Bloomberg Wealth: Vinod Khosla
We help on those bell companies the consequences of doing that is making a lot of money. I don't mind a 90 percent probability of failure if there's a 10 percent chance of changing the way more money is made by pioneering unchartered territory and thinking contrarian. Vino Khosla grew up in India removed from technology might never have even had a television or telephone at home. Inspired by the story of Andy Grove a Hungarian immigrant who ran Intel in Silicon Valley Koestler headed to America to study at Carnegie Mellon and Stanford Business School. I was completely back to this idea of following Andy Grove footsteps and starting a
company. Kosta made his first fortune by co-founded Daisy Systems and then soon thereafter Sun Microsystems. I like to say my willingness to fail is what allows me to succeed. In 1986 Koestler joined Kleiner Perkins and became a prolific venture investor overseeing blockbuster bets including a 3 to 4 million dollar investment in Juniper which returned 7 billion dollars in profits. So it's about these outliers and about having optimism to go after them and then the courage to stave it that not
selling. Now at his own firm Coastal Ventures. He is strictly focused on investing in technology with a large societal impact that falls short of my version of philanthropy that you could really help get to technologies that make a big positive difference. Being a venture investor for quite a while and you're one of the best known and one of the best in the world what does it take to be a great venture investor. What. It's a skill set. You know
the skill set is one of. First optimism. I always say skeptics never did them possible and venture is about the very large outsized implausible ones. It's so it's about optimism. But fit the healthy dose of paranoia. Few people recognize that most venture funds if they make 50 investments one or two or three at most will account for 90 percent of their returns. So you're really looking for very heavy tail risk. I like to say it's not about increasing the probability of success which is true of most investing not fail not lose money but it's about the consequences of success. If you're successful make them really consequential. So when you're doing a venture investment you're looking at something. Are you hoping to make five times your money 10 times your money or even more.
I would say at least 10 hopefully even more and the best returns will be 50 or 100. My highest return ever was twenty four hundred DAX. The money. What was that deal. That was a company called Juniper and it was the classic. None of the telecommunications carrier in this is how venture works believed in. And that is going to be important in 1996. So nobody
including established players like Cisco wanted to build equipment for the Internet. What did your investor say with that. Well Russia's obviously very happy but you know I spent 20 years at Kleiner before I started my own from Kleiner was very lucky in every fund had one or two of these. There was a Google in one fund and Amazon when I was there. And we investor in Amazon. Nobody could see a book seller could be DAX large or the search engine business could be DAX large or juniper which would. The networking company could be DAX. So it's about these outliers and about having optimism to go after them and then the courage to stay but that not selling. So did you ever have a deal where you thought it was going to be great and it wound up
going to zero all the time. I like to say my willingness to fail is what allows me to succeed. And it is the asymmetry. Nassim Taleb talks a lot about asymmetry. When you lose you lose 1 times your money. When you make money you make 50 times your money. That's the nature of venture capital. And it's very large societal change that very often comes and the returns come as a side effect of some change. It's not something you can ever put in this spreadsheet to be maybe the only venture investment fund.
We don't even allow calculating an ISE on an investment. Now sometimes some venture capitalists say I really backed off the entrepreneur. The idea I may not be that great but the entrepreneur is great. Some say I got us find a compelling idea and I can always get a new CEO. What is your perspective on that between those two. I
definitely picked on. No. You know if you have the wrong plan a great aunt nowhere will fix it. In fact people seldom realize there's very few successful companies that look like their original business plan. It happens occasionally but it's very rare. Well when I started my own company many years ago we had a business plan and
what actually developed or no relation to the business plan. That is true. Most of the time in venture. And so you're really relying on the team to keep iterating keep improving the plan targeting. Now the one thing I do worry about is ordained the right marketplace because if it's a large marketplace then to Aunt Nola who can find his way or build the team that can help don't know or find his way in. Team building is one of the key characteristics of an aunt. No. They will end up with a large share of the market. So you have a lot of people coming in with entrepreneurial ideas. How does it decided. You have a unanimous vote. Any one partner can push a deal through. And how long it take to actually go from approval
to meeting somebody to the approval process. Those questions are highly variable in every venture firm is different. I kind of went through a number of models of do you need a unanimous vote. You need one person only at coastal branches. We are very very clear. We are optimizing for the outliers. So any one person who really believes in something can go through with it no matter who else is opposed to it. So one partner has to have belief in something and that optimizes. For the outliers because one person buying into it but everybody else is skeptical and the nature of most things is
skeptical. Yeah. If if if you imagine square as a four person company. And you say well it has this ten dollar hardware dongle you attached to the iPhone audio Jack and that's going to be a big business. Extremely implausible. And that's what I thought because I sat next to Mr. Dorsey who was the inventor of Square at a conference once and he had obviously was famous for doing Twitter. And he pulled this little thing out and showed it to
me. So this is my next company. And I said she's you really think that's gonna make it. And he told me what the valuation is likely to be. I said I don't think that's for me. But that was a mistake obviously. Did you invest in it. We invested in it when it was for people. And obviously today it's not at 100 billion but it got close to the same valuation as American Express. My point is those things are very implausible when they happen. So let me ask you in the
recent couple years the tech valuations of public companies and also private companies are staggeringly high. Many people thought it was not sustainable. And now we're beginning to see dramatic decline in some of these well-known companies like Netflix or Facebook. Are you surprised by the decline in these valuations or do you think it's temporary and will come back. Well we I look at it is. What is the underlying innovation that's going on and how large a market is it addressing. If it's large then the valuations will look large. If you look at Google it. It's a great valuation I'm sure. I would think it come back but it's 20 some percent growth company not a 50 percent growth company. The
early stages of much what most venture 30 40 percent would be considered low growth. Venue in DAX world and you're addressing large markets and you have a proprietary advantage. Then the valuation metrics are very very different and traditional valuation approaches don't really work. But. Continuing to apply them as companies mature is a mistake and is that the deal valuation so high that it's going to be hard for people to get the returns that they want out of venture investing. So I do think given the hype we've seen the last five years we will see a decline in returns. That's not for everybody. The good funds continue to be
disciplined about valuations. But I do think in general for the industry we'll see a decline. The best phones will still do well. So coastal ventures will do OK. I hope so. We have to anarchy. I think most people in America don't realize how good they have it. Even as a foreigner with a funny accent add 25 people would give me money with a handshake and say go start the company.
