Where Einstein Meets Edison

Notes from an MIT alum and venture capitalist: Jim Kim of Khosla Ventures

Notes from an MIT alum and venture capitalist: Jim Kim of Khosla Ventures

Feb 11, 2011

On the morning of January 3, Khosla Ventures (KV) announced a second round investment in Ciris Energy, a company that has devised a way to convert coal into natural gas through a biochemical conversion. This represents yet another investment in the clean energy space by the prominent Silicon Valley venture capital firm, and a continued effort by the billionaire investor to successfully invest in the fuels space.

That same morning, Jim Kim, an MIT alum and partner at Khosla Ventures, met with a group of 100 students focused on entrepreneurship and innovation from the MIT Sloan School of Management. We had an opportunity to ask Jim about KV, industry trends, and his path into energy venture investing.

What trends are you seeing in the venture capital industry?
Lots of firms will shrink and others will grow. We’ve seen turmoil even in established firms, with many not being able to hit the targets for fundraising, coming in sometimes more than 30% below than the planned fund size. Subsequently, management fees and staffing levels across the board have come down. Furthermore, funds are becoming more risk averse and investment windows are also shorter because funds need to show returns to investors. Therefore, they are not going to be doing seed stage investments as much. That’s where we see more angels and superangels coming into the picture – they are taking the place of more established funds.

What makes Khosla Ventures unique in the venture capital world?
Well, we just raised a $350 million seed fund, where we invest anywhere from $10,000 to $5 to 7 million in seed through Series A. We find the passionate professor who needs experimental capital to continue with his research, and write the $50,000 initial investment. Ultimately, we’ll want the option to invest. By the Series A stage, we’ll likely take a meaningful stake in the company, fill board seats, and hire an entrepreneur to help the company grow. We did this with Amyris, Gevo, and Calera, for example. We also have a rolodex of CEOs and entrepreneurs to drive the company in the right way. These entrepreneurs are EIRs (Entrepreneurs in Residence) or other CEOs who have been successful multiple times in the past in an adjacent space and who simply “get it” in terms of how to build a successful company. Partnering with other VCs has proven to be tricky, so we are constantly on the look-out for experienced partners who can share the workload of adding value on boards, recruiting, and providing insightful advice to CEOs.  What differentiates us is that other VCs over-commit capital, but we’re able to drive the company and help the entrepreneurs set a vision.

What areas of energy does KV see as the best opportunities currently?
We’ve made 50 investments in the energy sector, and we’ve learned a lot. We have high hurdles in sectors where we have already made a significant number of investments – i.e. biofuels.  Another example is in solar. Between 2007 and 2009, lots of VCs invested in solar, but now it’s more difficult for the entrepreneur to raise capital, since that pool has dried up. Nevertheless, we made three seed investments in stealth solar spinouts in the last six months. We believe these companies have the potential to change the cost structure of solar. We’ve also stepped cautiously into smart grid.

We’re more active in early stage technologies, such as energy storage. Energy storage appears to be transformational and it’s super early stage. For example, in the batteries space, we’ve partnered with Gerbrand Ceder in the materials science department at MIT. The team needed to be built out, and we brought the world’s leading experts in next generation battery materials to form Pellion. It’s a fundamentally new battery material that is extremely high potential in terms of energy density.  [Pellion’s website says it is developing an innovative energy storage solution with the potential to deliver substantially lower cost and higher energy density than current lithium ion systems.] We’re continuing this in other areas of energy storage and also are looking at transformational improvements in materials science and engines. Let’s build an engine that has a 50% improvement in miles per gallon.

How did you get into energy?
Through luck. At Columbia, I was in a one-year accelerated MBA program, but I didn’t go to class. Columbia is super competitive and I knew the traditional path wasn’t going to be my route. I started interning for GE Capital in Structured Finance. I learned by doing and got a lot of value out of that. My boss was the Chief of Energy Finance. We looked at big power plants, renewables, commercial solar projects, oil and gas investments. But I had a hankering to do venture, so I wrote the business plan for GE to do energy venture investing. Unfortunately, most corporates have a bad history in this space – they get in at the top and leave at the bottom. Our first small investment of $3 million had to go through six layers, from GE Finance to the Treasury to the CFO and finally it got to Jeff Immelt. He approved, and we hired 7 people and got the approval to invest $50 million. It ultimately worked out due to luck, good managers, and timing.

Jim, what advice do you have for us, future entrepreneurs, to help us not “sell our soul” to the VC?
Get the technology as far as you can before you walk into a VC’s office because they will either turn you down cold if there is too much development risk or it will be a dogfight over valuation. For example, an entrepreneur we recently met with was already testing product with his customers. He came in and got a bidding war going between the VCs. He was able to do this because he got the technology to a point where there was tangible data about how it would take off. If you take angel money, you may give yourself runway to develop the product , and, at least in certain sectors of IT, can gain some valuable data about the market adoption of your technology. However, this may not be the case for energy  technologies because the prototype development often requires more money than an angel can provide. The value a VC can also provide in terms of locating talent and engineers is more important earlier in a company’s development, so it’s a balance that entrepreneurs will have to weigh – at what point do you need a VC’s rolodex and connections?