E37: The Vinod Khosla Interview

0:03Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. Today's guest likely needs no introduction to a listener of this podcast. Vinod talks about why Kuzla's approach is different than most funds and discusses his contrarian thesis in AI, biotech, robotics, crypto, and more. Without further ado, let's dive in. Well, Vinod, thank you so much for coming on the podcast. Sure. Happy to be here. Vinod, this has been a big year for you. OpenAI has done tremendously well. You've rehired Keith Raboy at KOSLA, and you've done a massive, massive fundraise.

0:44But before talking about the where we are today and where we're going in the future, first, I just want to have you reflect a little bit. It's 20 years since you founded the firm. Can you tell us a little bit about the evolution of the firm? Is this something you could have predicted where you are today? Talk a bit about the different phases that the firm has undergone. You know, the firm hasn't changed very much. So the two people who joined me in 2006, David Wyden and Samir Call, as senior people, have been there since then. And since the very, you know, other than the first two years when I was operating as a sole investor, the people are the same, David and Samir.

1:31Sven joined about a dozen years ago. He's still there and Keith joined recently, but he joined before. So the team has been roughly the same team for a very long time. Our mission's the same. We are a little bit different and I think this is why I think we are a little bit resilient. We're less in the investing business, I always say we are not investors. We are much more venture assistants to companies, helping build companies. And frankly, it sort of pains me when entrepreneurs don't realize the difference. Just yesterday at two meetings, the CEO of one of our companies showed four people in Portugal trying to implement his PhD thesis.

2:28Did, I forget if I remember the right numbers, like 22 was 27 million in revenue. 20 was like less than one. 22 was 27. 23 was like 75. And these are just rough. and this year expects 165. And we had dinner and a strategic conversation about 2027 and 28. And we had these dinners, and he flew out from Portugal just for the dinner. Poor guy landed it just before the dinner and left on a red eye to customer meetings in Boston. But he said he just would fly out any time. I'm willing to have dinner because the discussion is so different than with his other investors. They're not like bad investors, just it's different.

3:29And the kind of strategic thinking about the future, strategic thinking about staffing. So that's what we focus on at one end, which is how we operate, why we call it venture assistance. I've had so many companies change strategies or hire a pivotal person or build a strategic relationship. That's different than what most venture people do. And frankly, most venture people haven't built enough companies themselves to earn the right to advise an entrepreneur on these things. So I don't go to board meetings because I see such terrible advice being dispensed mostly. that I don't even go to board meetings.

4:14So that's one aspect. The other aspect, which is also very different, is everybody in the firm is there because they care about the mission we are on. Much more care about, you know, when you, if you look at 2004 when I left Kleiner, and I stayed in the Kleiner offices for two years, so I operated my venture firm from within the Kleiner offices. They were kind enough. In fact, when Samir joined me and then later David joined me, they gave them all offices. So then we got too big and they kicked us out. But our focus was science experiments, science and technology making a large impact, not the highest IRR.

5:02You know, we have to earn enough of an IRR, but it lets us do these really fun times. And a Samir or a Sven will say they're here for life, whether I pay them or not. Because they care about what we are doing, it's not a business. It's fun. So those things between our approach of venture assistance and our approach of working on really interesting problems with large technical solutions is different than most firms. How that leads to what you started with, which is OpenAI. In 2018, my conversation with Sam, it was 2018, five years ago. Nobody believed this was a business. It was still a science project.

5:57This odd, structured nonprofit. People worried about that. I said, if we can make AI happen, it's so great for the planet, we're going all in. By the way, about the same year, we invest in fusion, Commonwealth fusion systems, because that would be also huge for the planet. And so we take on these very large, impactful things. And if you build a large business, it's hard to not make money in the process. So you focus on building large businesses and you focus on large, impactful things. And the money takes care of itself. You know, my favorite book is Bill Walsh's book, if you haven't read it, called The Score Takes Care of Itself.

