Bloomberg Wealth: Vinod Khosla

We help entrepreneurs build companies. The consequence of doing that is making a lot of money. I don't mind a 90% probability of failure if there's a 10% chance of changing the world. More money is made by pioneering uncharted territory and thinking contrarian.

Vinod Khosla grew up in India, removed from technology.

I never even had a television or telephone at home.

Inspired by the story of Andy Grove, a Hungarian immigrant who ran Intel in Silicon Valley, Khosla headed to America to study at Carnegie Mellon and Stanford Business School.

I was completely wed to this idea of following Andy Grove's footsteps and starting a company.

Khosla made his first fortune by co-founding Daisy Systems, and then soon thereafter Sun Microsystems.

I like to say my willingness to fail is what allows me to succeed.

In 1986, Khosla joined Kleiner Perkins and became a prolific venture investor overseeing blockbuster bets, including a $3 to $4 million investment in Juniper, which returned $7 billion in profits.

So it's about these outliers and about having the optimism to go after them and then the courage to stay with it, not sell it.

Now at his own firm, Khosla Ventures, he is strictly focused on investing in technology with a large societal impact.

It was sort 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 is the skill set?

You know, the skill set is one of first optimism. I always say skeptics never did the impossible, and venture is about those very large, outsized, implausible ones. It's so— it's about optimism, but with a healthy dose of paranoia. Few people recognize that most venture funds, if they make 50 investments, 1 or 2 or 3 at most will account for 90% of the returns. So you're really looking for very heavy tail risk. I, I'd 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 5 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 2,400x the money.

What was that deal?

That was a company called Juniper, and it was a classic. None of the telecommunications carriers— and this is how venture works— believed the internet was going to be important in 1996. So nobody, including established players like Cisco, wanted to build equipment for the internet.

What did your investors say with that?

Well, investors obviously are very happy. But, you know, I spent 20 years at Kleiner before I started my own firm. 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, we invested in Amazon. Nobody could say a bookseller could be that large or the search engine business could be that large or Juniper, which was the networking company, could be that large. So it's about these outliers and about having the optimism to go after them and then the courage to stay with it, not sell it.

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 a spreadsheet. So we may be the only venture investment firm where we don't even allow calculating an IRR on an investment.

Now, sometimes some venture capitalists say, I really back the entrepreneur. The idea may not be that great, but the entrepreneur is great. Some say, I got to find a compelling idea and I can always get a new CEO. What is your perspective on that?

But between those two, I definitely pick the entrepreneur. You know, if you have the wrong plan, a great entrepreneur 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 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, are they in the right marketplace? Because if it's a large marketplace, then the entrepreneur who can find his way, or build the team that can help the entrepreneur find his way, and team building is one of the key characteristics of an entrepreneur, 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 decide— did you have a unanimous vote? Any one partner can push a deal through? And how long does it take to actually go from approval to meeting somebody to the approval process?

Those questions are highly variable, and every venture firm is different. At Kleiner, we went through a number of models of, do you need unanimous vote? Do you need one person only? At Vinod Khosla Ventures, 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's buying into it, but everybody else is skeptical. And the nature of most things is skeptical. Yeah, if, if you imagine Square as a 4-person company and you say, well, it has this $10 hardware dongle you attach to the iPhone audio jack and that's going to be a big business— extremely implausible.

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. He said, this is my next company. And I said, geez, you really think that's going to make it? And he told me what the valuation was 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 4 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 of 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, the way 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 a Google, it's, it's a great valuation. I'm sure I would think it'd come back, but it's a 20-some percent growth company. Not a 50% growth company. The early stages of much— most venture, 30-40% would be considered low growth. When you're in that 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 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 5 years, we will see a decline in returns. Not for everybody. The good firms continue to be disciplined about valuations. But I do think in general for the industry, we'll see a decline. The best firms will still do well.

So Khosla Ventures will do OK?

