Interview: Vinod Khosla, General Partner, Kleiner, Perkins, Caufield & Byers

60 MINUTES
"What India Needs Is Role Models"

The issue of the fourth licences promises to be no less messy than the first. With the odds stacked against the fourth operator, will it be worth it?

By Suveen K. Sinha

He apologises for not having a business card on him. But then if you are Vinod Khosla, you really don't need one. A general partner at Silicon Valley venture firm, Kleiner, Perkins, Caufield & Byers, Khosla has been called the best VC on the planet. At 25, the IIT-Delhi and Stanford Business School grad founded Daisy Systems, and two years later, became the founding CEO of Sun Microsystems. Leaving Sun in 1984 to do ''something else'' on his own, Khosla joined KPCB. The rest, as they say, is history. In his years at the venture firm, the 46-year-old has made some spectacular bets such as Excite, Cerent, Siara Systems, and Juniper Networks- bets that made billions for the firm. In Delhi recently to address a McKinsey-sponsored workshop on telecom, Khosla took time off to speak with BT's R. Sridharan. Excerpts from an exclusive interview:

How do you view the bust in the tech sector in the US?

From my point of view, the boom and bust cycle is a natural part of the capital allocation process in the US. Whenever a sector becomes an attractive sector-and in 1995, we started a very attractive investment cycle in the Internet because of all the potential it had-and when more people start thinking a sector is attractive, the more people enter the fray. So, you generally go from under allocation to over allocation, and by 1999, even in 2000, we were seeing excesses that were just crazy; it made no sense at all. People were not looking at the fundamentals. Fundamentals of business are very very simple: you add economic value, you get paid for it.

Now economic contribution comes from technology breakthroughs. If you have something that's a technical breakthrough, a new business to start, or a new business model. But a boom and bust cycle that characterises capital markets is better than the planned cycle, because here you get almost no innovation and change in direction of capital flow.

As an investor, you pretty much stayed off dotcoms, preferring to invest in hard-core technology companies. Why?

"We don't invest in everything that will give us a high rate of return. We invest in things that are interesting to us, and serve our lifestyle.

I don't like to be the one not making mistakes. Whenever you are at the leading edge, you make mistakes. But you want to be making small mistakes. And learn early in the process. I find that one of the best ways to be successful is to make a lot of mistakes. And learn from them. We participated in the dotcom space also selectively, but not to the excesses that some other people did, and we had plenty of early successes with dotcoms like Amazon, Excite, and Netscape. They may not be as highly valued, but they did give us reasonable rates of return. And I was telling people at the telecom workshop, as you go about making investments in telecom, the right thing is to make big plans but then say which are the experimental investments and which are the static investments.

When you build a conduit-a conduit is going to be valuable 20 years later, no matter what-it is not going to be a source of huge competitive advantage if five people are building it, so that investment is a good investment to make nationally. You can even share it with your competitors. But if you are making a technology choice, some people say, ''oh, we don't know, so we won't make any investments, but others are going to make all the big investment.'' I keep saying make small incremental investments as you learn. The world is too complex to plan. You just have to enable experiments and that is what has been happening in the US.

But you still do believe in the Internet?

Absolutely. All the potential is still there. If I look at five or 10 years from now, none of my views on where the Internet is going has changed in the last two years. The impact it's going to have both on business and society is very very visible. Every kid I see here is talking to his or her friend on chat. It's all over the world.

You've had your share of lemons early in your career. What were your key learnings from failures like DynaBook, GoCompany, and 3DO?

Every time it's a different lesson. The way I look at it is in terms of batting average: what per cent of your investment is successful. Most people are happy if 20 per cent of their investment is successful. One in 10 is the norm. I take a different view. I aim at an 80 or 90 per cent record. Because I find if you make small mistakes, you can change rapidly. But when you find the right formula, your gains are big. While normal investing is done with the premise that you preserve your capital and get a good rate of return, our kind of investment is based on the premise that you can only lose one time of your money, but you can make 10 times quite easily. To me the issue is of making lots of course corrections. Re-evaluating and replanning everything. Some people don't like that, they feel uncomfortable. I find that in an uncertain environment, that's what you have to do, and that's the learning process.

Once you've invested in a company, what kind of a role do you play in shaping the business up?

