Khosla Venture's Samir Kaul on building an iconic, durable firm, and the role of non-consensus decision making

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Khadji, and in this episode, we have a conversation with Samir Cowell from Kostla Ventures. Founded in 2004, Kostla is one of the largest and most well-known venture capital firms in the world, and led by legendary investor and entrepreneur Vinod Kostla. The firm is known for investing in companies that are solving very large and complex problems. The firm currently has over$15 billion in AUM and has invested in companies such as Square, DoorDash, Stripe, OpenAI, and Impossible Foods.

0:33During the episode, Samir provided his insights in investing across cycles, the market insanity that we saw pre-2022, and how they approached both building a firm and investing. We recorded this prior to the news that Keith Raboi was rejoining the firm, hence no mention of it during the discussion. Hope you enjoy the conversation, and let's get right to it. Samir Kaji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate.

1:14Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Samir, thanks for coming on today. Thank you for having me. So I want to start way back, actually, and go through your history of how you got into technology and venture. So maybe we can start with your background, working at Flagship, and then ultimately going to KV. I started my career as a scientist. And then after a few years of that, I went to business school where I met Newbarn as the founder of Flagship.

1:53And I joined force back in 2001, 2002. What I basically did with him was a little bit of investing in due diligence, but primarily finding academics with interesting technology and helping them commercialize it. And so we did a number of companies in therapeutics, diagnostics, and in kind of the tools market. Ultimately did one in renewable energy, which led me to Vinod. that Vinod was an investor with both his Kleiner and individual at, and three of the companies I started while at Flagship. When he left Kleiner and decided to start his own firm and focus on sustainability and renewable energy, in addition to traditional technology, but he hired, he said, let's join forces.

2:40We started the firm together, and I moved out to California in 2005, and the rest is history. Maybe we can go to the early days of KOSLA, And I'd love to hear from you, what were some of the strategic conversations you and Vinod and David had in terms of the type of firm you wanted to build, both from an investing standpoint, but also the overall operating ethos of the firm? Well, we always wanted to build a firm that was going to be technology heavy. We always felt like our edge would be our ability to evaluate technology, assess technical risk, prioritize technical risk, and have the appetite for risk that many others wouldn't have.

3:20That would be our differentiator as opposed to chasing the next fintech or social media or crypto deal where it affects the highest bid wins. And that works in bull markets like we had for about 10 years. We've lived through a lot of the tougher markets, dot com, 2008, etc. That doesn't hold forever. Technology is a sustainable long term advantage. That was what we wanted to focus on. We wanted to surround ourselves with investment professionals who were all technical, all had a real curiosity for technology. We wanted to provide industry-leading or top-decile returns, but we wanted to be proud of the companies that we invested in and felt like all companies should be society or mission positive while providing a return.

4:14We were going to also, unlike many firms, put a lot of our own money at risk. So, you know, we have always been our largest, our own largest LP. And so that was obviously from the beginning. As you, and this was during a time almost 20 years ago where, you know, now it seems like there's much more investing done in companies that have this intersection between science and technology. Some people call it deep tech. Of course, that term itself is a little bit amorphous. but you've been investing in things like sustainability, clean tech, really from the mid 2000s. When you think about some of the entrepreneurs that you're backing, obviously, in order to build a highly technical, defensible company, many of the entrepreneurs are people that are CS engineers, they're scientists.

5:04What do you look at when you are evaluating an entrepreneur to know if they are a KV type of entrepreneur and building the type of companies you're looking at back? What you want is someone that can take feedback well. We tend to be pretty direct. We're demanding. So you want someone that is going to run through walls to get the company successful, nimble on their feet. The only thing you can guarantee in life in startups is that the initial plan will not be the final business plan. They need to be great recruiters. The team you build is the company you build, and they have to be maniacal about retiring risk.

5:46And so you want to always lay out what are the binary risks to a company working or not, and as quickly as possible, retire those risks. You want to fail fast if you're going to fail. The worst companies are the ones that linger. You said something that I want to double click on, because I do think it goes to the overall ethos that you've created. So on the on the website, and I think I've heard you talk about I've heard Vinod talk about this, is that the concept of venture capital in terms of company building, so not just investing checks, but helping entrepreneurs build these long term companies that are built to last, requires a level of brutal honesty, versus hypocritical politics.

