20VC Khosla Ventures Founding Partner, Samir Kaul on Why Pro Rata Is A Cop Out, Why He Likes Technical Risk and Does Not Take Market Risk & How To Approach Time Allocation Across The Portfolio In Venture

In this episode of "20 Minutes VC," host Harry Stebbings interviews Samir Kaul, a founding partner at Khosla Ventures, to delve into the intricacies of venture capital investing and the journey of building impactful companies. Kaul shares insights from his experience leading investments in revolutionary firms like Square, Affirm, and Impossible Foods. He emphasizes the importance of taking bold technological risks without market risk, riding winners to their full potential, and the critical role of timing and involvement in reinvestment decisions. Kaul also reflects on the challenges and learnings from the clean tech industry's struggles, highlighting the necessity of resilience and adaptability in the face of failure. He advocates for the transformative power of partnering with top scientists to commercialize breakthrough innovations, citing his work with Nobel laureates and his passion for addressing climate change through sustainable food systems.

• Harry Stebbings introduces himself and the 20 minutes VC podcast.
• Harry invites audience interaction via Instagram for future questions and guest suggestions.
• The featured guest is Samir Kaul, a founding partner at Khosla Ventures.
• Khosla Ventures is highlighted as a prominent Silicon Valley firm with notable investments.
• Samir Kaul's background includes leading investments in several successful companies and working at Flagship Ventures.
• Samir Kaul was also the founding CEO of Codon Devices and led the Arabidopsis Genome Initiative.

This is the 20 minutes VC with me, Harry Stebbings at H. Stebbings 1996, with two B's on Instagram. And I'm thrilled to welcome Samir Kaul, founding partner at Khosla Ventures, one of the valley's most prominent firms of the last decade, with a portfolio including the likes of Square Affirm, Doordash, Impossible Foods, and Opendoor, just to name a few.

The quote introduces the podcast host, Harry Stebbings, and the episode's guest, Samir Kaul, highlighting Khosla Ventures' significance in the venture capital landscape.

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• Samir Kaul's venture career began accidentally while working on genome projects.
• He transitioned from genomic research to business school with the intent to return to Solara but had to change plans due to unforeseen circumstances.
• Samir Kaul's preference for smaller, more hands-on companies over large corporations.
• He interned and then worked at Flagship Ventures before co-founding Khosla Ventures with Vinod Khosla.

It's a complete accident. So I was working on the genome projects with Craig Venter in the late ninety s... And at some point, Craig and I both thought the right thing to do would be go to business school... Soon after I started business school, Craig got fired. So that option didn't exist anymore, and I had to figure out what I wanted to do.

Samir Kaul shares his unexpected journey into venture capital, which began with genomic research and took a turn when his mentor Craig Venter was fired, leading him to explore other career paths.

• Samir Kaul emphasizes the importance of not being conservative in venture capital.
• The goal is to achieve high net IRR for investors, focusing on returns rather than the success rate of individual companies.
• The significance of not selling winners too early and the uncapped potential of successful investments.
• Samir Kaul's perspective on booms and busts in the venture industry and how Khosla Ventures' diverse investment areas mitigate the impact.

I think in this business, being conservative is a real problem, because we're in the business of returning 20% or greater net IRR to our investors... You never want to sell your winners too soon, because you just don't know which one's going to be a winner.

Samir Kaul argues against conservative investing in venture capital, highlighting the necessity of taking risks and holding onto winners to achieve outstanding returns.

• The approach to seed investments as option value investing, requiring validation of a billion-dollar opportunity.
• The importance of recruiting the right team and addressing technical risks before committing more funds.
• The process of leading rounds for companies that demonstrate potential for significant success.

If it's a seed fund kind of investments, a million or $2 million, then what we look to do, invest in, and we call it option value investing, is that we make that investment because we have a thesis that this could be a billion dollar opportunity.

Samir Kaul describes the initial seed investment strategy at Khosla Ventures as option value investing, where they invest based on the potential for significant market opportunities and evaluate progress before further investment.

