosla:

15 or 20 years ago, it was hard to imagine taxis being as scalable as Uber has become. And I think an order of magnitude better service than Uber is now possible. They'll become public transit and eliminate the need for most people owning cars. So one of my major themes is dematerializing society. Most for a building, supports the building itself, not the people in it. If you have a three story house, you might support 30 people in it, and 30 people might be 5,000 pounds of weight, but the building itself is a lot more weight. So could you dematerialize it, use much less material per square foot of construction? Could you take one 10th amount of steel to build transportation? Today, a 200 pound person has thousands of pounds of steel surrounding them in a vehicle. Could you make it a few hundred pounds of steel? All these are not only possible, they're conceivable solutions today. And I think the brightest, smartest entrepreneurs are inventing all of this.

Kara Miller:

But who, you might ask, is going to come up with the biggest breakthroughs? The technologies that quietly change how we work and travel, spend our free time, get the stuff we need. Vinod Khosla notes that he's been in Silicon Valley since 1978. And in that time, the biggest winners in various industries, well, they aren't at all who you might imagine.

Vinod Khosla:

In that 40 some years, I have not seen one large example of large innovation that transforms society, and there's maybe one or two areas of exception. But, no large innovation we talk about comes from people who are experts in the area. Airbnb wasn't invented by hotel experts, it was by somebody who knew nothing about hotels. Electric cars sort of redirected by Tesla, it wasn't somebody who had ever worked in automotive or knew anything about automotive, electric cars. Space wasn't reinvented by anybody who knew Boeing, or Lockheed, or Airbus. It was done by a bunch of startups like Rocket Lab and SpaceX. Biotechnology was the first area I saw; pharmaceutical companies almost completely ignored biotechnology when Genentech was a small seed startup. So, retailing was invented by somebody, Jeff Bezos, who didn't know anything about retailing. You would've thought Walmart and Target people would know it. It wasn't.

Kara Miller:

Right.

Vinod Khosla:

So no matter where I look, media's my favorite example. It wasn't Fox or CBS or NBC or NPR. It was YouTube and Twitter and Netflix and Facebook, people who didn't even know they were in the media business. So no matter where you look, invention comes from people who reexamine inventions and ask, why can't this be done differently? Almost all incremental innovation comes from experts, people who know the area, they can improve an area. Intel can go from a 10 nanometer process to seven nanometer process for semiconductor chips that is incremental, but reinventing an area comes from people who rethink the problem from the bottom up.

Kara Miller:

So, I mean, that's very interesting because you're really saying, there's this power, which is the power of the outsider, of the founder. And we heard earlier from the journalist Sebastian Mallaby, and we're going to have him on this podcast for an in depth discussion soon. He really immersed himself in the venture capital world. He has a new book out about it. And he says, and I would say with some measure of concern, but I'm interested in your take, that, "There's a lot of power right now in the hands of founders." What do you think of that assessment? And if you think it is right, does it concern you at all?

Vinod Khosla:

So there's different types of power, and let me try and elaborate. Financial power, fundraising power to do what they want generally will result in no checks and balances, which can often be a good thing. More things will fail, more bad investments will be made. But in the end, if we are talking the power to innovate, not invest, founders having more power is a really good thing.

Kara Miller:

Okay.

Vinod Khosla:

They have more freedom to be unchecked by pragmatism, which is why large innovation happens. Pragmatism results in incremental innovation. Unchecked, imagine the possible and try and make it happen is something that happens from unchecked behavior. Somebody pursuing or dare to dream, and then try, sometimes very foolishly, to try and make that dream come true. And it's sort of the dream I followed. I had a dream when I first came to the Valley, then followed it and tried to make it happen against all odds, sort of a young person with a funny accent from a foreign land, never lived in this country, imagined building a large computer company to take on the giants.

Vinod Khosla:

Now, that sounds ridiculous. And if we had had pragmatic investors, they would've caused us to do some very narrow thing. So the probability of success goes up, but the consequences of success, in my mind, would've been inconsequential. I decide to go for broke, the phrase we used to use. And I think this is true of all entrepreneurs, is, let's shoot for the moon, how high we go doesn't matter if in the end the rocket is going to crash back to earth. Only time it matters is if it achieves orbital velocity and escapes Earth's gravity.

Kara Miller:

Is there a technology or two that you look at and you think, people think this is going somewhere, I don't really?

Vinod Khosla:

So I'm much more likely to talk about the future in terms of technologies. I think that will go somewhere. Taking a diversion for a minute, I'll come back to your question.

Kara Miller:

Okay.

Vinod Khosla:

If you had an AI tutor, every kid on the planet could have a personal tutor almost for free, far more effective than trying to build smaller classrooms, which are incremental solutions. And for which there's not enough money for, or if all of medicine could be practiced by an AI, you could replace 80% of what physicians do and really make the stuff accessible and cost effective for almost everybody on the planet. And so those are very optimistic areas we can come back and talk about. We haven't talked about the potential of AI in all these areas, but when it comes to talking about things that are over hyped, I would say in the past, we've seen cycles over hype.

Vinod Khosla:

So nanotechnology was very popular in the early 2000s, but what really happens is the concept is over hyped. And as time evolves, either it fails, but mostly it doesn't fail. It evolves into something useful. So take a technology like the Blockchain. Today, it's this vague speculator value, unfortunately, whereby being used by Russia to bypass the Ukraine sanctions because it's not tradable, but it does have value in Bitcoin, is a fixed commodity and it can't be printed. So there's real value as a store of value and coupling it with KYC and ML traditional banking concepts to make sure fraud doesn't happen would make it much more useful in my view. NFT is hyped a lot, but my bet is it'll become even more valuable for rare resources. So if you have NBA top shots as an NFT, it becomes even more valuable.

Vinod Khosla:

If anybody can call anything an NFT and there's no scarcity, then you lose a lot of money and hype that will go out of fashion. So I do think NFT will become much more useful for certain kinds of applications and certain rare events because scarcity is what is valuable in that societal function. So even the things that are hyped, and I'm bringing some things that people say are hyped, they will evolve into more useful forms over time. One of my favorite uses of the Blockchain is the Helium Network. A physical IOT network is being set up in the United States, using the Blockchain to create network effects. Could we use the blockchain to replace AT&T's 5G network for cell phones or Comcast at home service? Absolutely. And those kinds of uses will emerge out what seems like a messy, generally, optimistic environment and vague terms like web 3.0. They'll become very specific and very valuable.

Kara Miller:

Let me ask you a little bit about the intersection between technology. Obviously, you're seeing a lot of stuff sort of moving forward and changing how things look and government. You've touched on this a little bit. And I think a lot of times entrepreneurs think the less government, the better. But I've also talked to scientists over the years who feel like it's stressful in the US when you have different administrations with different priorities. And, so one administration was like, "Yeah, let's invest a lot in renewable energy.' And the next administration's like, "Yeah, we don't really care about that." And so your graduate student finding all this stuff is, it's hot and cold and hot and cold. Give me a sense of how you think tech and government intersect and how that works and how it maybe doesn't?

Vinod Khosla:

Look, you brought up a very important area, climate. Climate needs two things, very large technology breakthroughs. Today, we are mostly seeing a lot of hand waving on everybody can do their part, not true. We only need that dozen awesome instigators, like an Elon Musk, like a Pat Brown, like a Bob Mumgaard at Commonwealth Fusion, to transform the critical areas of carbon emissions. Now, the second piece that will accelerate these transformations is government policy. So policy will make a huge difference. And as we go from the Obama administration to the Trump administration, to the Biden administration, things will flow an (indistinct). And that's just a natural part of, life is just messy. Now, what that causes things to happen is things will take shorter or longer, based on the policy, but most likely, not always, but most likely, really valuable things will sustain and smart entrepreneurs will power through the hardship phases to emerge.

Vinod Khosla:

So most people think of Cleantech 1.0 as having failed, but I don't think so. Tesla's a huge success, made up in market cap for a lot of investments that were made in Cleantech. QuantumScape, in our portfolio, is a huge return in solid state batteries today. But it took through excitement about the Cleantech investment cycle and then (indistinct) of almost a decade, and now excitement again. So these cycles will happen, but quantum escape, what is Cleantech 1.0, is a really exciting investment for solid state batters and would make electric cars more cost effective than internal combustion engines, which is what has to happen. LanzaTech out of Cleantech 1.0 will make sustainable aviation fuels possible without obsoleting today's airplanes and today's infrastructure. Impossible Foods, part of Cleantech 1.0, will more than return the funds. So not only will these technologies sustain and work out. Whether it's fusion or electric car batteries, somebody will build a multi-hundred billion dollar company, maybe a trillion dollar valuation company out of solid state batteries or aviation fuel or public transit, these all happening.

Vinod Khosla:

It's just one where serious technology innovation is required like in solid state batteries, or aviation fuels, or fusion; they take time and we need patience and we will go through multiple iterations of presidential policy and cycles over this period of time. But in the end, the way for a clean tech technology to succeed is to achieve unsubsidized market competitiveness. And if they're on that path, they will succeed independent or policy, with policy that can be accelerated because even when they're market comparative, eventually at very small scale, when they're starting up, they will never be market competitive. And that's when a green premium will be required. People willing to pay that, people willing to subsidize that temporarily and for a short period of time. But there's so many exciting areas around climate where policy could be accelerated or decelerated, where we need large breakthroughs.

Kara Miller:

We've talked about a lot of, sort of these really big, next stage kinds of technologies, CleanTech dealing with global warming, whether it's that, or it's other things, since you often sit down with people who are telling you an idea, they haven't done the thing yet, they don't have the prototype to show you, or they can't really demonstrate it to you. What is it that you're looking for when somebody's telling you something that seems almost unbelievable? What are you looking for initially?