6:32And I think over the last decade, decade and a half, what we've seen is this concept of founder friendly being you do whatever the entrepreneur wants. You act as a cheerleader. And from what I've seen with Coastline, it is much more around let's be shareholder aligned. Let's build a company that's going to require some very tough conversation. How do you balance that level of tough conversation with this level of empathy that people are building really hard things and inherently within a startup, you're going to go through these ups and downs? People feel like you can't be founder friendly and tough.

7:10I actually think you can't be the opposite. You're not doing the founder a favor by letting them make mistakes or turning a blind eye when they're doing things that are wrong. you know the investors on we work's board weren't founder friendly to adam newman he got thrown out of his own fucking company because they allowed him to do a lot of silly things like build a sauna in his office or throw these crazy parties on the weekend or sell his own real estate like kind of you know inside baseball stuff but that didn't do this that wasn't made founder friendly the Company's not bankrupt. So just because they cheered on the person, that's not founder.

7:52That's hurting the founder. We're not tough on founders because we get our jollies by being tough. We're genuinely trying to help the founder build a great company. I have three kids. I let them know when they're making mistakes. And it's not because I want to be mean to them. It's because I love them. And you have to be honest and tough to make them better. Why would we get paid fees and carry if all we did was invest in a company, let the CEO, he or she do whatever the hell they wanted and have no input? Then we're like a hedge fund. We're just buying stock and selling stock. That's not what we do and that's not what we get paid to do.

8:28Now, we're pretty open about it because entrepreneurs should know what they're getting into when they work with us. If they want cheerleaders, there's plenty of firms they can go to. If they want someone that's going to be there Saturday night at midnight or jump on a red eye to go help recruit someone or close some sales deal, they'll come to us. So when you think about this, and I completely agree with everything you said, I think during the peak time of Zerp, everyone felt like in order to win deals, you had to be a certain way with founders to be able to get that high NPS score. I think that the more mature founders, the ones that have been around the block actually like somebody that is going to act as a real sounding board, is going to challenge certain hypotheses and help them build businesses.

9:17You talk about this on the website. Obviously, you let founders know what they're getting into when they take an investment from CoSlot. But oftentimes, you have an entire board around with other VCs that might have a different way of interfacing. So how does this manifest actually with the day-to-day with an entrepreneur, whether you're talking to a one-on-one or even within the dynamics of a boardroom when you have other VCs that might simply act as cheerleaders or simply lack the experience that you have in providing credible feedback to the entrepreneur? Well, in a broader word setting, it's hard to give that kind of feedback and be effective.

9:54I tend to save a lot of the toughest participants at the boardroom. I'm not going to shy away from it, but the dynamics there are different. You want to be careful. A lot of other VCs like to position us as the bad guys. So they'll stare at their shoes when there's something obvious that needs to be discussed at the boardroom. look the good ceos want to be told look the very good ceos could probably sell fund all their companies the reason why they take money is they want to help they want help and they want a sounding board they want people to give them advice and it's and if you look at the ceos in our portfolio the max lepchin's sam altman's the jack dorsey's you know these people have chosen no secret how we are to work with they've chosen to work with us multiple times time and time again because they appreciate the feedback and they're strong enough to know which things to listen to which things to discount and they want to be told because they want to get better that's pretty clear and in boardrooms i often find myself defending the ceo or than anybody else you know hey look let the person let he or she spend money on r &d uh it's okay they miss their sales number you know the goals are ambitious the prize is still there those kind of things like i usually end up being the biggest champion the irony is right in a more public setting i tend to be more of the champion look look at look at um the open ai drama right who was tweeting more in support of Sam Altman than Vinod.

11:31So at a public setting, we tend to be the biggest supporters of our CEOs, and they know we have their back. But one-on-one is what I say my toughest principle. We're not looking for an audience. Yeah, I'm glad you brought up some of those examples. And as we think about support of entrepreneurs, Vinod, for example, has been very publicly supportive of Sam through the entire OpenAI ordeal, which lasted about a week, actually. Thinking, I guess, maybe beyond that for a second, you've been around for 20 years now in this firm, and the venture market during that time has changed. And there have been a lot of people that have done well because of interest rates and the tailwinds that we saw.

