Investing is like a game of chess: Vinod Khosla

Investing is like a game of chess: Vinod Khosla

The Silicon Valley investor has many successes to talk about but is equally passionate talking about his failures. In a chat with Business Today, Khosla shares his investment strategy.

Khosla Ventures founder Vinod Khosla. PHOTO: Reuters Khosla Ventures founder Vinod Khosla. PHOTO: Reuters
He believes "different people define success in different ways". But Vinod Khosla has many successes to talk about. His venture capital fund, Khosla Ventures, with $3 billion assets under management, has backed the likes of RingCentral, Square, EcoMotors International, a dozen companies in healthcare and more than a dozen in energy. One of his favorite right now is AliveCor Heart Monitor, an ECG screening device for mobiles.

The Silicon Valley investor is equally passionate talking about his failures. His biggest failure? "There have been many. The laptop company Dynabook in the late 1980s would be the biggest, I guess." Khosla talks to Business Today's Josey Puliyenthuruthel John and Sarika Malhotra:

Q. What's your world view from an investing perspective?
A. I don't think of myself as being in the investing business. I think private equity investors are very much in the business of doing deals, putting money in, getting money out. To me, that is a very, very different business and all that they are doing is spreadsheets. I think of myself in a completely different business of building companies. I have not made IRR calculations on a spreadsheet ever since 2004. I either believe or I don't. If I believe, then my goal is to get involved and make things much bigger and help them be successful. It's a different kind of business. If you are an investor you might say you are taking an option investment strategy as opposed to a rate of return strategy. It is like buying an option; you invest and help them build, if they are really successful, you do well. I have never enjoyed the financial side; I have very little patience for it. What I really enjoy is building things where technology drives the change.

Q. How do you decide how much to stretch?
A. It is always about gut instinct. We have to be sensible and it has to make common sense. Sometimes a million make sense and sometimes more. In the end, what really interests me is the technology. I don't even invest in businesses where six other people have the same technology. The idea is how can you turn a technology advantage into a business advantage? It's much more like playing a chess game than it is investing. It is strategic, it depends how much you can help the company. Therefore, it is much more fun. All I care about is how to keep our investors happy, so that I can enjoy what I enjoy doing most.

'What really interests me is the technology. I don't even invest in businesses where six other people have the same technology.' PHOTO: Aditya Kapoor
Q. What investment strategy works for you?
A. The way we invest is very, very different from India. We are never afraid to fail. When I invest I assume that I have lost all the money I have invested. Then it is very liberating, you feel much freer. In my mind, I say, all that investment money is lost. Now what can we do. Because of this approach, investors find it surprising. I believe we can only lose one time the money we invest. If I invest Rs 100, I can lose Rs 100. I can't lose, more than I invest. The key to that math is that when you win, you should make a 1,000. I don't worry about when I lose. Most investors are making sure 80 per cent of their time that they don't lose. I only play to win and don't worry about when I lose. That's our strategy. I don't mind falling, but when I succeed, it better be worth succeeding. I don't want a 10 per cent return when I succeed. We will take much bigger risks, bigger swings at the back. So either it's an out or a six. In energy, we had a big failure in Range Fuels, in which we invested $ 50 million; however we had a huge success in KiOR, made much more money in KiOR than we lost in Range. That's the math. We always have two active funds, the bigger fund is a billion dollars; the smaller is $400 million. We take the more risky bets on the smaller fund and later invest in them from the big fund.

Q. Where does this thinking of Vinod Khosla come from?
A. I have trained myself not to just accept what others say. I trained myself to think originally. I don't say something can't be done, I ask why it can't be done. I think my best and worst habit is asking a lot of questions. And I never take no for an answer. I believe there is always a solution.

Q. What would Vinod Khosla bet on?
A. I love new technologies that are affordable and radical, technology that causes an economic impact. If you have technology that has an economic impact, then you can build a business. People who do green energy because it is nice as opposed to because it is cost effective don't understand real economics. Nobody is going to buy electricity because it is solar at twice the cost. You have to create a price at which people in India and China will buy renewable energy. That's why it's important to do an engine that is cheaper and better, not just better.

'I either believe or I don't. If I believe, then my goal is to get involved and make things much bigger and help them be successful.' PHOTO: Aditya Kapoor
Q. What's the mandate behind Khosla Labs?
A. Khosla Ventures is backing Khosla Labs for start-up incubation in India, betting on energy, consumer driven healthcare and Information technology. Khosla Labs is an experiment. In our business, the most important thing is the quality of people. We didn't go out to start Khosla Labs, but Srikanth Nadhamuni and team became available, and I said, if we have a good team, let's try and do something with that. They built the Aadhaar system; they understand how to build large scale systems. They are not restricted in any way. It's a place to test things.

Q. What' your take on the Indian entrepreneurial ecosystem?
A. The ecosystem is not developing. A few entrepreneurs are popping up. But the support system is not there. In California, there are other entrepreneurs they can ask for advice, regular meetups happen. Investors in India are mostly financial. They provide help too, but since they have not been entrepreneurs, they can't give real advice. Indian entrepreneurs are at a disadvantage in that sense. But, of course, they are very smart and motivated.

Q. How willing are investors to put money in non-conventional areas like technology?
A. When you are doing an unconventional fund, the reputation of people doing the fund becomes important as you are taking much more of a blind leap. Our investors invest, not because I can prove to them that they will make more money, but because they have more confidence in me.

Published on: Sep 09, 2013, 6:53 PM IST
Posted by: Gaytri Madhura, Sep 09, 2013, 6:53 PM IST