Vinod Khosla:

When somebody's talking about something really improbable, I don't think of it as investing in a rate of return I can compute in a spreadsheet. I think, we are investing in an option, buying an option in financial terms, in a large area. So I look at the probability of success and the consequences of success. If we are successful, how large is it? So take a company like Square. It was four or five people when we invested, but if it was going to transform small business, it'd be as valuable or more valuable than American Express in 10 years, that was the thesis. The probability of it being an American Express was low. The value probability of creating a $100 billion of value, if it succeeded, would be high. So if it succeeded was low, let's say, single digit percent, but the expected value was very high. So, that's one way to look at it. Another way I look at it is investing is not what we do, investing is about transactions. You buy equity in a company and then you sell equity.

Vinod Khosla:

That to me, is that transaction. I think of us at Khosla Ventures, being in the business of venture assistance, assisting entrepreneurs to build their dreams. It's not a transaction; it's somebody's dream we help them build. So it's building a great enterprise is what we are assisting in and helping an entrepreneur with. And if the consequences of success, no matter what the probability of success, are large, like a $100 billions of value in a company like Square or Stripe or Impossible Foods, or pick your favorite.

Vinod Khosla:

Or a DoorDash or an Instacart, then it's worth attempting. And that's what our business is about. That's the venture part of venture capital. The capital part of venture capital is mostly inconsequential. And whether the environment is hyped as it is today, and there's a lot of wasteful investing or high valuation investing or not, in the end will not be consequential to society. What will be consequential is that really interesting projects get taken on by entrepreneurs emboldened, and despite all the hubris that turns out to be fraud or hubris only; the ones that succeed will make it all. Look at the transformation technology has done in the last 20 years; in medicine, in biotechnology, in transportation, in Uber, in Google, in Facebook, all these things.

Kara Miller:

Was there a company or two that you wish you had invested in? Are there a couple that you sort of think about as like, yeah, I wish I had gotten in on the ground floor those?

Vinod Khosla:

Look, one of the things about our business is these things are so improbable. We are guessing at which improbable is more probable than a less likely improbable. To answer your question directly, I feel stupid all the time. I made stupid decisions so often through the 40 years I've been in the venture capital business, but this is where you have to be willing to fail, to succeed and know that you'll never get most of these right.

Kara Miller:

You talked about being an immigrant and coming to Silicon Valley. And I just wonder if you can give a sense of where you think America is in terms of competitiveness. I mean, there's been a lot of work done on, that, when you think about companies in the Valley, many of them, something like half, have at least one immigrant founder, and I wonder is the US still in that sort of good position that it was when you came or are people like, "No, I'm going to stay where I am and not come to the US." Just give me a sense of how you see the competitiveness issue.

Vinod Khosla:

So the US and the Trump administration definitely set back innovation in the US by discouraging talent. Talent in our universities, talent in our startups under a fairly silly notion of jobs and immigrants. I think the more talented immigrants we allow, and frankly, the more immigrants we allow in a legal way, the better off we will be. We can't have unfettered illegal immigration, but that shouldn't hurt legal immigration of all types, talented or otherwise. So I do think we've set America back, but I don't think we've set it back. And I think we can still change course and I'm hopeful for the future. But let me go beyond that and say, transformative innovation to build a new society or societal infrastructure more precisely is a global imperative. It's not just for America to do, and Silicon Valley used to be a place. It really is a culture and a mindset.

Vinod Khosla:

And so the fact that seeds of innovation are being sewn elsewhere. Isn't to me a bad thing. To me, the more Silicon Valley locations we can start, whether they're in Bangalore or Shanghai, the better off we are. And the more we can enable talent with the mindset of support for the larger vision, the better off we as a society will be. But let me also say, despite the fact that we set back the importation of talent into America, it's still the place where the most innovation happens. And I would say, even though, and I look at Europe, there's equally good scientists and entrepreneurs there. The rest of the ecosystem, the investors, the business people, the others needed to support the entrepreneur aren't as developed and they turn really big ideas into decent ideas. So they de-risk big ideas to increase the probability of success, but in the process, reduce the consequences of success.

Vinod Khosla:

If you want the large consequences, I do believe America is still the best place to be. And the good thing to me is there's so many things to be done and innovation isn't a zero-sum game. Looking for resources, whether it's titanium in Ukraine, or wheat from Ukraine, some things are zero sum games. The really important things, the multipliers of resources, a new kind of cement, which we are working on. A new kind of direct air capture or methane paralysis that really impacts society, they're not zero-sum games, they're multipliers. And we can have innovation, in many, many areas, and all of those succeed in all parts of the world. We've done exciting investments from all over the world. In fact, my most recent one was in New Zealand and Rocket Lab was in New Zealand seven, eight years ago. So it is possible to do innovation everywhere.

Kara Miller:

Vinod Khosla, the founder of Khosla Ventures. Thanks so much for being here. Thanks for talking to me.

Vinod Khosla:

Thank you very much.

Kara Miller:

And thanks to you for joining us on our first show. Next week, we're going to move from what can go right with innovation to, frankly, what can go wrong.

Maureen Farrell:

They knew how to say whatever the zeitgeist of the moment. What was raising money, what investors wanted to hear.

Kara Miller:

In the meantime, subscribe to Instigators of Change. Leave us a review on Apple Podcasts. I'm Kara Miller. Our show is produced by Matt Purdy. I'll talk to you soon.