This is really a common misperception. Most of what we do isn't investing money. About 90 per cent of what we do doesn't have to do with investing money. I don't even do a rate of return calculation. Most of it is helping entrepreneurs build a successful company. First, build a successful team. Once you get the right team you don't have to do much. Normally, you have good entrepreneurs but they are very incomplete. Very often they are not experienced business people, so they don't even know what a complete team looks like. The main thing I do is to help them define each problem coming up.

You've been called a hard taskmaster, a difficult man to work with, arrogant and imperious...

I don't think that (comes from) anybody who's worked with me. If asking difficult questions is being hard, then, yes, I do that. But I never tell anybody what to do. There's a big distinction; you want them to face the reality; you want them to face the hard issues before they face them unprepared in the market. If there's a problem with their business, the sooner they know about it the better. My interest is in making sure that these people succeed.

But just how did the son of an army officer and an engineer turn out to be the best VC on the planet, as Red Herring called you recently?

First, in the US, most often, the press tends to over-characterise things. I really try to talk those magazines out of using titles like that. It's silly. Nobody is that good. Most of my time is spent on grunt work, making all sorts of mistakes; there is no magical wand. So, if you look at some of my presentations, I now talk about my bubble. Everybody gets a lucky bubble, and for me it's just a lucky streak. If you do the right things, you consistently do well. But you can't do 6x (six times) off the median better than everybody else. That's just not a sustainable thing. Unfortunately, the press likes to make heroes, and then it likes to take heroes down. I don't like these excesses.

But how did you acquire the strong entrepreneurial streak your track-record shows? For instance, you were just 25 when you started Daisy Systems.

To me it's very very simple. Role models are very very important. If I can make one contribution, which is just motivate some people...it's not money, it's not time, but if you can motivate people, motivation is the biggest resource. Right now it is happening in the software and technology business, but the same thing can happen outside the technology business. If the country as a whole built more role models on all parts of businesses, and enabled enough infrastructure to allow more people to participate in the economy, that's how you will be successful. In my case, I just read about companies like Intel when I was 16 in Delhi Cantonment. I said, ''oh, boy, that would be neat.'' I didn't know anything about business, and at that point I didn't know anything about technology. There's more than enough educated talent in India. What we need is role models. I think the real boom in a place like India will happen 15 years from now, when the percentage of people who work in software goes up from 1 per cent of the graduating class to, say, 20 per cent. These motivation factors take a long time but create long-term value. Fortunately for India, it's hard to stop these cycles once they happen.

There's been a huge drop in VC funding in the US this year. Is that a correction or a sign of a difficult fund-raising climate ahead?

It's a rationalisation that is happening. There may be a huge drop, but it's still much much larger than what it was five years ago. Also, I don't think we have the kind of talent to scale up investment. It takes experience and talent even to make investment.

What kind of new technologies are you betting on now?

There's one thing that you can't do, and that is make long-term forecasting in technology. You have to make short-term forecasts. Many of the same technologies are still applicable. We are still making investments in telecom, although we are more selective; we are still investing in software. I think biotechnology will be a huge area for India. An area where India should develop the same kind of talent pool and strategic advantage like it has in software relative to the rest of the world. The next year or two would be the time to really make that happen. The other thing is that new technologies will keep popping up. You enable the environment and run lots of little experiments and see which way it goes. Funny that we have software technology parks; we should simply have entrepreneurial parks. Why constrain it to software?

There are so many opportunities within India, be it in high-end telecom network or small things for the local mass. People are adopting newer standards without thinking about it. There is no innovation. What I see is people taking what is done in the US and trying to translate it, instead of doing some research and innovation in India for the Indian masses. I see the same thing happening in telecom. I see people adopting expensive technology from the US. I spent a lot of time at the workshop saying why not to copy the US model. They may need a telephone service that fails no more than five minutes a year. But if we can cut its cost in half by letting it fail 15 minutes a year-something which is very possible-who wouldn't buy that service in India?

Does KPCB have any plans of opening any venture capital outfit in India?

No, and the reason is very simple. We really are not like a business. It may seem like it, but we are not. It's a lifestyle interest. So we are not into expansion, marketshare, or any other traditional metrics for getting a higher rate of return. We don't invest in everything that will give us a high rate of return. We invest in things that are interesting to us, and serve our lifestyle. I treat all business as a hobby. To me, being around with the kids, and not being away at night is much more important than any business deal. My principal thing is I enjoy life and do the things that make a difference.

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