I hope so. We have to earn our keep. I think most people in America don't realize how good they have it. Even as a foreigner with a funny accent at 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's Sundar Pichai, Microsoft's Satya Nadella, IBM's Arvind Krishna, Micron Technologies' Sanjay Mehrotra, and that's just the start. Add in the chief executives of Adobe, Deloitte, Gap, VMware, and that doesn't count Indians running companies all over the world. Why have so many Indians risen to the top? Vinod Khosla 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 H-1B 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 sent so many people here and they've succeeded so well? And is there an India 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 most of it is informal. And it's a pretty great diaspora. You know, many of the India technology companies run by people of Indian origin. But 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, 40 or 50% of the startups in Silicon Valley have immigrant co-founders. Playing a significant role. That has helped the US a lot stay ahead in technology and some of the 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 old 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 gone to college yet?

No, I hadn't gone to college, so I decided I wanted to go to engineering school, went to engineering school in India, one of the IITs 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 after you got your degree, did your parents say, your family say, "Come back to India," or 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, a technology company in India. It's a very foreign concept. In fact, I think most people in America don't realize how good they have it. Even as a foreigner with a funny accent at 25, people would give me money with a handshake and say, go start the 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 wed 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 focused on design and architecture. But John Doerr, who was on my board and investor in Sun, talked me into joining Kleiner, where I then spent 20 years there.

You finished at Kleiner after 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 Khosla Ventures has done is about every 3 years, there's a new area that other people in the venture business are not investing in that we start. So climate was very early in 2006 through 2009. We started that when few people were investing. After that, we did food, Impossible Foods. We did financial services like Square, Stripe, and Affirm, which people weren't doing back then. We've talked about the Square story. After that came AI and robotics. We were one of the first people in digital health. So we are now doing construction with radical technology changes, or transportation. One of my favorites, we are doing Mach 5 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 tech among— we were one of the early firms to start investing in climate technologies. Those as a whole have worked out. So QuantumScape's worth $5 billion, was worth $10 billion before, worked out. You know, one of those can return the whole fund.

What about crypto and blockchain?

So most of our investments in crypto have been where they affect everyday life, things people would recognize. Could you build better financial services? Square's very big on crypto. Could you build a better telecommunications network? And the Helium token and the Helium network does that. So 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 most partners in venture firms haven't earned the right to advise an entrepreneur. They can give them money, but money is the smaller part of the equation.

Suppose somebody is watching this and they say, I want to be the next Vinod Khosla. I want to be a venture investor. What would you say that he or she should do? Get an 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 background. And the fact that so many Indians do has really made a big difference there. By and large, I tell 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 firm. One of my beefs is most partners in venture firms haven't earned the right to advise an entrepreneur. 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 it's 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 done. I'm always the largest investor in our funds. And I think of that as the principal vehicle.

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 things. One, my relationship with my kids and how they've grown up. The other thing I feel really good about is, fortunately, it's sort of— I've sort of become a role model to many young Indians coming up in India, and I constantly get emails from them saying how they're 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 be, and I'm pretty proud of that.

Suppose the President of the United States called you up and said, "We need to have more technology knowledge in the government, and Vinod, you should come in and be my special advisor on technology." What would you say to any President of the United States?

I'm probably not very good for DC. I probably don't fit in. I'm probably too direct and I'm not very politically—

You do have a reputation for being direct. And where did that come from? You just don't really like to kind of be mealy-mouthed. You say, this is what I really think. And does that sometimes offend people or not?

There's a Stanford professor called Sam Harris who wrote a great book called Lying. 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 our fund, I put on our website, we prefer Brutal honesty to hypocritical politeness, because once you get the 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 are wrong, or you can—

I hate to ask you what you think of this interview then. I better not get an answer then. Okay, 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 reduced risk, but at the expense of making the consequences of success relatively inconsequential. You might make 2 times your money or something. I For our business, what works is I don't mind a 90% probability of failure if there's a 10% chance of changing the world.

So what is the most common mistake that investors make generally in the venture world or just generally investors? You 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. You know, so 6 months ago, people would say, hey, this X company is valued at so many billion. This other thing must be similar. More money is made by pioneering uncharted 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 $100,000, extra million dollars. What should I do with it right now? Would you tell them not to put it in venture?

What are you—

Do you ever get people asking you these kind of questions at cocktail parties or—

Well, they do. And I'm not a very good advisor on investing because we're really in this other business of company building. You know, we help entrepreneurs build companies. The 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 areas.

So you would prefer the business you're in to be not called venture investing, but company building.

If you look at our website, I don't call it venture capital. I call it— in fact, I've never in 40 years doing this called myself a venture capitalist. I say I'm a venture assistant.