Khosla Ventures Raises Bigger Funds While Other VCs Struggle
November 18, 2023
Khosla Ventures is expected to raise $3 billion for its new funds by year-end, up from $1.85 million it raised in 2020, the Wall Street Journal reported this week.
This is a major accomplishment for the Menlo Park, California based firm. Even major rival venture funds like Sequoia Capital have had to reduce the size of their fund raising, amidst slumping valuations of technology businesses in the past two years of rising interest rates,
“We prefer brutal honesty to hypocritical politeness,” says the landing page of Khosla Ventures website. Founder Vinod Khosla, speaking of fellow venture capitalists, said that, “90% really add no value, and I truly believe 70% of them reduce the potential of a company.” The most important role for an entrepreneur is to get advice from those who have worked at a startup. “And most VCs haven’t done that, so they give stupid advice.” Khosla was speaking to students at the Stanford Business School in 2015. He earned an MBA from the school in 1980, persevering with his application after earlier being rejected twice by the school.
Khosla, 68-years-old, views business consultants as being less accurate than a bunch of monkeys throwing darts.
For Khosla, the quality of the founding teams is more important than the technology. Its website notes, “We look for A teams and founders: entrepreneurs who know what they know, and are the best in the world at it — but are also aware of what they don’t know, and are open to building strong teams to fill those knowledge gaps. Experience in the domain in which they want to innovate is not a requirement. We invest more in people than in a specific plan, because plans often change.”
Founded nineteen years ago, Khosla Ventures has invested in a range of businesses from artificial intelligence and digital health to clean energy and consumer products. Its major winners include: Open AI, whose ChatGPT and DALL-E provide AI tools for businesses as well as consumers, valued at $29 billion in its March funding round; consumer payments services Affirm ($7 billion); credit card services firm Square ($36 billion); and home delivery services DoorDash ($38 billion) and Instacart ($7 billion).
Vinod Khosla’s net worth is estimated to be $6.3 billion by Forbes.
The videos of Khosla’s talk at Stanford and his other chats, details on Khosla Ventures website about the types of investments it makes and Khosla’s blogs and media interviews offer key insights into founding, investing, managing, and working for technology as well as other startups and companies. They also offer insights on how AI and other new technologies will impact jobs and society.
Khosla Ventures Seed Fund invests in science or business innovation experiments. The website notes, “We’re looking for a crazy idea, one that may require upending an established business model or even an industry — and may have a significant chance of working…planning for risk elimination at the lowest possible cost is the key variable. “
Khosla’s Main Fund supports more traditional early to later stage ventures in all areas of technology, pursuing billion-dollar markets. “For Main Fund consideration, we assume that a reasonable number of the risks and milestones (or uncertain markets) associated with seed-type investments have been mitigated, though we understand there is still significant technology and execution risk.”
In fact, reducing risk of failure is the key component of Khosla’s strategy. The website notes: “Not all hard things are valuable, but most valuable things are hard. Every plan has risks, and we both understand and cherish that. We prefer technology risk to market risk, and we prefer to remove technology and business risks up front.”
Vinod Khosla has been blunt and public about his opinions in fields beyond technology. In 2019, Vinod Khosla got hit by a tweet storm after he questioned the competence of Alexandria Ocasio-Cortez, a Democratic member of the U.S. Congress.
In 2020, the state of California sued Khosla for denying access to a public beach adjacent to his property in San Mateo County, south of San Francisco.
Vinod Khosla has often pushed for closer U.S.-India relations. India’s greatest risk is a disruption to economic growth from the instability and inequality inflamed by Hindu nationalism, he told the New York Times in July this year. He added that it was time to recognize that the Modi government’s favoring of Hindus “can take attention off the principal path of economic progress, and set it back, and set back global relationships.”
Khosla grew up in an Indian army household with no business or technology connections. Since the age of 16, when he first heard about the founding of Intel, he dreamt of starting his own technology company.
