Most of my meetings during the recent J.P. Morgan Healthcare conference in San Francisco were held in Union Square’s old, overpriced hotel rooms, lined with tacky wallpaper. Most of the furniture had been cleared out and replaced with a table and chairs. Then I walked through the looking glass into a contemporary, white deluxe suite at the Grand Hyatt San Francisco. The open-concept room had floor-to-ceiling glass, modern furniture, and, if memory serves, a foosball table.
The lavish suite belonged to Samir Kaul, founding partner and managing director of Khosla Ventures, who was sitting in one of the chairs with his feet up on the coffee table, a hybrid pose between relaxation and intense focus. Kaul was plugging away on his phone while he greeted me, shifting his concentration away from the screen towards his guest.
What followed was a nearly hour-long conversation with Kaul, who, before co-founding Khosla in 2004, spent five years at Flagship Ventures, where he started and made investments in early-stage biotechnology companies. Kaul also co-founded Helicos BioSciences with Stanford’s Steve Quake and entrepreneur Stanley Lapidus, and was the first CEO of Codon Devices, one of the first synthetic biology companies (co-founded by the ubiquitous George Church). Some of his other investments include Morphotek (acquired by Eisai), LS9 (acquired by REG), and Epitome (acquired by Millipore).
Kaul was eager to tell me about the various ways he is running the VC firm in a lukewarm and uncertain financial climate. We discussed how Kaul evaluates potential investments, how he will manage risk in 2023, and what he’d like to see in the future. Kaul spoke candidly and enthusiastically, even after I embarrassed myself by asking him, “Where does the company name come from?” [The company is, of course, named after Vinod Khosla, the co-founder of Sun Microsystems and a highly successful venture capitalist.]
Here are some of the highlights of our conversation:
GEN Edge: How do you evaluate a potential investment?
Kaul: For me, there are four pillars to supporting a venture, regardless of its vertical. The degree to which Khosla delves into each of these four areas is determined by the size of the check.
The first is the team. There has to be someone exemplary on the team, whether it’s the founder or the CEO, that you can bank on. The second is the market, which has to be massive because we take too much risk if the market’s small. Third, there has to be something differentiated. The fourth leg is the agreement on the investment terms.
GEN Edge: Can you elaborate on what it means for something to be differentiated?
Kaul: People should say that’s science fiction when we start, like with Impossible Foods, QuantumScape, Commonwealth Fusion, or OpenAI. Our job is to take the fiction out of science fiction!
It’s got to be, “Is there something really proprietary here?” We’re really unique in the sense that we just don’t want to take market risk. We’ll take technology risks. If a new product is 20% better than an existing product, that’s market risk. If it’s three times better, even if it takes another two years in the lab to prove that out, that’s a technology risk, and that’s okay.
If something isn’t demonstrably better, where it sells itself, I’ll keep it in the lab longer to get to that kind of threshold because I can tell you exactly what my burn rate is in the lab. It costs $250,000 per year for each scientist. If I go and do a launch, I have no idea how much marketing I have to spend, how long it will take for me to spin up a salesperson, what their quota should be, or how you are going to outcompete another product.
It has to be a no-brainer. If it means two years extra of R&D, that’s okay because the market is massive and you’ve got proprietary technology. If it’s that much better, you’re not taking so much risk. In these environments, you cannot miss your burn rate numbers at all. To the extent that margin plays into that burn rate, you’re at risk if you don’t have a really superior product.
GEN Edge: What’s your financial strategy for making a deal?
Kaul: We’re a high-risk, high-reward type of business. I’m pretty proud of the fact that we haven’t gotten much FOMO [fear of missing out]. We didn’t jump into crypto, quantum computing, or some of the other fads of the day. We’ve made mistakes, but we’ve been pretty disciplined.
We bought 40-50% of Rocket Lab for $5 million; it’s now a multibillion-dollar public company. We bought 50% of Impossible Foods for $3 million. We bought 40% of Just Foods for $500,000. We fish in ponds where no one else does.
When we invested in Square, we put $8-9 million down for 20% of the company, and now we look like rock stars. But back then, it was controversial. It was Jack Dorsey, his co-founder, a PowerPoint presentation—and Jack wasn’t the powerhouse that he is now. He had just been fired from Twitter and it was very controversial.
We back repeat entrepreneurs a whole lot. That’s the best source of deal flow. The reason we were the first investors in DoorDash wasn’t because we were delivery algorithm gurus. It was that Tony Xu was an intern at Square; he left and came to us, and we gave him $1 (or 1.5) million for almost 10% of DoorDash.
I gave Gilad Almogy, the founder and CEO of Ultima Genomics, $10 million the first time I met him. The first company was a grind. It was a solar company. We actually made money on it, but it was a grind. Since then, we’ve done three things with him [including Ultima Genomics], and those are looking good now. We’re excited!
Ultimately, you want to be aligned with the entrepreneur. You don’t want there ever to be a situation where you and the entrepreneur are on opposite sides of the table. The pitch is, “Let us build equity together, and then we’re going to be on the same side of the table.” For better or worse, we have a certain style that we’d like to build within our companies. If you’re going to raise a kid, the earlier you get into the program, the better.
