March 25, 2023

DealBook: Vinod Khosla Keeps Long-Term Bet on Clean Technology

Vinod Khosla, founder of Khosla Ventures.Stephen Lam/ReutersThe venture capitalist Vinod Khosla at the TechCrunch Disrupt conference in San Francisco in September.

Vinod Khosla crowed about the clean energy industry last year. Three of the biofuel start-ups in his venture capital portfolio had just gone public, and the stocks had risen considerably after their debuts. “I challenge anybody to claim that clean tech done right is a disaster,” Mr. Khosla said at a conference, rebuffing recent criticism. “We’ve generated more profits there than anybody has.”

Since then, Mr. Khosla, the founder of Khosla Ventures, has watched much of those paper gains evaporate. As the clean energy industry broadly has taken a hit, shares of the biofuel companies — Amyris, Gevo and KiOR — have slumped 70 percent to 90 percent from their peaks. His stakes, once worth as much as $1.3 billion, are now valued at roughly $378 million.

The billionaire investor has been caught in the cyclical downdraft.

The public stocks of solar, wind and biofuel companies are suffering amid industrywide pressures. The price of natural gas remains low. Europe has pulled back on incentives. American subsidies are in question after the bankruptcy of the solar panel maker Solyndra. And China is providing formidable low-cost competition.

“The whole clean tech sector has been out of favor,” said Pavel Molchanov, an analyst at Raymond James Associates, a brokerage firm. “I’d be hard pressed to name one trading above its I.P.O. price.”

Despite the crosscurrents, Mr. Khosla seems unwavering in his commitment. He is pouring money into start-ups. Khosla Ventures recently invested more in LightSail Energy, a three-year-old start-up working to develop low-cost energy storage. He is also sticking with his public companies. His firm, for example, still owns 54 percent of KiOR.

“He’s a visionary who likes to make big bets on ideas that can really change the world,” said Andy Bechtolsheim, who co-founded Sun Microsystems with Mr. Khosla 30 years ago and shares a house with him at Big Sur on the California coast. “I would think he’s made a larger personal bet on green tech than anybody else.”

While the public markets are raising short-term doubts, the long-term investment thinking remains unchanged. Governments around the globe are pushing to find alternative sources of energy in an effort to reduce their dependence on fossil fuels that may hurt the environment. In a television interview in 2007, Mr. Khosla said “mainstream solutions” could replace up to 80 percent of oil-based power. Without them, he said, “this planet is history the way we know it today.” After Hurricane Sandy, the subject of global warming — and changing climate conditions — has again come to the forefront.

In a recent blog post on the Forbes Web site, Mr. Khosla acknowledged the shift in market sentiment. “Clean tech went through a time when it was in vogue and now it is not,” he wrote. “The financing environment for clean tech companies is tough today,” he added. But he said he still expected “to do better than industry averages by keeping our losing companies to a minority.”

Since founding his venture capital firm in 2004, Mr. Khosla has become one of the most vocal advocates for clean tech innovation, buying stakes in about 60 industry start-ups. Ausra, a solar thermal start-up that had drawn $130 million in venture backing, was sold in 2010 to the French nuclear plant builder Areva for about $250 million, according to one industry estimate. And SeaMicro, a low-power server maker, was bought this year by Advanced Micro Devices for $334 million, more than five times the amount invested by its venture backers, according to a SeaMicro co-founder, Andrew Feldman.

It’s unclear how the broader clean tech portfolio has performed at Khosla Ventures. Mr. Khosla declined to disclose the firm’s returns or to comment for the article.

But one of his funds, which raised $1 billion to invest in clean tech and other start-ups, shows gain of 30 percent since its inception in 2009, according to filings by the California Public Employees’ Retirement System, the largest state pension fund. In his Forbes blog post, Mr. Khosla said a recent fund, which raised $1.05 billion in October 2011, was oversubscribed, and his firm’s broader performance since 2006 had “well exceeded typical venture funds.” In that period, venture funds over all have returned 7.25 percent annually after fees, according to industry data.

Mr. Khosla’s commitment is an outgrowth of his three decades at the cutting edge of technology.

A native of India, Mr. Khosla, 57, earned a master’s degree in biomedical engineering from Carnegie Mellon and an M.B.A. from Stanford in 1980. After starting the design automation company Daisy Systems in 1982, he co-founded Sun Microsystems, then a growing technology company.

At Sun, he supplied drive and vision. But Mr. Khosla, who is known for his blunt talk and intense manner, was replaced as chief executive two years later and left the company shortly thereafter.

In 1986, he joined the venture capital firm Kleiner Perkins Caufield Byers. Over the next two decades, Mr. Khosla scored sizable returns betting on the growth of fiber optic networks. Two companies, Cerent and Siara Systems, were sold for a combined $15 billion-plus at the height of the late-1990s dot-com bubble.

Mr. Khosla was looking into alternative fuel technologies at Kleiner Perkins when a business plan for an ethanol start-up crossed his desk in 2003. The plan “sat on a corner of my desk for nearly 18 months while I read everything I could about petroleum and its alternatives,” he wrote in an article for Wired magazine in 2006.

When he branched out on his own in 2004, Mr. Khosla invested millions in the ethanol start-up, Celunol. He soon established himself as a top venture capitalist in clean tech, attracting prominent outside investors like Microsoft’s founder, Bill Gates. Former Prime Minister Tony Blair of Britain joined the firm as a senior adviser.

Over the years, Mr. Khosla has experienced his share of blowups.

In September 2011, Khosla-backed Range Fuels, a wood-chips-to-ethanol company, went bankrupt after receiving a $44 million grant from the Department of Energy and $33 million under a Department of Agriculture loan guarantee. When The Wall Street Journal editorial page criticized Range Fuels as an “exercise in corporate welfare,” Mr. Khosla lashed back, saying the authors inhabited an “ivory tower” that was “full of people who don’t understand technology.”

