Why Vinod Khosla Stopped Loving the Internet

Thanks Drew,

You point out the two things that always send up a red flag for me in this industry:  business plans that sound like CLECs, and the industrial scale financing issues.  Those are bigger than the issue of subsidies, which a lot of people point out but I believe are a good thing that will enable a market.

picking your spots in greentech is a big deal.  solar panels are quickly becoming commoditized, so focusing on innovation around them is already leading to an oversupply of startups in the cell/module space with only technical differentiation.  But the supply chain in solar, for one, has a lot of links, and there are definitely some interesting ways to break in and take some share.

For me, the market is a great place to dive in, try and put out some valuable information, and watch this thing grow.  I'm actually rather pessimistic about the entrepreneur-driven  part of this market being able to solve climate change on its own, but I'm glad to see the attempt.  Hotshots competing to see who can build the best solar cell is so much more fun to watch than competition over who has the densest OC-192 blade.  The thrill is pretty much gone for me in that world.

Scott 

Scott:

A well-written piece and provocative.

We all know that most companies in the Silicon Valley don't get started because people want to make a buttload of cash, but because they want to do something 'cool'. And there is nothing cooler these days than tackling the coming energy crisis or global warming (hey, 'it's cool to stop global warming' - do I get extra points for bad puns?).

But this has to become a virtuous cycle, or it will fall short. Vinod succeeded in the 90's because the planet wanted to be wired, people were willing to pay money to make that happen, and reasonable amounts of capital (say $15-50M) could be deployed to build companies that could grow to the same size in revenue and be worth 3-5x their revenue in an acquisition or an IPO. Of course, there was also the bubble, where all those sorts of rational ratios went out the window, and maybe Vinod can create his own bubble in cleantech, but I sure as heck hope not, the scars from the last bubble are finally starting to heal.

I'm not so sure that we can create a virtuous cycle in cleantech. Software and fabless chip companies, a place where VCs have made lots of money, are mostly about monetizing intellectual property. Even a lot of systems companies are probably equal weights of IP and hardware. But cleantech is different. Cleantech is largely industrial and about infrastructure. Energy and water need things like plants, pipes, and cables. Even solar panels are largely about bent metal and hauling them onto a roof. The analogy is not to the systems, chip, and software companies that Vinod backed in the 90s, but to the CLEC and other alternative carriers that were created in the 90s. Those guys had real infrastructure (towers, cables, trucks). And those stories seldom had happy endings for the VCs who invested in them.

Infrastructure is not the only thing that ties this analogy together. Like the telecom carrier space, the energy space is dominated by a few, very large companies. And they are not noted for being nimble, but they ARE noted for fighting like crazed badgers when they come under attack, just like the carriers.

I have no doubt that there are enough bright, hard working folks in the Silicon Valley to fix any problem we throw at them. And there's also no doubt that our government is less than clueless when it comes to tackling this thorny problem. But it remains to be seen if our bright entrepreneurs can figure out how to raise the massive amounts of capital needed to scale their ideas up to production, or find a buyer (private or public) willing to take on the challenge.

Caveat emptor, dude.

Drew

http://www.projectbetterplace.com/ 

Anyone who thinks about efficiency knows how wasteful most any activity is in the USA. And traveling to most any other country you know efficiency doesn't mean "lower standard of living" nor sacrifice. So there is a LOT of opportunity and lots of room for success.

VC especially like ROI that easy to calculate as a drop in oil (cost of energy) very unlikely - perhaps a depression could cause a drop, but only if cash flow requirements aren't being met, this might cause a temporary drop in oil price. But with demands increasing for 6 billion people the trend seems up to me.

Trade deficits finally catching up and so dollar drops - and now US manufacturing very competitive again. So perhaps US can re-build manufacturing base, especially in high tech areas. Only downside is lack of education, but then immigrants have often taken up the slack. Interesting times. 

I think many traditional VCs have a harder and harder time finding investments of the right scale for them in the Internet market, where many companies need only capital in the hundreds of thousands to get cranking -angel money, really.

Greentech can fit right into the wheelhouse of some big funds, with companies needing four or five rounds of solid capital to prove out a technology, scale it up, and get in the market.  That said, a lot of greentech deals are often too big for VCs to stay in: think an ethanol company that needs to build refineries before they sell a gallon - that can require hundreds of millions, and often leads to hybrid investments that include equity and debt, sort of VC + project finance kind of things.  

Talk to a VC in this space and they'll often give you two answers about why it's better than the Internet

 1) Halo effect.  this is an investment that addresses a real problem in the world

 2) Envy.  Those VCs that got into this market early have had some decent exits

downside remains this market's dependence on government support.  But, governments make markets, they always have, and with the confluence of climate crises and $100 oil, there is little likelihood this market can ever just vanish or pop.  It's a real sector now, like life sciences. 

Scott,

Are VC's shifting money away from the Internet and into green tech because they think green tech is hotter, or because they've done the analysis & think a second bubble collapse is on the way for the Internet industry?

Insultant  

Kind of hard to follow all the threads in that post other than to see you generally mistrust rich people and corporations, which is understandable.

but, to the specific points, there is plenty of near-term money to be made in the clean energy or greentech markets.  There have been far more IPOs in the past year in this market than in telecom (tho a great deal of volatility) and there continues to be a strong appetitie for taking these companies public.  That is music to VCs' ears, no doubt.  The solar market, for one, has already gotten pretty crowded, and it has a bit of a whiff of a bubble, but it is a market that growing at a consistent pace of over 40% a year, currenlty around $17 billion, so it makes perfect sense to throw some venture dollars behind that with the expectation that you will see rewards in the near term.

Will that translate into meaningful climate change in the same time horizon?  Probably not. Solar power, for example, represents far less than one percent of the world's electricity generation, so it's rapid growth is only adding small increments to its paltry share of the overal power generation market and not realy taking much of a bite out of the impact of coal.   

As for this sentence "The reality is that external costs (such as environmental damage) need to be factored into the price of goods and services. Only then will the market conditions exist for efficient "green" tech to thrive." I don't understand your point in writing it.  It is true on its face, but the fact is that the greentech market is already thriving by all acounts, even in the face of huge oil and fossil fuel subsidies and incentives, and without products including the cost of their carbon footprint.  

The greentech market is working, so that's why a VC wants to capitalize on it.  Right?

Scott 

No doubt there's shed loads of money to be made (that seems to be Scott's point), but it's a long-term thing. Khosla can afford to wait it out (or die trying).