12:20And the notion of founder-friendly, of course, as you mentioned, changed over time. One question I have, I guess, for you, just kind of zooming out, is how have you seen the evolution of venture during the time that Kostla has existed? And how has it potentially impacted how you work with founders and what you do in terms of creating these competitive edges? Well, I need dips who have made money in the last 10 years with zero interest rates. There are a lot of people who are riding high. And now, I think our LP spoke, we raised the largest fund we've ever raised. in a time where most VCs are condensing or going out of business because I think people love the venture asset class.

13:02They see that this is a great time to invest because prices are finally coming to reality in most cases. There's still some sectors who I think are pretty frothy. And we've been around the block. We've been there through dot-com, through 2008, through COVID, through all these things. We've seen really tough days. We've got to navigate it. A lot of these newer firms and even partners who are newer partners at established firms, I'm seeing it in boardrooms are, you know, like deer with their headlights because they don't know. They've not seen an inability to raise money. They've not seen the need to do 30, 40 percent rifts and layoffs.

13:42You know, they've not seen deadholders coming after them for breaking covenants. For a few years in there, we weren't that popular with some of our entrepreneurs because we were still trying to enforce discipline, not have crazy expenditures, and stay relatively out of the, you know, not over PR. Because we knew that eventually, frankly, it took longer for the doomsday to come than I thought it would, but it stayed. And now those CEOs are spending a lot more time with us because they know that we have the experience. It's not to say that there are a lot of other VCs that are out there that have had that experience.

14:20The guys at Andreessen or Sequoia, General Catalyst, and many others have been through all these ups and downs also. But we're definitely in the minority now. There's probably a dozen or so groups that have leadership who have been through tough times. A lot of the newer firms, I think, are going to struggle because it's hard. The first time, the first crises I experienced in this business was terrifying. Now you could be a little bit more even keeled. You don't want to overpanic. You don't want to overcut. You don't want to sell everything under the sun. You've got to be disabled. And you need to prioritize.

14:56You have a fixed closed-end fund. So you only have X number of dollars as reserves. So every company is not going to get reserves. Many companies that probably deserve a shot just aren't going to get there. Now the trick is how do you sell companies that don't meet the bar for getting further investment from you? And how do you pick the companies that are going to get more money and optimize those investments? And that's another thing is that you need to be realistic of what the right valuations is. The more experienced VCs don't care about some artificial vanity mark on your books. They want the company to be marked for success.

15:40So there's upside. So employees get upside. And that's another thing. A lot of VCs want to go out and try to raise other funds, and they're scared to mark down their investments. And that's, again, very short-sighted. I completely agree with that. And we certainly saw that in the 2010s, where because of the capital abundancy in the market, and the number of people willing to mark up companies, especially larger crossover funds, funds were able to mark up deals. And as a result, we're able to use those marks to raise subsequent funds and bigger funds. And of course, now everything's unwound. The two areas that seem somewhat insulated from the reset that we've seen over the last two years are seed stage financing and also anything that relates to AI.

16:27And of course, the discussion generally is around generative AI and the potential impact to enterprises and consumers in the future. And since you've been an investor, you were an early investor in OpenAI, have tracked AI, as well as some of the last technology super cycles, whether it be mobile cloud, the internet, wanted to get your take on how you compare the potential of the AI super cycle relative to some of the tech super cycles of the past. or it'll be bigger than anything that's been done before. But there's not like an AI company. Any company, even pharmaceutical companies or companies that you wouldn't think would incorporate wouldn't come to the tip of your tongue if you think about AI.

17:10AI is going to become like software or the internet or mobile or the iPhone. Unless a company has incorporated AI in whatever they do, supply chain, manufacturing, et cetera, et cetera, they will be left behind. That is clear. But if someone says, oh, I'm doing an AI company, that's probably just marketing bullshit. You should run away. If you've got someone that isn't incorporating AI in their short to near-term plan, I would run away. It's going to be a pervasive technology across law verticals. The valuations in AI right now are super high for the most part. There are some that are warranted and justified, but some are very, very high and are just following on.

17:51But if OpenAI is worth$86 million, we're worth 10 % of that, 5 % of that. Those are always kind of a fool's rush, right? Like a fool's error to do analysis like that. But that's how a lot of companies are getting valued right now. We've seen this in.com. We saw it in crypto. We saw it in clean tech. You have the version 1.0 where there's a lot of aduberance and a lot of disappointment. and then version 2.0 is much more robust and people learn their lessons you started in 99 so you'll know that the e-toys the etch.com volume, volume, volume despite the fact that every transaction was unprofitable was all the craves and if people left.com for debt I remember in 2002 I graduated with school, people were like wow the internet there's no more tech investing it's dead, blah blah blah and then you have Facebook Uber, Airbnb, Strikes, Square, DoorDash, you name it on and on.

18:54Probably the most richest, most lucrative part of venture capital was in tech 2.0. You're seeing that, you mentioned seed rounds are insulated because it's not that much money and not that much dilution. And seed checks, the funnel is just more. A lot of people can write a$50 ,000 check. the other area that we're seeing a lot of lifted valuation is in the sustainability area i lift through 1.0 i have all the scars on my back you've had some successes like lots of tech and tesla and but there were definitely some successes but for the most part it was you know at least 80 90 failed now you've got version 2.0 and people have learned a lot of the lessons you know that don't be dependent on subsidy.

19:41Be clever on capital allocation. Focus on the founder. Don't hire executives for portfolio or Shell or Exxon. We've learned a lot of that. Incorporated that. I'm really excited about that area. So my bet is that AI will go through the same thing. I think it'll be a quicker cycle. You'll have a bunch of companies that fail. You've already started to see some companies stumble. We'll see more of that. And then you'll see a second wave come that will be very powerful. So aside from OpenAI, we're the first PC investor. Most of our investing in kind of AI companies are what's next? What's next after LLS?

20:24What are some specific applications? Maybe it's in healthcare. Maybe it's in financial services. Maybe it's in legal services. Where can AI play a real role in more shorter or longer term and start investing in those areas right now? and stayed away from kind of the multi-billion dollar valuation mega growth round it would really with very few exceptions you stay away from those rounds and passed on a lot of those companies a lot of them are pretty good companies good teams but just we need better ways to deploy capital one of the things i do want to unpack a little bit more is something you alluded to so thinking back in 97 98 99 actually companies like pets.com or even Webvan.

21:07At the time, the infrastructure, the adoption wasn't there to sustain those companies. The distribution was there, of course. Webvan, ultimately now we have Instacart, right? It's good to bring that up because we invested a million bucks in Instacart for 10 % of the company. And the reason why Portiva had struggled to raise money at a better price was everyone kept bringing up Webvan. And it was still early days of the iPhone. But remember, you and I are old enough. WebFam was you got home, you wanted your dial-up AOL modem. You had a shitty user interface and you ordered groceries that took forever to get there.

21:42Instacart, you get your Uber on the way home, you press a few buttons and the ship's there by the time you get home. Very different. But you had to make that technical leap. Back then when Instacart started, people were still scared to put their credit card online. You had to make the leap that everyone was going to have an iPhone. WebFam was going to be more pervasive and faster, people would be very comfortable doing all commerce on their phone, and that people would figure out the delivery infrastructure, 1099 workers, all that stuff would all work, and people would do that. It's obvious now, but back then it wasn't, or we wouldn't have been able to own such a big chunk of the company for a small amount of money.

22:24Of course, that's the fundamental nature of being a successful VC, of seeing in the future and not being tethered to what has happened in the past, understanding that biases that may exist from past failures simply may not provide the map to the future territory. So a great example, but maybe going back to AI for a second, in particular, going back to the hypothesis of when you invested in open AI. At that time, it wasn't really in the public eye, generative AI, there was no chat GPT-3 people were using. But what did you see as you looked into the future that got you so excited about the opportunity?

23:00It was pretty simple. It did. And the firm has been pushing AI and thinking about what AI could do for a long time. So that's one. So anything, so probably very early days, we were looking at that area. And then second, more important than an idea or even the technology, at least to me, is the quality of the entrepreneur. And look, Sam Altman's a once-in-a-generation entrepreneur. There's not many people like Sam. There aren't many. He's super smart, very mission-driven. hard working, recruits well, raise money well. We would have invested in anything Sam was doing. I mean, case in point,$50 million, our single biggest check, first check ever, into a company that was actually structured as a non-profit.

23:42There's less than five people on the planet that we would have done that for. Sam happened to be one of them. So it really wasn't more complicated than that. Now that you mentioned things that you're looking at in the future, so it's the next generation of AI, the next generation of sustainability, startups, How do you know, because ultimately you want to invest before things become evident, but not too far in advance, i.e. the web van, the pets.com. What are the markers of timing when you're looking at things to invest in companies that are building for this future you believe in, but not something that might be 10 years away?

24:19So I don't think 10 years is too far. You know, we incubated QuantumScape 12 years ago, and, you know, they're a public company. You can read their reports on what their schedule is. I don't think that's too far. I think WebBand was early, but they spent too much money. But if the prize is big enough, I mean, we're investing in nuclear fusion, you know, which won't have a real commercial reactor until 2030. If the prize is big enough, the timeline is fine to be 10 years, 15 years, 20 years. but you need to spend you need to spend against that time so you can't spend it if you're going to be a commercial entity in two years if it's going to take you 10 years which should be doing this and and remember that's another reason why we like these some of these companies is that if the market is huge and the technology advantage is big enough you can wait you don't need to rush to market.

25:13While you're developing the technology, the burn rate, which is the most critical thing, is very controlled. $250 ,000 per year fully loaded per engineer. That's not going to change. That's what your burn rate is. What's unpredictable is when you go to market. So how many salespeople do you need? What's the quota? How long does it take them to spin up a salesperson? What's the sales cycle? What's the cost of customer acquisition? What's the retention rating those are all only knowable once you're in market so me personally i'd rather wait two years to enter a market with a clearly superior product versus a product that's just slightly better where i'm taking all that unknowable risk because i'll take the knowable risk of what the burden range is going to be and so if something is delayed which it almost always is i know okay i have a hundred engineers working on it that's 25 million bucks when i raise money when I look at my balance sheet and say, what's the minimum threshold I can hit before I need to put more money on the balance sheet?

26:16I know what the costs are. Where it starts to get scary is something like, people say, oh, well, you know, Claytech, it's super capital intensive. I mean, how much money have enterprise software companies raised? I mean, look at the history of Salesforce, Facebook, companies have raised a snowflake, billions of dollars for markets that aren't nearly as big as electricity or electric vehicles or you know these things the difference is you have this false sense of comfort that you don't need to raise that much money to get to a million euro or five million euro and that's true but your upside is also much lower for a crm company or hr tech company and most likely you're going to fire which is fine but the TAMs for nuclear fusion or plant-based foods or electric vehicles are just massive and so you can afford to wait until you got it right right and that's one of the the things that people have struggled with when they're thinking about these type of companies which yes there's a lot of technical risk but the TAMs are big the commercial application is big if they can solve and de-risk on the technical side.

27:31You have a natural moat because the amount of money and the time, you have a natural moat. It's not like someone coming quickly in Clubhouse or Cameo or some of these things where they get a lot of hype, they get a lot of usage, and the next few people say, I'm kind of bored of it. Be real. I mean, these companies, right, they get super hypey, super usage, and then the usage falls off. versus look at like a Tesla or these kind of bigger markets. Once the company's there, people will stop with it. Let's shift a little bit to the investing side. And in particular, when you look at these long-term trends that you have high conviction, AI is a great example.

28:10And I think most people would agree that it at least has the potential to exceed some of the big tech super cycles of the past. And yet when that happens, you have a lot of momentum, you have a lot of dollars flow in, and ultimately things like valuations creep up. to a point where they lack fundamental metrics in terms of what usually would make sense for a company generating either none or some small amount of revenue. And you have to reconcile that, of course, with your own investing thesis and what you look for from an ownership standpoint, the valuations you think allow for enough upside.

28:45How do you navigate that? And are there times where you make exceptions to your normal parameters of investing? We made an exception with Replit. We invested in a big valuation at Replit with Umjad because Umjad's an exceptional entrepreneur. And we believe in what he's doing, what he's building is critical. We like his go-to market experience. What Academy makes a lot of sense for his initial go-to market. We tell him that we believe he's an entrepreneur. There are a dozen or so other companies, similar valuation, similar traction that we passed on because we didn't have the same level of conviction.

29:17So it's a level of discipline, but not rigidity and an understanding of when you need to stretch the boundaries for the right individual. So it does sound that it's very much based on the individual and the founder. And the opportunity. How big is the upside big enough to make an exception? And that's one of the things about us, as you know, Samir, is that we don't have a veto in our shop. So if any of the four MDs want to do an investment, they can do it. And there's a real, but look, if someone makes a lot of bad investments, they get fired. We're not scared to do that. But if, you know, this business is all about power law, which means you have to shoot for asymmetric upside.