TRANSCRIPT OF THE VIDEO PRESENTATION VINOD KHOSLA TECHNZ INNOVATION FORUM 29 JUNE 2010 Interviewer: What drives and inspires you to innovate? Vinod Khosla: Innovation is fun. I was one of those kids who never read fiction. I just thought there was so much more in non-fiction and to me inventing a new technology, discovering a new phenomenon, discovering a new piece of science – that’s just a lot of fun and you’re playing with real life mysteries as opposed to some hypothetical mystery you make up so I have always been intrigued and fascinated by learning a new science and new discoveries. And frankly, innovation is about taking all that science knowledge which we have developed and using it for the benefit of mankind. Interviewer: Can you tell us about ‘black swan ideas’? Vinod Khosla: I am very intrigued by the notion that social change happens not in small increments but in massive change. Massive runaway phenomena – when a small temperature difference in the ocean can turn into a hurricane, that’s pretty stunning. A little thing to the left or right can cause revolution in a country or in a market place. The financial crisis was a negative black swan. Series of bad mortgage things – that seemed perfectly OK back in July 2008 - became a massive crisis by September, October. And nobody recognised it. It’s that kind of change - this rapid, significant, mostly unpredictable change, is what a ‘black swan’ is and I think the world is full of positive technology ‘black swans’. The financial crisis was a negative black swan. The green revolution that started feeding most of the world was a positive black swan. And there are many more positive black swans to be had. Nobody expected Google – it’s a black swan. Facebook, Twitter – these are all black swans. The Apple iPhone is a black swan. Can we have a black swan technology to replace oil? Absolutely. Can we have a black swan technology to change the nature of our electricity source? Absolutely. My belief is the really effective technology is the ones that really take over the world are not going to be incremental improvements in solar cell efficiency or wind efficiency. It will be something radical, something new, something unexpected. The definition of a black swan is something highly improbable, massive impact, and retrospective but not prospective predictability. And I think the technology world, the innovation world is full of positive black swans. And I am a religious believer in these. Interviewer: Khosla Ventures prefers ‘technology risk’ to ‘market risk’. Can you explain, and what advice do you have regarding reducing and removing risk? Vinod Khosla: Well, when you innovate in technology you can gain significant advantages. Frankly, more staffing with small amounts of money. Large innovation never comes from the big companies. General Electrics is in the lighting business, in fact their logo is a lamp. They didn’t innovate in LED lighting. A company like Cree did, nobody has heard of it. BP, Solar and Shell were big investors in solar cells while the success came to two little companies called Sunpower and First Solar. You look at wind. Almost all the really innovative wind stuff happened in start ups, not in the big companies. Same thing is happening with biofuels – the big companies may be spending lots of money on biofuels, the oil companies. They may even be spending more money on advertising what they are doing on biofuels but not one of those technologies would fit in the Top 10 most interesting technologies for biofuels, for replacing oil. In fact, Lanzatech, a New Zealand company that we backed with very small amounts of money, has completely changed the rules around biofuels. They make ethanol from flue gases of steel melts – who would have imagined that and in fact if a big company executive had proposed it to his board he would have been laughed out of the room. And that is why almost all innovation black swans come from little companies. Google didn’t come from big media companies like NBC or CBS. It came from two young PhDs at Stanford. Facebook came from a 23-year old and so over and over we see this model of innovation coming from little, small efforts. To your original question, technology innovation happens best with very small amounts of money and very experienced, intelligent and most often, really creative technology scientists who are trying something different. Not massive amounts of money spent on a predefined vision. Mostly, innovation happens within one year or less. Most big companies cannot even plan in that horizon. So it is the scientists, people like Sean Simpson who started Lanzatech, come up with a great idea, do just enough to prove it, just enough to get the next set of financial support to try the next set of experiments. That’s the nature of technology innovation and where it comes from. Interviewer: Khosla Ventures seed fund consists of science or innovation experiments. What do you look for at the seed stage? Vinod Khosla: Well, more than anything else we look for brilliant entrepreneurs. And mostly, in the seed fund they are brilliant scientist entrepreneurs, they are technologist entrepreneurs. In fact, Sean Simpson would be the typical one. The original email he sent me with a two-page proposal would not have fit any business school matrix of a business plan. It was a bad idea, badly done, badly written, badly presented. But the science and the person behind it came through very clearly. It was clear he had good ideas, he had an ambitious goal and he knew his stuff. He knew his science and could potentially do this project of, as ridiculous as it sounds, producing fuels from the flue gases of steel melts. I saw that nugget and decided to support him. And that is how it generally happens. Interviewer: New Zealand has a culture of raising start up capital from family and friends. Do you have any advice when raising capital from these groups? Vinod Khosla: Now in the very, very early stages it is sometimes a good idea. My only worry is that most of your family and friends don’t understand the risks they are taking and you don’t want them to be ex-friends or ex-family if you get it wrong. Very often, technology projects don’t work the first time. The idea may be brilliant but it may take ten passes at it to get it right, to get it to work as advertised, and so proving out a concept with very small amounts of money, whether you do it on sweat equity or with a little bit of family or friends support, probably works that science experiment in the garage. But eventually, building a successful company is not just about the technology and when you come to investors like us, you can get help in all sorts of other ways. There’s probably ten factors responsible for building a successful business. And the technology is one, two or three of those. Even picking markets is difficult. So, when you have a great idea, in a great market, you can get a little bit of help to prove that you have some technology that is unique and differentiated, or at least some ideas that might bear fruit. Eventually, you want professional support to help you pick the markets, how to enter the markets after you picked them and most people don’t realise how complex and nuanced these decisions are. How to hire the other people that fit into your team because nothing happens without the right team. And if you are a technical scientist or a technologist you don’t know what a good marketing person is, you don’t even know what a good market is, and why it may or may not make sense and that is the kind of thing you want help on from professional investors who can help you with all that. Interviewer: Which countries are the smartest investors in clean tech and research and development? Vinod Khosla: The countries that have less structured, more exploratory science - mostly at the universities - do really well. You take two contrasts: America does really well because the university system is so independent and so unstructured that all kinds of crazy ideas get tried. You take a country like Germany at the other end and it is equally sophisticated in its science and technology and almost no innovation happens in Germany. They are very good at engineering, they are very good at exports, they are very good at all businesses, and precision machining and things that don’t require a lot of innovation but require discipline. And the German system does pretty well at that but they don’t do very well at innovating new ideas. Hardly any important clean tech technology is coming out of Germany. Because it is such a structured, disciplined system and you want the exact opposite – a little bit of chaos, a little bit of fun, a lot of passion, short term plans not long term plans, anything that means long term plans means it is probably a waste of money when it comes to innovation. Because you can’t predict things. So I do think those cultural differences are very important. Interviewer: You are an investor and chairman of the Board of Lanzatech. Can you tell us more about this partnership? Vinod Khosla: Frankly, when I first got an email, even though it was wrapped in wrappings that were very unattractive from a business plan point of view, I loved the nugget of the idea behind the science. And when I looked at how flexible and versatile it could be, it could not only produce ethanol, it could produce specialty chemicals, it could work with steel mill flue gases or other flue gases, it could work with stranded natural gas reformed into syn [sic] gas, it could work with biomass to convert biomass into fuels and chemicals. It was very flexible technology but frankly what sealed the deal for me was talking to Sean [Simpson]. I loved his approach as a scientist, as an entrepreneur. I just got enamoured with Sean and said: ‘we’ve got to do this’. Interviewer: On behalf of the government, the Foundation [for Research, Science and Technology] invests in research, science and technology for the benefit of all New Zealanders. How important do you think investing in science and technology is to growing a nation’s economy? Vinod Khosla: I think it is absolutely critical to growing an economy, to have investments in science and technology. Far more other than education, far more than almost anything else. I saw a statistic a while ago, it was a while ago, that said 40 per cent of GDP growth in the United States is coming from innovation in technology. That is a very large percentage and I do think that is important for every country. Today, 500 million people enjoy what I call an energy-rich lifestyle, mostly in the Western world. We have air conditioners, we have heating in our homes, we have running water, we drive automobiles and are fly in airplanes, all of them very energy intensive. The fact is over the next 30 years, or 40 years five billion more people will want that same energy- rich lifestyle. It creates a wonderful opportunity to create new technologies and with it new companies that can grow an economy providing this. And frankly, of all the things we can do, and we can save and be more efficient and conserve more, it’s not going to matter. What matters is technology that multiplies the world’s resources. And we have done this over and over again. The green revolution as I mentioned before, multiplied productivity of land. We produce seven times more corn per acre today than we did fifty years ago. There is no question we can have an engine go five times further on the same oil and so need 80 per cent less oil. We know we can come up with radical new batteries that are actually cost-effective and work for electric cars and hybrids. Today, most of the efforts are incremental. And so multiplying the world’s resources is the most important need the next 50 years as five billion more people want this energy-rich lifestyle that will only happen through science and technology innovation and hence this investment is not only important to growing an economy - it is the only thing that will work. Interviewer: What are the best ways for research organisations like universities and government research labs to commercialise their discoveries? Vinod Khosla: My personal view is commercialisation is about generating passion. I have seldom seen simple licences work. When licensing technologies it dies because whoever adapts it has no passion for it. When a great scientist working in a government lab can not only develop the technology but has the passion to then take it out and go with it, and his government job for example, allows him to take a one or two- year sabbatical, so he can go not only take the technology out but take his passion for the technology out and build a team that can pick up that passion and continue that passion and imbibe the team with his passion. And then maybe come back to his old government job. That’s the way to commercialise these technologies and it is almost always with little companies, little start ups, not with large companies. Now governments are terrible at picking which companies to fund but they can make it easier – reduce the risk for a scientist who wants to leave his government job or university job for a year or two and then come back. That’s the kind of thing I think will encourage innovation and experimentation. Many a great technology has died because it was licensed and it went outside as a technology minus the passion. And so passion is the key to commercialising these innovations. Interviewer: What advice do you have for entrepreneurs on building businesses that last? Vinod Khosla: First, when entrepreneurs start worrying about the wrong things. When I read a business plan that says ‘IP’ on the first page I tend to just drop it because that’s not the goal. You should commercialise the technology and use it in some really beneficial way in the market place. Now Apple is a great example. Steve Jobs doesn’t care what the PC business is doing, what the cell phone business is doing. He just cares about producing insanely great products for consumers. And the rest takes care of itself, and that is what I recommend to all entrepreneurs. Get passionate about what benefit you are providing, not about the financials, not about the IP, not about the money you will make and you will get through lots of barriers. And in the end that’s what will make an entrepreneur successful. The other piece of that is no entrepreneur is good enough to do everything that needs to be done in taking a technology and commercialising it. Teams have to be built and entrepreneurs seldom know what constitutes a good team. What is a good marketing person, what is a good CEO? What is a good market and so getting the right help is very important to you and for an entrepreneur to know not only what he knows but to know what he doesn’t know and where he really needs help. He may not even know who to ask for help. Those are important for an entrepreneur. Interviewer: Do you have any future technology predictions? Vinod Khosla: The only prediction I have is that nobody can make a prediction. The nature of technology, especially the more important technologies I talk about – the black swans - they are fundamentally, only retrospectively predictable, which is an oxymoron. So I don’t think we can predict the path of technology. Who could have predicted Twitter, just three years ago? Who could have predicted one of the most valuable companies in the world - Google – just ten years ago? You couldn’t have, they were two graduate students in a computer science department at Stanford. And so all kinds of surprising things happen, and that is the very nature of this. I do say one thing we can do is encourage more shots on goal. If we take more shots on goal we are more likely to be successful.