• The firm rates companies on a scale of 1 to 4 for investment potential.
• A rating of 1 indicates strong confidence and a recommendation to invest heavily.
• A rating of 4 suggests the managing director would personally not invest and advises caution, though the final decision rests with the individual.
• The firm does not practice vetoing investment decisions, which fosters a culture of trust and responsibility among partners.
• The absence of a veto power encourages more candid feedback and personal accountability for investment decisions.
• This approach helps to avoid internal politics and ensures that each partner's judgment is respected.

And with that seed money, some of the key risks which will help us decide whether or not this is a multibillion dollar potential opportunity, are addressed for the traditional venture investing.

This quote explains that seed money is used to address key risks and assess the potential for a venture to become a multibillion-dollar opportunity.

We rate the companies as a one to a four. And a one means absolutely, this is awesome. We should absolutely pile in money and do it.

This quote outlines the firm's internal rating system for evaluating potential investments, with a rating of 1 being the highest endorsement.

We don't really even have a number for a veto.

This quote highlights the firm's culture, where vetoing decisions is not practiced, emphasizing trust in partners' judgment.

But they know that they can and there's nowhere to hide.

This quote signifies that without the option to veto, partners must confront the feedback they receive and take full responsibility for their investment decisions.

• The firm believes in reassessing investments at each funding round rather than automatically following on with prorata investments.
• The decision to reinvest should be based on whether the company has addressed key risks and the firm's current view of the team, prospects, and competition.
• The firm's strategy involves either increasing their investment significantly or reducing it to zero based on new information, rather than maintaining the same level of investment.
• The rationale is that venture investments inherently have low odds of success, so when positive signals emerge, it's crucial to increase investment aggressively.

I think when a company comes for a reinvestment, we need to have a strong opinion on it.

This quote emphasizes the need for a firm stance on reinvestment decisions, requiring thorough due diligence.

We should either do more than prorata or much less to zero of prorata because we get to change our bet.

This quote suggests a binary approach to reinvestment: significantly increase the investment or reduce it drastically, akin to changing a bet with new information.

• The firm reviews its portfolio companies quarterly to determine where to allocate time and resources.
• Time allocation is based on the potential return on investment and the impact the firm's involvement could have on the company's success.
• Decisions on time investment also consider whether a company requires the firm's involvement to succeed or if it's already on a strong trajectory.
• Time is prioritized for companies where the firm's involvement can significantly influence outcomes, rather than spreading efforts evenly across all portfolio companies.

We definitely look at our companies every quarter and say, where are the ones where we think we can make a very good return?

This quote indicates the firm's practice of regularly evaluating which companies in their portfolio have the highest potential for a good return on investment.

Not only can we make a very good return, but our involvement would help drive that to a better outcome.

This quote underscores the dual criteria for time allocation: the potential for a good return and the meaningful impact of the firm's involvement on the company's success.

• Price sensitivity varies depending on the stage of the company and the investment's potential return.
• High valuations at early stages may not be a concern if the company has the potential to become significantly more valuable.
• The firm agrees with the philosophy that one should not turn down an early-stage investment based on valuation alone if the upside is substantial.

If the upside is a billion dollar company and you're in early, you just have to have the conviction that you want to do the investment and go do it.

This quote conveys the belief that, for early-stage investments, the potential for a company to reach a billion-dollar valuation outweighs concerns about high initial valuations.

• Time allocation is strategic, focusing on companies that will drive fund returns and where the firm's involvement is impactful.
• The firm avoids spending excessive time on successful companies that don't require their involvement, as it may not influence the outcome.
• Struggling companies may receive support for soft landings, such as acquisitions, which provide value beyond financial returns.
• Emotional attachment to companies can challenge the objective assessment of time allocation.

I look at it as an xy axis of which of the companies are going to drive returns for our fund.

This quote describes the methodical approach to time allocation, balancing potential fund returns with the effectiveness of the firm's involvement.

There's companies I spend a lot of time on where we've gotten $0 back, but we've landed the company with a good home.

This quote acknowledges that while financial returns are important, there are other outcomes, such as securing a positive future for a company's technology and employees, that are also valuable.

