Khosla: Sticking with Cleantech “Takes Guts”

Renewable-fuels company KiOR Inc. raised money in March by going directly to billionaire venture capitalist Vinod Khosla, according to the Wall Street Journal.

Mr. Khosla dug deep into his own pocket to loan the firm $50 million.  The Pasadena, Texas firm will use the money to build a facility that turns wood and other nonfood sources of feedstock into renewable crude oil via a proprietary technology that processes the crude into gasoline and diesel fuel.

Mr. Khosla’s venture-capital firm, Khosla Ventures loaned KiOR $25 million in early 2012.

The loans demonstrate the serious commitment Mr. Khosla and his firm have to the cleantech sector, which is now largely ignored by venture-capital world. Last year, venture investment in cleantech plunged 44% to $3.2 billion from $5.7 billion in 2011 and down from nearly $6 billion in 2008, according to VentureSource.

Since forming in 2004, Khosla Ventures has raised more than $2.5 billion—more than half of which has gone into cleantech. Mr. Khosla said cleantech startups operate in “humongous markets and there’s a lot of disruptive technologies to come [with] great economics.”

One way Mr. Khosla has been successful with many of his cleantech bets is by going big. Many investors reduce risk to the point where the returns are inconsequential, he said. “We set our goals much more ambitiously.”

Going big may also not cost Khosla Ventures as much these days since investing in cleantech is less competitive and cheaper now. Earlier this year, the firm spent $1 million to buy a 33% stake in battery startup Alveo Energy.

One of his firm’s funds raised $1 billion in 2009, and is up about 22.4% since inception, according to filings by the California Public Employees’ Retirement System, the state pension fund that invested in Khosla’s fund, according to the Wall Street Journal. Contrast that to the average return of a U.S. venture fund for the three years ended Sept. 30, 2012, at 12.2%, and Khosla’s record is impressive.

The key to the positive positioning of Mr. Khosla’s remaining cleantech companies, he says, is due to the fact that they don’t rely on government subsidies.

It hasn’t all been wins for Mr. Khosla. Ethanol company Range Fuels declared bankruptcy in late 2011 after raising more than $165 million in venture capital, which Khosla Ventures was a part of. And Mascoma, another of Khosla’s biofuel investments, shelved its planned $100 million IPO in March due to market conditions.

That other investors are dropping out of clean tech presents problems for Mr. Khosla. In late 2011, Khosla Ventures was the only investor left backing energy-production startup AltaRock Energy Inc. after co-investor Kleiner Perkins withdrew from a $10 million funding round. AltaRock had been counting on the money to help commercialize its geothermal technology. Mr. Khosla personally wrote checks to AltaRock to tide it over.

Khosla Ventures is increasingly looking overseas and to other billionaires to finance new deals. One co-investor is Microsoft Corp. co-founder Bill Gates.

The firm has also started to invest in more “food tech” startups, including Nu-Tek Salt, Unreal Candy, Hampton Creek Foods and Sand Hill Foods, which are making food more sustainable and cheaper.

Nancy Pfund’s Bullish Huffington Post Blog

DBL Investor’s Nancy Pfund, another well-known cleantech bull, recently blogged in the Huffington Post about how the recent strong outperformance of the NADSAQ clean energy stock market index reflects American’s propensity for clean energy.  She points out that, for the first time in U.S. history, three of the 10 top-performing stocks of the current calendar year are cleantech stocks.

Pfund argues that as more cleantech companies go public, the cost of capital will decline, allowing companies to reinvest in innovation, infrastructure, technology and so on.  This will continue to drive down costs, improve functionality to customers and deliver social and environmental returns.

And more public cleantech stocks will also allow investors to replace their carbon-loaded holdings, like oil, gas, coal and automobiles, with carbon-free or carbon-lite equivalents, she says.

To read the Wall Street Journal article cited in this story, click here

To read the Huffington Post blog cited in this story, click here

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