He earned a bachelor’s degree in electrical engineering from the Indian Institute of Technology, New Delhi. He failed to start a soymilk company to service the many people in India who did not have refrigerators.
Migrating to the U.S., he earned a master’s degree in biomedical engineering from Carnegie Mellon University and an MBA from Stanford University.
In 1981, after his MBA, Khosla co-founded Daisy Systems, the first significant computer-aided design system for electrical engineers. The Mountain View, California, company achieved sizeable revenue and profit growth and went public.
Then, in 1982, driven by the frustration of having to design the computer hardware on which the Daisy software needed to be built, Vinod started Sun Microsystems to build workstations for software developers. Sun was funded by Khosla’s longtime friend and board member John Doerr of Kleiner Perkins Caufield and Byers.
In 1986, Khosla joined Kleiner as a general partner. While there, he played a crucial role in taking on Intel’s monopoly by building and growing semiconductor company, Nexgen, which eventually was acquired by Advanced Micro Devices (AMD). Nexgen/AMD was the only microprocessor to have significant success against Intel. Thereafter, Khosla helped incubate the idea and business plan for Juniper Networks to take on Cisco System’s dominance of the router market. He also was involved in the formulation of the early advertising-based search strategy for Excite. In addition, he helped transform the moribund telecommunications business with Cerent Corporation, which was acquired by Cisco Systems in 1999 for $7.2 billion.
In 2004, driven by the desire to be more experimental and to fund sometimes imprudent “science experiments,” he formed Khosla Ventures.
Khosla is a supporter of many microfinance organizations in India and Africa. He also has been experimenting with innovations in education and global housing. He is a founding board member of the Indian School of Business (ISB), Hyderabad.
“I like to say my willingness to fail is what gives me the ability to succeed,” Khosla said. “If you actually believe something, you try your best to make it happen. It doesn’t always happen, but it happens most of the time.” But too many people, he says, “take no for an answer far too easily.”
Khosla views investments from a very long term perspective. For instance, he first grasped the value of artificial intelligence in 1982. In 2012, he wrote a blog “Do we Need Doctors or Algorithms? He expects AI to replace 80% of doctors, especially given the high rate of errors among doctors.
Healthcare today is often the “practice of medicine” rather than the “science of medicine”, Khosla writes in a blog. “In the best cases of practice, good care is delivered, but in the worst cases of the practice of medicine, medical doctors (MD’s as they are called in the US) take moderately educated shots-in-the-dark when it comes to patient care…Much of the current practice is driven by conclusions derived from partial information of a patient’s history and current symptoms interacting subjectively with various known and unknown biases of the physician, hospital, and healthcare system as a whole.”
“Misdiagnosis, conflicting diagnoses, and general diagnostic error are also common problems in today’s medical system…a 2013 study estimated that greater than 400,000 deaths a year were attributable to medical errors in the US and estimated that there were perhaps 4,000,000 events of serious harm attributable to medical errors.”
The future of healthcare, adds Khosla, “should utilize an approach akin to the scientific method, with increased data collection, analysis and experimentation to rapidly improve systems.“ AI will hence play a crucial role in healthcare, he notes.
In 2012, Khosla wrote another blog: “Do we Need Teachers or Algorithms?” As with doctors, AI will displace most teachers, he says. By understanding advancing technology, namely decentralization and gamification, Khosla writes, “it is much easier to imagine why we won’t need teachers or why we can free up today’s teachers to be mentors and coaches. Software can free teachers to have more human relationships by giving them the time to be guidance counselors and friends to young kids instead of being lecturers who talk at them.“
Gates Ventures, the family office of Microsoft founder Bill Gates has invested in Khosla Ventures for more than 10 years. Gates Venture chief executive Larry Cohen told the Wall Street Journal, that Khosla Ventures financial performance has been among the strongest for venture capital funds.
“This is not your typical software investing,” said Cohen. “The time horizons are super long.”
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