Sometimes, Mr. Khosla’s companies had to pivot from their original plans and focus on new markets. For example, Calera was founded in 2007 with plans to use power plant exhaust to make cement. Mr. Khosla called its technology “game changing” in 2008.

But the company encountered some setbacks. It postponed plans for commercial-scale production in 2010 pending further research and later cut its 145-employee work force by two-thirds. Since then, Calera has broadened its focus, developing other products like fillers for paper and plastics.

Like many venture capital investors, Mr. Khosla will risk a few strikeouts for the chance to hit home runs. “My willingness to fail is what gives me the ability to succeed,” the investor has said frequently.

The odds can be especially brutal in clean technology. The projects are often capital-intensive — like $200 million or more for a biofuels plant — and they can take years to pay out, said Sam Shelton, a research engineer at Georgia Institute of Technology. By comparison, social media start-ups often require little upfront money and few employees. “The economics are totally different,” Mr. Shelton said.

In part, Mr. Khosla aims to take stakes when the companies are still getting off the ground, rather than waiting until they’re more mature and more expensive. He first bought a stake in KiOR, which aims to convert wood chips to gas and diesel fuel, in 2007. The company is now completing the first of five planned plants in Mississippi with the help of a $75 million interest-free loan from the state.

Mr. Khosla is “always thinking at a very high level about the potential of an idea,” KiOR’s chief executive, Fred Cannon, said. “He has a very good feel for when to step on the gas.”

After jumping in early, Mr. Khosla appears willing to ride out the swings, in both directions. Over the years, public filings indicate he has plowed roughly $80 million into KiOR, amassing a 54 percent stake in the company. Although the stock is off its peak levels and I.P.O. investors are still underwater, his holdings are worth $356 million — a threefold gain.

This post has been revised to reflect the following correction:

Correction: November 30, 2012

An earlier version of this article mischaracterized Mr. Khosla’s return on his investment in KiOR. He invested roughly $80 million and his holdings are worth $356 million — a threefold gain, not a fourfold gain.

Article source:

U.S. Is Falling Behind in the Business of ‘Green’

But as a result of those incentives, market saturation was nearly complete — more than 80 percent of the country’s older homes had been at least partly retrofitted by 2010, the company estimated. So the Mark Group recently opened its newest office in another country, one with a relative paucity of expertise in the company’s specialty of cutting home energy bills and greenhouse gas emissions.

The office is in Philadelphia.

“The United States was a nearly untouched market with 120 million homes, most of them very energy-inefficient — it was a massive opportunity,” said Bill Rumble, the company’s commercial director, who had recently returned from its new American headquarters.

Many European countries — along with China, Japan and South Korea — have pushed commercial development of carbon-reducing technologies with a robust policy mix of direct government investment, tax breaks, loans, regulation and laws that cap or tax emissions. Incentives have fostered rapid entrepreneurial growth in new industries like solar and wind power, as well as in traditional fields like home building and food processing, with a focus on energy efficiency.

But with Congress deeply divided over whether climate change is real or if the country should use less fossil fuel, efforts in the United States have paled in comparison. That slow start is ceding job growth and profits to companies overseas that now profitably export their goods and expertise to the United States.

A recent report by the Pew Charitable Trusts found that while the clean technology sector was booming in Europe, Asia and Latin America, its competitive position was “at risk” in the United States because of “uncertainties surrounding key policies and incentives.”

“This is a $5 trillion business and if we fail to be serious players in the new energy economy, the costs will be staggering to this country,” said Hal Harvey, a Stanford engineer who was an adviser to both the Clinton and the first Bush administration and is now chief executive of the San Francisco-based energy and environment nonprofit organization Climate Works. Although the 2009 stimulus bill provided a burst of funding — $45 billion — that has now tapered off, he said, “We’ve let energy policy succumb to partisan politics.”

The aggressive entry of Britain into the field over the last few years shows the power of government inducements to redesign a nation’s energy economy away from traditional fuel. The country’s Green Deal, as it is called, is currently being spearheaded by the Conservative-led coalition government. In Britain, reducing carbon dioxide emissions was one of the few policies supported by political parties of both the right and left, which both accepted that climate change was a serious problem and saw clean technology investment as a growth opportunity rather than an onerous obligation.

“We are determined to harness the industrial benefits of the low-carbon economy ahead of the rest of the pack — we see it as a competitive advantage,” said Gregory Barker, Britain’s minister of state for energy and climate change. Last month, Mr. Barker led the first British green trade delegation to the United States; it included a wind energy company and a battery maker, but also Adnams Southwold, a famed brewery that now makes beer using less energy and water, and the Mark Group.

President Obama has vowed a switch to cleaner energy, and some states, like California, have taken aggressive measures. But the current patchwork of government inducements remains generally insufficient as a draw for American companies and investors to jump into new fields like wind power, energy-efficient appliances or even mass-market insulation, because upfront costs are large and profits uncertain.

Energy Department officials express frustration that they cannot do more at a crucial juncture without the support of Congress. Dr. Arun Majumdar, senior adviser to Energy Secretary Steven Chu, said that the department’s $5 billion budget for research should be tripled as it currently financed less than 5 percent of proposed projects. He said the country needed better low-cost financing methods to bring companies into the market, as well as stricter energy-efficiency standards to stimulate customer demand.

“We want this ecosystem to grow and thrive like I.T. and biotechnology,” he said, adding he was “concerned” it would not. While he agreed the United States remained a hotbed of good ideas, he said, “in actual downstream deployment we are at risk of falling behind — we are falling behind already.”

Article source: