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James Grundvig

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The Venture Capital Paradox Explained: Interview With Silicon Valley Legend Vinod Khosla

Posted: 10/04/2012 6:19 pm

Two Silicon Valley technology conferences in mid-September came up with opposing headlines, not unlike two colliding neutron stars. They are also contrarian coming from two elite members of the venture capital community.

On the one side of the valley, Jim Goetz, partner at Sequoia Capital, spoke at the "Tech Crunch Disrupt" in San Francisco. He stated that he was "shocked that more people are not building for the enterprise" in the B2B space or the next technology wave after social media. His comment focused on the "$500 billion opportunity" not only for entrepreneurs but for venture firms which are in the business of making money for their partners and investors. He drove home the point that the Salesforce.com Software-as-a-service (SaaS) subscription model was a "blue ocean" where legacy era software cannot compete in due to the low price point, and compared to cloud startups, no heavy overhead and bloated executive salaries.

Two days later came the opposing view of Vinod Khosla, keynote speaker at the Churchill Club series event, who was quoted by Business Insider in a headline that screamed: "Don't Fund Anyone Over Thirty" by Julie Bort.

Mr. Khosla, cofounder of Sun Microsystems, once-upon-a-time an iconic database server company and creator of Java, and a partner at the venerable venture capital firm Kleiner Perkins before setting up his own venture house in Vinod Khosla Partners, certainly earned his right to have well-formed views on technology.

Still, those two opposing views invited some questions.

When a venture capital firm like Mr. Khosla's is supposed to return profits to their investors and the failure rates of most startups exceed 75 percent, something just didn't add up.

In the new era of rapid change in technology -- where Ms. Bort pointed out that people older than 30 wouldn't be able to keep up with all the new technologies entering the market -- why would a smart, pragmatic, and visionary mentor like Vinod Khosla take a seemingly risky position of picking between 'apples and oranges' like which domains new products and solutions will have an impact in technology beyond a one year horizon? How can two opposing venture themes exist in Silicon Valley?

The Venture Capital Paradox

When scientists in 1994 argued -- no, fought -- over the age of the universe estimated at 13.5 billion years versus the age some thought were older stars at 15 billion years old, there was a major divide in the astrophysics community. It was a paradox.

Mr. Goetz may be dropping a hint to entrepreneurs that the enterprise is underserved in the mobile-cloud space to the tune of a $500 billion opportunity, how would that work in Mr. Khosla's view of funding only entrepreneurs under 30 if in fact that was true?

People under 30 are bright, ambitious, searching, learning, experimenting, tinkering, finding direction, and accumulating experience across a host of sectors that most often require decades, not just years, to see the lay of the land, understand the pain points, and identify solutions for highly nuanced problems. Today's under 30 crowd remains the same in human behavior like the generations before them.

The difference is not merely technology but the rapid pace of change in technology. This was the central thesis floated by Ms. Bort in her article.

One who is over 30 (disclosure: I am 52 years old and launched my startup last year) apparently carries with him a 'kiss of death' in entrepreneurial creativity and technological savvy when compared to the under 30 who shows no visible sign of the first forehead wrinkles or graying hair locks. But 25-year-olds, many of whom are out of work with twice as many unemployed than the national rate of 8%, with some exceptions, lack industry-specific knowledge and experience that can be gained from exposure to a range of complex problems.

So if no seasoned, over-30 professional can be funded by Vinod Khosla Ventures, who will take on the $500 billion opportunity? It made no sense.

Thus, I reached out to and requested an interview from both venture capitalists. Jim Goetz passed on the offer, but Mr. Khosla accepted to correct the record and to share his insights of where technology is heading over the next few years.

The Two-Year Business Plan

At an Intel conference in New York City on May 15, Intel's principal engineer, David Bucholz stated: "Intel no longer does a five-year plan. The business plan is capped at two years. That's because the rate of change of technology is so rapid that we cannot predict the future trends, new devices, media platforms, or the behavior of consumers."

Mr. Bucholz went on to remind the audience that five years ago, "Skype was in beta, the Apple Store was just opening, mobile apps were new, and Facebook was on no one's radar," to prove his point.

In posing a question to Mr. Khosla on the new Intel model of two-year business plan, he replied with vigor via email, first to correct the case of the over-30: "I have never said 'don't fund anyone over 30.' People make up nonsense. I have said younger people tend to be more open-minded to new ideas. We like investing in younger people, but there are plenty of older folks we have invested in."

In correcting the record and reconciling the paradox in venture capital, Mr. Khosla went on to respond to the new Intel model: "Yes, I agree, two year planning is the most you can do now. We seldom look at what they plan beyond two years. We mostly look at the next twelve months and after that there are just 'possibilities, not probabilities'."

Interview on Technology and the Future

James Grundvig (JG): Would you fund any doctor over 30 years old with the right skill sets, expertise, and special knowledge within the healthcare sector?

Vinod Khosla (VK): "Absolutely. Dr. Albert, cardiologist/inventor at Alivecor is probably in his 50s. Good ideas can come from everywhere. We mix people from inside a system like healthcare with people from outside who can ask naïve questions. But we are investing in things that are mostly not reimbursable today."

JG: Do you agree with the context of Jim Goetz's quote on the "$500 billion opportunity?"

VK: "Yes. We have a long list of enterprise investments -- Nutanix, Big Switch, Contrails, Seamicro (recently sold to AMD), Metamarkets, Ayasdi, Evolv, and many more B2B companies."

JG: What is more important to you, Technology or market opportunity?

VK: "Everything, but People is number one."

JG: Is the Social/B2C tech wave receding? If so, how will the under 30 crowd
develop the new technologies that require years of experience in most fields of work?

VK: "There will always be new ideas in all these areas and there will be hype cycles in each area that gets 'HOT.' We try to not be misled about HOT areas, but we will keep looking for opportunities broadly."

JG: Over the next 3-5 years, what technology trends will have the greatest impact for consumers, businesses, and verticals and why: Social, Mobile, Cloud Computing, or Big Data Analytics?

VK: "Usually innovation happens at the edges and intersections of areas. We look for those intersections. Hot areas tend to get over-mined."

JG: As a mentor who provides "venture assistance" to startups, beside the agility of being young, what other qualities do you look for in entrepreneurs?

VK: "Entrepreneurs who love to hire great talent, who incessantly question themselves and are always learning and adapting."

 

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