The tag on the product may read Made in the USA but the sign on the CEO's door often says Made in India. Alphabet. Sun. Dark Child. Microsoft Satya Nadella. IBM is Arvind Krishna. Micron Technology. Sanjay May ho truck. And that's just the start. How did the chief executives of Adobe the Loy Gap VMware. And that doesn't count Indians running companies all over the world. Why have so many Indians risen to the top. No. Koestler points to India's incredibly competitive education system. If you can survive the pressure it takes to get into one of the Indian institutes of technology. It gives you confidence to handle American universities. And later the business world. Meanwhile the belief in India's ability to produce so many tech wizards is
reinforced. Every year Indians make up about three fourths of the immigrants receiving coveted H1 B visas for the U.S. and it's a safe bet that some of them will eventually find their way to the C suite. So let me ask you about India for a moment. Many entrepreneurs in Silicon Valley and venture investors have a background in
India. What is it about India that send so many people here and they've succeeded so well. And is there an Indian diaspora in Silicon Valley that you keep up with. So there is definitely a strong diaspora that does a lot of things together. There's a couple of organizations but more most of it is informal and it's a pretty. Great diaspora. You know many of India technology companies run by people of Indian origin. What really has happened is there was a strong technical community in India and they saw a lot of opportunity in the US. So they both contributed to the development of those startups. And frankly I think the last report I saw for you 50 percent of
the startups in Silicon Valley have immigrant co-founders playing a significant role. DAX has helped us alot stay ahead in technology and some of their diaspora going back to India. Also helping India I would guess that when you were growing up you didn't say I want to be one of the world's greatest venture investors when you were growing up in India. So I grew up far away from any business. I grew up far away from any technology. In fact when I left home I'd never even had a television or a telephone at home. So my history is really about. I used to be able to rent to all magazines in India as a young kid. And I heard about Andy Grove who started Intel as a Hungarian immigrant coming to Silicon
Valley to start a company. And I fell in love with the idea of starting a technology company. Reading his story in a pretty old magazine. Had you going to college. No I hadn't gone to college so I decided I wanted to go to engineering school went to engineering school in India wanted diabetes in Delhi and then immediately made a beeline for the US went to Carnegie Mellon got my master's degree in biomedical engineering there. I was an electrical engineer. But if you got your degree did your
parents say your family should come back to India. Did you say look I love India but I'm staying in the United States. Well they knew I had no opportunity to really start a company or technology company in India. So very foreign concept. And in fact I think most people in America don't realise how good they have it even as a foreigner with a funny accent. At twenty five people would give me money with a handshake and say go start a company. That was my first company. That's a real privilege we have in this country. That wasn't possible in a place like India. So I was completely back to this idea of following Andy Grove's footsteps and starting a company. Why did you decide to get out of the business of starting and
running companies to go into venture capital. I actually thought I'd do something completely different from technology mostly focus on design and architecture. But John Door who is on my board an investor in Sun talked me into joining Kleiner and where I then spent 20 years there. You finished Kleiner for about 20 years there and you decided I'll just have my own venture firm called not surprisingly Khosla Ventures. So at that time did you expect to just invest your own money. I wanted to
invest in technology that could have large societal impact. So it was sort of my version of philanthropy that you could really help get to technologies that make a big positive difference. In 2009 we raised an external fund because I felt comfortable with our formula. And we started taking outside investor money. Our focus was climate and financial services. But I would say what's been unique about what coastal venture has done is about every three years there's a new area that other people in the venture business are not investing in that we stop. So climate is very early in 2006 through 2009. We started that when few people were investing. After that we did food and possible foods. We did financial services like Square Stripe and a firm which people weren't doing back then. We've talked about
the square story. After that came a I and robotics. We one of the first people in digital health. So we are now doing construction with radical technology changes our transportation. One of my favorites. We are doing mock five aircraft London to New York in 90 minutes. That's a really exciting project. In hindsight was it too early for green tech. And now maybe it's a better time. Here's what I would say.
I don't think it was too early. I think when you go into a new area that is completely undefined. There's a lot of learning. So we started investing in clean CAC among everyone. The early funds to start investing in climate technologies. Those as a whole have book club. So quantum escapes what five was worth 10
billion before. What got you. One of those can return the whole fund. What about crypto and block change. Show more support. Investments and crypto have been better. They affect everyday life. Things people would recognize. Could you build better financial services. Squares. Very big on crypto. Could you build a better telecommunications network. And the helium token and the helium network. Does that show when things start to affect everyday life. That's an interesting area for crypto. It's not that interesting to most other people in crypto. So in some sense it is less competitive and a better area for us. We've not done the speculative part of crypto mostly because I wanted to stay away from areas where there's a lot of illegal activity which is common in crypto. One of my beefs is more
partners in venture firms haven't found the right to advice. They can give them money but money is a smaller part of a place. Well somebody is watching this as they say I want to be the next Silvano coastline I want to be a venture investor. What would you say that he or she should do get a MBA. Get a technology background or do what. Well first you don't need a technology background to start a company but it helps tremendously to have one. If you're in the
technology areas if you're in healthcare if you're in climate technologies you will need generally a technical backup. And the fact that so many Indians do it's really made a big difference there. By and large I help people go through the experience of learning how a startup works. So join a startup. Don't join a venture capital firm or an investment fund. One of my beefs says most. Partners in venture firms haven't earned the right to advice and not know they can give them money but money is the smaller part of the equation. So what do you do with your own money. Do you put all your money in venture yourself because you've been so good for you. Or do you diversify and put in real estate or
something really important like buyouts. You know in a traditional sense. I'm not a very good investor. I don't wealth manage. I may be one of the few people I've done. I'm always the largest investor in our funds and I think of that as the principle Waco. So as you look back on what you've achieved in your career to date and it's obviously you're still young at 67 what are you most proud of having achieved. I am most proud of probably two tanks. One. My relationship with my kids and how
they've grown up. The other thing I feel really good about is. Fortunately it's short. I've sort of become a role model to many young Indians coming up in India and I constantly get e-mails from them saying how they are motivated to do the same thing. And if we've instigated a new movement to have more innovation and more people try to do more with their lives. I think that's
a really good thing to bear and I'm pretty proud of that. Close the prison. United States called you up and said we need to have more technology knowledge in the government and V.A. You should come in and be my special adviser on technology. What would you say to any president United States. I'm probably not very good for D.C. I probably don't fit in. I'm probably too didactic and
I'm not very politically right. You do have a reputation for being direct. And where did that come from. You just don't. What we like to kind of be mealy mouth you say this is what I really think and is that sometimes offend people or not. There's a Stanford professor called Sam Harris who wrote a great book called Line and Why Most People Lie Very Often. That book was a real test for me that I really never wanted to lie. So I never want to politely say to you hey you're doing great when you're not. And so I learned that being direct helps people more than being polite. So when we started off find I put on our Web site.
We prefer brutal honesty to hypocritical politeness because once you get honest feedback whether you like it or not you can do something about it. You can try to ignore it. You can judge it and say no you're wrong. Or you can hate to ask you what you think of this interview. Then I'd better get an answer that I won't ask you that question. So a couple of final questions. So what's the best investment advice you've ever received. I would say the one piece that works really well in our business is go for higher risk higher consequences. So most people in business reduce risk
increase the probability of success which is reduce risk. But at the expense of making the consequences a success relatively inconsequential. You might make two times your money or something. I for our business what works is I don't mind a 90 percent chance probability of failure if there's a 10 percent chance of changing to one. So what is the most common mistake that investors make generally in the venture world or just generally investors see a common mistake buying at the wrong time selling at the wrong time. You know investing by analogy is a mistake in our business. So.
September 6 months ago you would say hey this X company is valued at so many billion. This other thing must be similar. More money is made by pioneering unchartered territory and thinking contrarian. And if somebody is a friend of yours at a cocktail party comes up to you and says look I have an extra hundred thousand dollars extra a million dollars. What should I do with it right now. Would you tell him not to put it in venture. What did you do. You ever get people asking these kind of questions at cocktail parties or. Well they they do. And I'm not a very good adviser on investing because we really in this other business of company building. You know we help on those Bell companies. A consequence of doing
that is making a lot of money. It's not directly trying to make more money because then you take all kinds of shortcuts which is which limits what what I would say is only do that in venture capital. If you have access to the best funds. The difference between good investors really good venture investors and not so good investors is very large much larger than you might see in private equity or real estate or some other area. So you would prefer the business you're in to be not called venture investing but company building. If you look at our Web site I don't call
it venture capital I call it. In fact I've never in 40 years doing this card myself a venture capitalist. I say I'm a venture assistant.