6:50You don't win or lose games. You prepare for the games in the right way, work the right way in practice. And the score, it does take care of itself. And the score is statistical. You win some, lose some. But statistically, if you're better prepared and have a better team, you'll win more than you lose. And that's sort of very much our approach. Because you're betting on the future, how do you make sure that you're not too early? Because being too early can be as bad as being just incorrect. I don't care. I don't care. We'll stick with it. You know, look, aviation fuels, Lonza Tech, we did that in 2008 or something.

7:31They're now producing aviation fuel. We know aviation fuel is a multi-hundred billion dollar, if not a trillion dollar business. There aren't a lot of sustainable solutions. So we worked on it, and it took forever. But, you know, when we invest in Fusion in 2018, I didn't know what timeframes would work. There was no plan to have a product before 2030s, early 2030s. That was 2018. But, you know, to build something significant takes a lot of effort and a lot of ups and downs. And it's important to realize if you're building something significant, that's what it takes. When we do a GitLab, when you do a Square or an Affirm or a Stripe, we invest in Square, Stripe and Affirm.

8:26We still mostly have a lot of those shares. We didn't sort of look at liquidity and cashing out. It's a different approach. Are you building something important over the long term? Stay with it. You know, I still own a bunch of my Google stock from the 1998 IPO. Right? So are you transactional? Do you buy and sell stock? There isn't a single stock I bought and sold, the same stock, in the last 10, 15 years. I just don't trade. Right? I sort of do things I believe in and stay with it. It's a little bit more of the Warren Buffett-like. Believe where the markets are. Believe where others are not going.

9:15Focus on that. To that end, say more about the green tech or climate 1.0. Some people see it as a failure. I think you have more nuanced perspective on it. When you talk about that time period and where we're at today in climate. So if you look, you know, we did QuantumScape. It's worth multiple billions today. We did LanzaTech. It's worth multiple billions today. There's multiple companies. Some we sold in solar and other areas. We sold two battery company quite profitably. They stuck with QuantumScape as the long back. So it wasn't as great a return as if the market had been exuberant. But even in the crummy markets, we did fine and had decent returns in that fund.

10:13So, but mostly because we stayed with it. If I tried to cash out of everything by 2011 or 2012 when things were in a funk, we wouldn't have made money. But to us, Cleantech 1.0 was reasonably successful and set us up. Look, we have the best solid-state battery company in the planet. We have the best sustainable aviation fuel company in the planet. We are the best cement company in Fortara. We'll be announcing the largest direct carbon capture facility in the United States later in March or April, a plant in Redding, California. I could go on. Those are both worth doing in very large markets. And they worked out financially well for us because we stayed with them.

11:13We want market timing for sure. Yeah, it's interesting. In the crypto space, you see a lot of people get in when there's a lot of hype, but then they get in at the wrong time and it all crashes. And then they leave when it's the wrong time to leave and then they miss out on the boon. Here's the philosophy, whether you're a venture firm or an entrepreneur. You have to bet on something that you believe in that the market doesn't believe in. and then stick with it through the ups and downs. For God's sake, I invested in a public transit system. I believe in 25 years, we can replace most cars in most cities.

11:56That sounds totally ridiculous. Investing to a venture firm, investing in public transit sounds silly. The first two contracts that we were not invited to bid, that we bid on, we won outright. and we are building a public transit system from San Jose Airport to the new Google campus to the Apple campus. We are building one in the East Bay from the Concord Bot Station all the way to Antioch, Concord, Brentford, Pittsburgh, I forget the four cities. You have to do contrarian things. Fusion was contrarian when we bet on it. OpenAI was contrarian. We have other contrarian, hugely contrarian bets in AI, even today.