• Effective board meetings require preparation, with materials sent in advance to avoid wasting time during the meeting.
• Board members should not simply read slides but engage in strategic discussions about the company's challenges.
• Management team presentations at board meetings should be focused, with one area highlighted for deep dives per meeting.
• The firm advises entrepreneurs on how to conduct productive board meetings and utilize the board's time effectively.

Make sure at least 48 hours before the board meeting you've sent a preread.

This quote suggests best practices for board meetings, emphasizing the importance of pre-meeting preparation to facilitate meaningful discussions.

Let's really do one focus area per board meeting where whoever the leader, he or she of that particular organization is, can come and present and meet the board and give us an impression on one of those areas.

This quote outlines a strategic approach to board meetings, focusing on in-depth discussions on specific business areas rather than covering everything superficially.

• The importance of trust between board members and entrepreneurs is emphasized.
• Being direct and honest without being humiliating or aggressive is valued.
• Board members should be available to support founders in practical ways, such as recruitment and introductions.
• It's crucial for board members to be both the biggest supporter and the toughest critic of entrepreneurs.

"I think you need to develop trust with the entrepreneur. That I like to think I have."

This quote underscores the necessity of trust as the foundation of the board member-entrepreneur relationship.

"They also know that if they mess up or if they're missing something, I'll be very tough on them."

This quote reflects the balance of support and accountability that a board member must maintain with entrepreneurs.

• Board members should be aware of the significant impact their opinions can have on CEOs and their companies.
• Entrepreneurs should be discerning and not act on every piece of advice without considering their unique context.
• It's important for entrepreneurs to filter advice and apply what is relevant to their situation.

"For God's sake, don't listen to everything I say and certainly don't do everything that I say because I don't have the context you do."

This quote advises entrepreneurs to critically evaluate board member advice, recognizing that board members may lack full context.

"You have to figure out of the things I tell you what are worth listening to and what aren't correct, and that's going to be your job."

This quote speaks to the entrepreneur's responsibility to discern valuable advice from what may not be applicable.

• A preference for investing in large markets with high technical risk is expressed.
• The speaker avoids market risk but embraces technical challenges.
• Understanding and modeling the financial implications of R&D and delays is critical.

"I don't want to take any market risk, so I want the market to be big."

This quote reveals the speaker's investment strategy to focus on large markets to minimize market risk.

"You could spend millions and millions of dollars on marketing and sales in a salesforce and not know what the result is and you can't model that."

This quote highlights the unpredictable nature of small markets and the preference for technical risk where costs can be more accurately projected.

• The speaker acknowledges the burden of funding companies through difficult times.
• Strategic planning for potential delays and identifying additional investors is part of the investment approach.
• The speaker has experience in being the last resort funder for companies in the clean tech industry.

"And that was quite a big burden and we carried it for some and were unable to carry it for others."

This quote reflects on the challenges of sustaining funding for companies during industry downturns.

"Who else should I bring in or who else would be there to invest?"

This quote indicates the need for strategic foresight in securing future funding sources.

• Regulated markets are seen as opportunities for technological innovation due to lower competition.
• These markets can be sticky, potentially leading to significant successes.
• The speaker does not specifically seek out regulated markets but acknowledges their defensibility once entry barriers are overcome.

"The regulated markets tend to fit the thesis that we mentioned, which is they tend not to have had as much innovation because people are scared of them."

This quote explains the potential for innovation in regulated markets due to a general aversion to them.

"Square is in the banking industry. Gardent and Oscar have been in the healthcare industry. Impossible foods is in the food industry."

This quote provides examples of successful investments in regulated markets, illustrating the speaker's point about the opportunities within these spaces.

• Meeting influential scientists and partnering with them on startups has been a key moment in the speaker's career.
• The ability to bridge scientific innovation and business commercialization is a driving force for the speaker.
• The speaker finds fulfillment in turning scientific research into successful companies.

"This is what I want to do the rest of my life."

This quote captures the speaker's passion for transforming scientific discoveries into viable businesses.

"Build a company that sells burgers in every burger King in the country like it started in 2002 with helicos. And I haven't looked back since."

This quote exemplifies the impact of the speaker's investment approach, highlighting the journey from scientific paper to widespread commercial success.

• Failure is a common occurrence in ventures and can be a source of learning and improvement.
• Self-reflection and self-awareness during failures are crucial to personal and professional growth.
• A specific moment of failure that stands out for Sameer Kaul was during the clean tech bust.

"You could argue that the whole clean tech sector was a failure. I think I'm proud of our portfolio in there."

This quote emphasizes that despite the general failure of the clean tech sector, Sameer Kaul maintains pride in his portfolio and the positive outcomes that emerged.

"It was a dark point for me personally, and I had to really do some real soul searching."

Sameer Kaul experienced a personal low during the clean tech bust, leading to introspection and questioning of his abilities.

"It's easy to kind of brag about all your winners, but the reality is where you learn more and where you get better is when you really evaluate where you're really bad at things and getting self aware about that."

The speaker highlights the importance of learning from failures and becoming self-aware to improve one's skills and decision-making.

• Consumer willingness to pay for environmentally friendly products can drive change.
• Observations at Whole Foods indicated a broad customer base willing to pay more for organic and health-conscious products.
• The realization that addressing animal farming could have a significant environmental impact led to investments in food technology companies like Impossible Foods.

"Animal farming is as important a thing to address as coal, and the consumer actually gives a shit about it."

This quote reveals Sameer Kaul's epiphany that consumer concern for animal farming's environmental impact could be leveraged for change.

"People pay more for food. They'll pay more for what they put in their bodies. They'll certainly pay more for what they put in their kids' bodies."

Sameer Kaul observed that consumers are willing to invest in healthier food options for themselves and their families, indicating a market for environmentally sustainable products.

• The support of loved ones and professionals like therapists can help overcome self-doubt.
• Engaging in self-care practices such as meditation, exercise, and reading can also contribute to mental well-being.

"My wife's support is the most important thing on the planet to me."

This quote underscores the significance of spousal support in Sameer Kaul's personal and professional life.

"There's not one answer, unfortunately, but there are answers."

Sameer Kaul acknowledges that there is no single solution to overcoming self-doubt, but a combination of strategies can be effective.

• Reading books such as "Eating Animals" by Jonathan Safran Foer, "The Power of Now" by Eckhart Tolle, and "Start Something That Matters" by Blake Mycoskie can provide insights and guidance.
• These books cover topics like environmentalism, mindfulness, and social entrepreneurship.

"Start something that matters. If you have a mission, you'll create a movement."

This quote from Sameer Kaul reflects the influence of Blake Mycoskie's book on his investment philosophy, emphasizing the importance of mission-driven entrepreneurship.

• The emotional attachment to companies can make it challenging to make tough decisions like shutting them down.
• Understanding that the potential for financial gain in venture capital is unlimited can encourage taking bolder risks.
• Sameer Kaul's pride in Kosler's mission to be bold, early, and impactful in investments.

"You can only lose one time, your money, and that you can make infinite amounts."

Sameer Kaul reflects on the lesson that financial losses are limited, but the potential for gain in venture capital is vast.

"Our desire to be at our sticking to our mission of being bold early, and impactful in everything we do."

This quote expresses Sameer Kaul's pride in Kosler's commitment to their mission and approach to investing.

• Lightship, a company facilitating direct-to-patient clinical trials, represents Kosler's most recent investment.
• The company aims to make clinical trials more efficient and cost-effective by managing them at the patient's home.

"Every day you shorten clinical trials is a million dollars that is saved to the healthcare system."

Sameer Kaul explains the financial and systemic benefits of Lightship's approach to streamlining clinical trials.

• Sameer Kaul expresses gratitude for the opportunity to share his experiences and insights.
• Harry Stebbings and Samir Kaul conclude the podcast with an appreciation for the conversation and a reminder of additional content available on social media.

"Thank you for having me. It's been great."

Sameer Kaul thanks the host for the interview, signaling the end of the conversation.