GEN Edge: Are there certain areas or trends in biotechnology and healthcare that always work for you?
Kaul: We do have well-recognized expertise in AI (artificial intelligence). We’ve done well in the diagnostics and tool space. Guardant Health is one of our real big wins, and we were there very early. I’m still the only venture capitalist on the board there. We’ve got Ultima in the DNA sequencing space. It’s too early to do the victory lap, but we find it very promising and are excited about the progress we’ve made.
On the digital health side, we’ve done really well. You look at Ginger now, it’s part of Headspace, or AliveCor and Hello Heart, areas where you’re really taking consumer focus and healthcare. We like those areas and we’ll continue to spend time in those areas.
We’re always into new science. If someone really good like George Church wants to do something, we’re always open for business for people like that.
GEN Edge: How big of a check are you willing to write?
Kaul: Until recently, the largest first check at the highest valuation we ever did was $20 or $25 million to Stripe at a $1-billion valuation. We thought that was really risky, but now it’s worked out pretty well. Stripe has been valued at north of $100 billion, depending on which number you believe. It’s been a great investment.
We’re not going to be able to—and don’t want to—compete with a $100-million Series A for a therapeutic company. That’s just not what we’ll do. There are some phenomenal firms that have done really well doing that, like Arch and Flagship Pioneering. But that’s just not what we’re cut out to do.
What Khosla Ventures does across the board is going beyond risk into the areas of uncertainty. If you actually go into the areas of uncertainty, all you need to do is to hit three out of 10—but those three out of 10 better be big! You are actually taking more risk playing in the field where you can calculate your risk because the things that are calculable have already been picked over. In uncertainty, people get freaked out. The low-hanging fruit is available there, and we don’t have to bat 80% or 90%.
We’re in this for the long run, so we care about what the company’s worth. Once they hit the critical milestone, get a drug approved, a product launched, or become profitable, then you make sure to bring on the right partners, hire the right people, and stay frugal, stay disciplined, and hit your milestones.
You have to stay alive long enough to get lucky because that’s the game! Every successful company in Silicon Valley or tech has had those moments of luck. I’ve seen a lot of companies that deserved to survive, not survive, because they didn’t survive long enough to get that luck, whether it’s a customer, key hire, acquisition, a competitor falls on their face—who knows.
GEN Edge: How has the current market temperature affected Khosla’s investment strategy?
Kaul: The private markets obviously have yet to correct in the way that I think they will. They’ll start to correct probably Q2/Q3 of this year, which again, is a great opportunity for funds like us.
Too many entrepreneurs got ahead of their skis, shot the moon on valuation, and are going to be in a tough spot. Everyone needs money. The good entrepreneurs will just take their medicine and make sure they do what they need to do to retain their key team members, and just say, “It is what it is, so let’s move on.” That’s the advice I give my entrepreneurs.
One of the things that’s also interesting about these times is that every company’s cutting 10-20%, and what often gets cut from the public companies are the things that are more than three years out because they don’t contribute. Many companies that are cash-strapped or being pounded by analysts must cut spending on these programs because there is no quick return on investment. Now that interest rates are returning to normal, when you do a DCF (discounted cash flow) [analysis] on things that are three or four years out, it’s effectively of very low value. That’s a blessing for us.
GEN Edge: Let’s say the market and interest rates return to “normal.” Does your strategy change at all?
Kaul: The main thing it does is extend the time for liquidity. Some of our later-stage companies, if the market were more robust, could probably go public this year, but we’ll have to wait a year or two to go public. But in terms of our early seed and Series A investments, if anything, it adds more opportunity.
I would be thrilled if 2023 proved me wrong, but I’m thinking this is going to be a tough year. Let’s prepare for the worst, hope for the best, and run our businesses as if it is going to be a tough year. And if we get surprised by the upside—great!
GEN Edge: What’s an area you would really like to see take off?
Kaul: There are a bunch. I’d like to see the world become carbon neutral, whether through nuclear power or electric vehicles. I’d like to see most of the world adopt a plant-based diet, not out of guilt or health concerns, but simply because it tastes the best. When you start a company like that, the fully altruistic roll their eyes at the business folks, and the business folks roll their eyes at the altruistic. You put them in the same room and say, “If you want to make a lot of money, you want to save the world; and if you save the world, you make a lot of money.” Those things work well because you need both greed and fear.
I would love to see more people jump into climate investing and do it in a responsible way. We think technology can solve almost every problem, and the market is massive. We haven’t even come close to tipping the iceberg. There is a lot of enthusiasm among the next generation of people who want to see climate technologies implemented. The brightest students want to work in climate change. People who leave their jobs at big companies are saying, “We’ve made enough money. We want to go work on climate.”
If you could solve climate, education, and food security, you’d go a long way toward solving poverty and other large issues that would follow.
GEN Edge: Will you ever stop working?
Kaul: If I stopped learning, I would stop working. But I learn every day! I feel like I get to take electives in all kinds of cool sciences every day and learn from the smartest.