12:47What's contrarian in AI today? Well, what comes after transformers or LLMs? There are new approaches that will be complementary but significant and as important if the thesis is right. And the thesis could be wrong. For example, I'm a huge believer in neurosymbolic computing. I'm a huge believer in probabilistic. I believe they will add significant capability to LLMs. I'm trying it. You were writing about AI in 2011 or 2012, more than a decade before everyone else was catching on to it. What's something that you've been writing about today or in the last couple of years that is also people just aren't taking seriously yet, that in 10 years from now, people will be talking about just like you're talking about AI today?

13:42Yeah. So in 2011, 2012, I wrote about do we need doctors? Do we need teachers? There's AI doctor, AI tutor. But if you go back just to correct history, in the year 2000, there's an interview with me in the New York Times that said, when we get AI, we will need to redefine what it means to be human. That's a quote from a 2000 interview. So I've been a long-time believer. I didn't invest in AI between 2000 and 2010, but I tracked it pretty closely. In 2012, I started closing it. My first deep learning investment was in 2014. We did some others. In 2018, we invested in OpenAI. Now, some of these other approaches are things, I mean, I should say the right answer is investigating.

14:43Right? But small bets, a million here, two million there, and looking at all the alternative approaches. Carl Friston has had a theory of the brain around energy minimization. We invested in that idea just a million bucks six years ago. Didn't work. We'll look at it again. We'll look at symbolic, neurosymbolic computing. That's what Rabbit is doing, by the way, with agents. It's rather suddenly gotten popular. We invested a while ago, a year ago. So that's an example of something we are doing. We have similar theses in biotech. We have similar theses in robotics. And so looking at what others aren't looking at is how you make money and sticking with it because you can't predict timing of some of these things.

15:42Yeah. How have you approached crypto and what are your thoughts on, could you see yourself going big in that sector or unlikely? So we've approached crypto pretty differently than everybody else. We don't, most crypto investing is crypto for crypto, the crypto world, right? Tools for crypto, trading in crypto, those kinds of things. I look at the real world uses of crypto. So Helium is a good example. They're building a 5G network to compete with AT &T using crypto. That's a really good use of crypto. We've invested in that. We have a huge bet in WorldCoin. Why global ID is not related to crypto.

16:33Global ID is related to a societal need, especially as fraud and other things go up on the Internet. And that coin has been exploding because of SORA. And people now think fraud will go up and so we'll need ID. But we invest in that because a human ID was an important requirement. And so we invest in that. We invested in Bitwise because it's one of the larger ETFs now, because Wall Street would want to use it for trading, not crypto traders in China. But we've stayed away from anything that might be crypto for bad uses, you know, gun trading, child trading, drugs, you know. So we stay pretty much on the clear, we want to be regulatory compliant in that side and have real world applications of crypto, which I think is the proper use of crypto.

17:44There is money to be made in other stuff and more money to be made, but I'm less interested in making that money. on speculation and other things than timing and getting in and out. Hey, we'll continue our interview in a moment after a word from our sponsors. I want to return to your idea of venture assistance and ask you to think about how you've structured your team to deliver the best assistance possible to entrepreneurs, both in terms of what type of people that you look for, what sort of recruiting lessons you've learned over time, but then also how you just think about team construction.

18:21i.e. the best use of your fees to best structure the team so that you could best serve entrepreneurs? Because lots of firms do it very differently. Yeah. So first, why did Keith come back? That's a good place to start. Because he likes working with entrepreneurs. And nothing wrong with Founders Fund. It's a very good fund. They've had a stellar track record. But they're hands off. Right? They invest and then they let the entrepreneurs be.

18:54Keith is much more hands-on. In fact, he was one of the founders of Opendoor. He started companies of his own. He was early in Square. Before that, he worked for Max Lepchin at a company we had invested in that got sold to Google. We had a long relationship with Keith, but he's an operator. And so he can help an entrepreneur very differently than a board member from an investing firm. You watch his interviews. He has nuanced understanding of what an entrepreneur goes through. And I was just talking to my old chief of staff yesterday. He was chief of staff for three years, which is a typical assignment for my chief of staff.

