Vinod Khosla has his critics, including me now and then, but give him credit for often and unapologetically making risky, early-stage investments with a very high chance of failure.
Khosla has been dabbling in [clean tech] deals since he started his outfit in 2004. With his fresh capital, he is on the hunt for the most ambitious startups. "Our specialty is risk," says Khosla. "Forget [hitting] singles. Lay it out there and take a swing. You may not get a very high percentage of hits, but you get a high slugging percentage."
Khosla’s approach is to winnow losing ideas quickly before they consume too much cash, gambling that the surviving startups can score big. Whereas most venture capital firms budget for product-development milestones by the companies they invest in, Khosla Ventures uses metrics that forecast how much it will cost for startups to remove technical risks, tackling the toughest problems first. "We’ve developed a few tricks," says Khosla.
Take Calera, a startup launched by Stanford University. Its goal is to reduce emissions by making cement that traps CO2 gas during manufacture. Khosla figures there’s a 10% chance his firm can make 100 times its eight-figure investment and a 90% chance the company will fail. That’s precisely the kind of prospect that draws his attention. "Sometimes we tell an entrepreneur, ‘Your project does not have enough risk for us,’" he says. "They look at you kind of funny."
I have no objection to the idea of taking more risk and aiming for things with massive returns. The challenge, however, with this model is that it has largely been highly capital-intensive – solving technical problems in technologies where there is no new tool is expensive – so even fast failures can be highly debilitating to an early-stage portfolio.