Monday, December 01, 2008

Venture capitalist Vinod Khosla on reasons for long-term optimism about technology and the economy

Venture capitalist Vinod Khosla on reasons for long-term optimism about technology and the economy

A Conversation with Vinod Khosla by Alison Berkley Wagonfeld

From Vinod Khosla’s perspective, the world’s economic future looks bright. After cofounding Sun Microsystems and spending two decades as a venture capitalist with Kleiner Perkins, Khosla created his own venture firm in 2004 to invest in early-stage technologies, especially those with minimal environmental impact. Khosla Ventures, based in Menlo Park, California, has a portfolio of some 65 start-ups, 45 of which are in clean technology, or cleantech. The latter range from Kior, a speculative biofuels company, to Ausra, which is developing utility-scale solar thermal technology. Khosla’s goals include turning niche cleantech forms of energy into what he calls “maintech” by proving that green technologies can be economically cheaper than current ones.

Do you see the current downturn differently from how other people do?

Economists don’t appreciate the extent to which innovation can disrupt assumptions. A new technology can render forecasts obsolete. We are investing in many such technologies, and some of them will surely succeed. I live by an idea from the computer pioneer Alan Kay, who said, “The best way to predict the future is to invent it.”

The technologies we’re working on have the potential to affect energy prices and thus geopolitics and poverty, not to mention global warming. But the impact won’t be immediate. Many of the technologies are in early stages and face significant hurdles before they can become operational. The economists may be correct that in the near term, at least, the cost of inputs will continue to rise. But the specific critical technological events that will truly determine future economics are impossible to predict.

Which technologies give you the greatest hope?

While home rooftop solar photovoltaic cells will continue to improve, I’m excited about solar thermal’s ability to compete cost-effectively with utility-scale power from coal and natural gas plants. Many of our investments are in biofuels, which I’m very positive about because they have low financial and adoption risks. We look for technologies that don’t require people to change their driving, transportation, and heating patterns. Within 25 years, I believe the world will be able to replace most fossil fuels with nonfood biomass and waste or with solar, geothermal, and wind energy. There is no question in my mind that biofuels can be produced for a dollar per gallon, probably much less.

In the U.S., for example, the acreage that is currently out of production or devoted to export crops is more than adequate to supply the country’s biofuel needs. If we innovate in biomass production, my analysis shows that we may need zero additional land to replace all our gasoline. The biofuels I’m referring to are cellulosic, such as forestry waste and winter cover crops—maybe even algae someday—but not corn, which cannot scale up to meet the world’s energy needs.

Will the world’s current financial state delay development of some critically important technologies?

I do worry about that. Energy and cleantech companies require plenty of follow-on financing. Combine the current state of the capital markets with the risk aversion we are seeing among other investors in this space, and there’s real reason for concern. I also worry about governmental policies, both in the U.S. and elsewhere. The traditional enemies of alternative energy—the coal and oil industries—are fighting change. However, policy is gradually moving in the right direction, and the entrenched industries will adapt, because the global imperative is immense. The world is witnessing an unusual confluence of natural, geopolitical, and technological factors that are pulling in the same direction, away from fossil fuels and toward alternatives. I believe there will be many energy and cleantech successes, not just from the companies we’re working with. In addition, traditional energy companies will participate actively as investors and implementers.

There’s always another worry, too—that our firm might be dead wrong about its investments. There are no historical rules on what will and won’t work. But we believe that the freedom to fail gives us the freedom to succeed. We are willing to take risks because we believe the opportunities are so exciting. I am a technology optimist. A lot of what can be imagined can be invented.