19:44and then I helped them start a company. He started a company. And he said, he didn't understand what I meant when I said, you don't have empathy for entrepreneurs till you've gone through the ups and downs of starting a company. And I feel like I have better empathy. And that doesn't mean I'm nice to entrepreneurs. It doesn't. I treat them like my kids. Some things I agree, some things I disagree and I push them on, but I want them to succeed just like I want my kids to succeed. If I say yes to everything, like a lot of firms do to entrepreneurs, it is bad for them. It is truly bad if you just try and be their friend and say yes to everything instead of giving them the honest truth.

20:34Tell them, here's a problem they'll run into in two or three years. You know, we had a company called PolyAI doing extremely well in the UK, does customer service with voice AI. I had to push them a while ago to say LLMs are important. Switch. Because they already had a functioning system, they had customers. And the founder swears by if I hadn't pushed him, he would never have done it and it'd be too late by now. So the company got saved because of a strategic discussion. Then I pushed him on hiring certain types of people. First time entrepreneur, in retrospect, he loves the fact that I push him, and he's much bigger and more successful than he would have been.

21:28And that's what I call venture assistance. Keith came back because he loves doing that. and can help entrepreneurs. You know, if a typical VC tries to do that, they've not built multiple billion-dollar companies with founders. They haven't gone through the downs a founder goes through. It's very hard for them to give relevant advice. In fact, I found it so frustrating to watch the bad advice dispatched by board members. I stopped going to board meetings. I generally don't go to board meetings anymore. I'll do one-on-ones with the founders and try and help them. And that's why I say most VCs act negative value.

22:13You know, we just had a company called Robin Go Under, scribing for physician offices. Three years ago, I invested, and I said, I'll invest, help you look at AI to do scribing. their board focused just on revenue, not on building the tools to have a comparative cost structure. So guess what happened? Four years later, they had revenue and zero margin. So they actually came back to me and said, will you take the lead here and do a technology insertion? But it was too late. It was too late in a business that would have been a phenomenal business. And that's one that didn't take my advice because the board was focused on revenue.

23:09What are other examples of advice that may look like okay advice to other people, but looks like bad advice to you? Well, I'll tell you my dinner last night with the founder of Soad. You know, they're a substantial size company. and, you know, they should be prepping to go public sometime in the next couple of years and all that. And boards do that. And I said to him, if you show profitability, you're admitting you have no great investment opportunities. Think about it. Profitability, I said, be close enough to cash flow break even. you never need to depend on outside capital. That's really good advice.

23:56But maximizing profitability is an admission of guilt that you don't have great investment opportunities. And if you're looking at 2024 or 2025, yes, you can optimize profitability at the expense of products and services that might cause you to grow faster in 26 and 27. So I said, set 27 in your goal. Maximize growth and even profitability by that time frame. But don't focus on this year or next. And don't admit you don't have opportunities to invest another 10 here or 20 million there. And a good example, you know, he added a service called Bloom. Two years ago, we had a dinner similar to this.

24:50and I said, you've got to look past your basic business, which is growing very rapidly, to what comes next. If you'd focus on profitability, you wouldn't have invested. It's about 20 % of his business to a year and a half after launch. By the way, same thing happened to Square Cash. The general board advice on Square Cash was focus. You're a small business company, not a consumer company. Square Cash is consumer. It's most of their market cap today. But the board wanted to give sensible advice of focus, which is really bad advice most of the time. Of course, focus and lack of focus is a very nuanced thing.

25:30You can't say don't be focused. That's bad advice. You can't say be focused. It's nuanced. And that's what I mean by venture assistance and why this is so much fun and hopefully so much more valuable for entrepreneurs. And that's why I think founder VCs are so much better off in their ability to advise an entrepreneur because they've gone through the experience. So if you're an entrepreneur, besides looking for someone who's built a company before, how else are you determining who to take advice from? And similarly, when you're looking to hire partners, there are a lot of people who've built big companies before.

26:09Or how are you determining which of the ones would be great assistance entrepreneurs versus not? I tell founders, look at how many billion dollar companies has somebody helped build. From scratch, not join Google or Facebook and take a business internally. That's not entrepreneurship. You don't have to worry about your paycheck. When you worry about your paycheck and when you can't hire somebody because you're going to convince them to drop a big paycheck at Google Meta, and come to you and you feel guilty about that because you're not sure you can get your next financing together, that's pain.

26:52That's when you learn empathy for entrepreneurs.

27:00So I think what I tell people is who's gone through building that? Who's gone through assembling teams that are unusual? So if you look at a simple fact, I've done innovation only for 40 years. I can't think of one example of large innovation that came from an existing company or from somebody who knew the area. I would submit if Elon Musk had been in the auto industry, Tesla would never be born and the world wouldn't be on an electric car path today. Same thing. If Brian Chesky had worked at Hilton, he'd never do Airbnb. So you want to be outside your domain. And most board members advise get somebody who understands the domain as a CEO.

27:56That's really bad advice generally. You want somebody who can think from first principles and learn the business rapidly in six months. and be much better off than somebody who's been in the business for 20 years. You look for completely different characteristics in a hire if you really, being an entrepreneur, understand what it takes. So you look at really great entrepreneurs like, say, Patrick Collison and John Collison. They hire very differently than somebody who's been in the industry for 30 years. from Bank of America, which is what most board prescribes. That's one small example. How to think about investment or profitability versus investment opportunities.

28:47I gave you that example. How to think about risk or burn rate and how to manage it. They're all nuanced things entrepreneurs learn or learn after the fact and say, I wish I'd known that. For example, your biotech practice, is that you getting smart on bio? Is that you hiring someone to lead that practice internally? Or how are you able to invest in these spaces that require a lot of domain expertise? It's both. You need a combination of some expertise. We have a great bio group. But we have an unusual bio group. Take digital health. We probably had the most successful companies in digital health.

29:32We knew nothing about digital health, but nobody did. And people who came from healthcare to do digital health generally failed at it. When you look back at running KOSLA and building this organization, you've done a lot of things tremendously well and have a lot of outcomes to show for it. But what are things you either wish you did differently or certain things you wish you did sooner that other entrepreneurs can learn from? You know, so I just want to give an elaboration, my last example. Digital health didn't exist. We did it differently. When we talk about cell therapy or cell engineering, we have deep expertise.

30:16You know, the founder of Intalia, the person who did the first gene therapy company, is on our team. They can help at a very different level. To your question, I say, if I look over the years, there's nobody in the venture business who's failed more often than I have failed. I've just tried many more times and screwed up more often than most people. Then a small, tiny percentage become the big visible successes. Right. So understanding even more starkly that venture is really asymmetric. So you don't want to take low risk. You want to take very high risk. When we invest. I assume we lost the money the day we invest.

31:09And then I maximize for the upside. I don't try and protect that investment. And even now, I fall back into this, hey, we got$20 million invested here. Let's, you know, sometimes play the safeguard. Venture is all about the upside opportunity. How do you make it asymmetric? So you can lose one times your money, but if you can make 50 times your money, one out of 10 or one out of 20 times, you'll do fine. And people don't understand what venture is. And I have to keep clarifying even to myself. We're not in investing business. We've not computed an IRR on investment last 10 years, ever, that I can think of.

31:58Maybe somebody has somewhere in our shop, but I discourage people from looking at computing IRRs. We are buying an option. So if I were to explain venture financially, we are buying an option, OpenAI and AI can be big. And we buy an option with a great team, and then you help them succeed. Same thing in fusion or public transit or a new kind of protein when we did impossible food. And why do you discourage that? So I call it option value investing is what we do, not IRR investing. And is the problem with IRR investing that it discourages risk-taking or you're too cautious? Absolutely. And it's deluding yourself because IRRs are not computable given the wide range of outcomes and timings.