Conversation with Vinohd Khosla

This was from the oil drum, notes taken from a call with Khosla.

Some of the points were good, others were suspect.

The one that comes to the top of the list is subsidies for biofuels. These exist, and are deemed necessary because the price wouldn't be competitive without them.

I would suggest that we eliminate all subsidies to transportation fuel companies.

Granted, this would skyrocket the price of gas, since some of the biggest beneficiaries of corporate welfare are the big oil companies. The very same oil companies that have been hitting record revenue/return numbers. But the lack of subsidies would increase the price at the pump.

But it's an example of how much gasoline is "subsidized" in the US. I agree that corn ethanol is not the final solution. Biodiesel has a position, and switchgrass will be an intermediate solution. Will electric cars take over? Probably. Most people drive less than 40 miles on their commute. Being able to go with plug in hybrids will change a lot. And there are technologies to try and improve the range of battery powered driving.

Take a look at the elements the two agreed on and which ones they didn't. An interesting take from two experts.

Where are we going?

Taking a quick look at the current state of Venture Capital from my perspective, it's an interesting lay of the land.

Clean energy/Clean tech is at a lot of hype and interest. There are many groups looking at investing in the sector. Lots of folks trying to claim longevity in the industry, and a lot more people trying to learn about clean energy investments. One of the challenges in going and picking conferences to attend is what the main focus of these groups will be. I'm more interested in good investments, rather than trying to learn about all the ways you can make ethanol. Or the difference between biodiesel and methanol.

Software still seems to be the stable investment. It's something most investors know, understand, and feel comfortable with. Biotech is still around, again getting a comfortable slot with some investors.

The key thing about cleantech right now, in the summer of 2006, is after all the money has been raised, it'll have to be put to work. I wonder how many “obvious” investments I'll miss. How many no-brainer companies will go bankrupt, and who will become the long-standing captains of industry in cleantech.

Alternative energy is part of the solution. Energy independence is part of the answer, but the final solution is murky right now.

Echoing Green

Tonight was Echoing Green's announcement of the class of 2006. They're entrepreneurs who want to start/launch nonprofit foundations focused on one social ill or another. They've been around for 10 years, and have had more than their share of successes.

Echoing Green was how I became associated with the I do Foundation. Being a good citizen is part an parcel of being a good investor. I can't cover the entire region, so networking with these events, and working with these groups is part of what I do.

It feels great to be the good guy.

Veggie cars won’t save us

CNN's article on recycled grease cars.

Pretty good article on why vegetable oil/yellow grease won’t be the final solution. This is not to say it won’t play a role, but it is unlikely to be the solution for the majority of vehicles out there.

This shows the distinction between an idea, and a real change. There is a place for yellow grease/biodiesel. However, it's not going to be the big solution that will stop all oil imports.

But even at the small percentage stated by the article, this will make a difference. The costs won't stay at $0 though. So expect to pay something, may not be much, but it might be enough to whack the numbers.

Choose your own adventures

USA Today’s article on DVDs where you can influence the storyline.

This is probably the beginning of the interactive media.

First it’ll be the storyline, then eventually the shots and the narration. The best “directed” scripts will be available for other folks to use. Most others will fall by the way side as neat projects.

But consider this. Final Fantasy the movie was all computer generated. With today’s machines, and in the future, such rendering will be faster. Fast enough to do that rendering on the fly. So given that the computer/player can create the video content quickly, you can start changing the positions of the camera, or characters. Alter the background, alter a lot of things.

Eventually you can watch/show the story in your own way. From a different angle, different perspective, and a different point of view.

How can we tell if this is going to happen? Well, we can look out for the choose your own adventure series and see how it plays out.

Or go to the old standby, and see what the pornographic industry is up to. If reams and reams of B-roll footage ends up in the HD-DVD or Blu-ray disks, then we’ll start seeing user directed films. Some of it will be better than what was available at the first take.

Rookie question

What do VC's look for in managment?

Trust

As an investor, we have to trust the people running the company. We have no real way to force someone to work for us. So we need to incentivise them, reward them, and encourage them to show up every morning.

There's the empty chair test. Is the person you're hiring better than an empty chair? Remember, if you hired the wrong person, you've got to then fire him (causing disruption) and then hire someone else to replace the guy you just fired (again causing disruption).

The skills should be there, or the meta-skill to get the necessary skills for success. But that's never enough. If you're not willing to invite the person over for dinner in your own home. Find another candidate.

Been a while

I got a phone call that was a bit curt and abrupt today. I had to smile when it was over, because the scenario had not happened to me in a while.

Someone called the office, and asked for to speak with someone who could invest in a wind energy company. When I informed the caller that we do make such investments, they asked if we would invest in project financing. I informed him we do not do project financing. He then asked for my title/designation. I informed him that I would be at the associate level. It sounded like he wanted to hear the title “VP”, since the response on the other end was “Okay….” .

As I said, it’s been a while since that happened to me.

Now, it might have been the best way to terminate the call. It was short, and efficient. But I never got a real sense of who the caller was, or if I could help them at all. Nor did the caller seem to really understand the types of investment we could or would make. It seemed like he was dialing for dollars, hoping to get someone to bite on his project. Cold calling is hard enough, trying to


Be polite.

You never know what contacts or connections other folks have. Hanging up can cost more than you realize. But if you know the conversation is going nowhere, end it but don't be rude.

Go and visit

When investing, you want to make sure everything is going will with your investments. When you have the chance, go visit them.

This goes for the public stocks as well as the private companies. Just see what's going on during a typical day. Understand how the customer approaches the product or service, and make sure you recognize what's being desired, expected and purchased.

It's an eye opening case of actually seeing what's happening, and reading the management reports. Ideally you should keep an eye out for all of your investments. See how they're doing, and know the difference between what they claim, and what's really going on.

Sometimes things aren't as easy on the ground, as they look from the boardroom. Othertimes, it's better than they expect (this is rare). But the more real your view and understanding of the business, the better your investment guidelines will be.

Beyond Clean Energy

RedHerring’s article on how VC’s are looking back towards fossil fuels.

Fundamentally saying that there’s money to be made in fossil fuels other than sweet light crude. The usual crew of suspects: Coal Gasification, tar sands, shale oil, etc.

The concept of CleanTech investors going after these forms of energy is a little disturbing to me. Not that these aren’t good investments, or that they won’t make money. But when an investor goes to his/her limited partners (financers) the investors represents a philosophy. And the LP usually writes a check having formulated a portfolio strategy. Changing tactics or approaches can be seen as a breach of trust.

This has happened before, during the dot-com bubble, when some investors felt pressured to put money to work in companies that were bad ideas. Now, some CleanTech investors may be forced to put money into a business that wouldn’t be considered CleanTech by everyone. If they make money, then it’s an OK thing to do. But if they lose money, then a double whammy occurs. Not only did they go against the principles that they were created under, they lost in addition to that.

In the end, some folks will make good money in these fossil fuel technologies. They’re the reason I don’t believe oil will hit $200 per barrel, or why we won’t have a huge rush towards clean energy in the first place. However, these technologies do nothing for the CO2 situation. Nor can they always be considered “clean” at the end of the day. They may free us from Middle East oil. And some would say that’s enough.

Less free grease

The supply of yellow grease, used vegetable oil, is starting to decrease.

Articles like this will encourage the use of such refineries. I still think the owner of the original grease will have the greatest say in who gets to refine it and produce diesel.

Right now, the owners are happy someone’s taking the yellow grease away and not charging them. However, as time goes by, they’ll see the economic value of the yellow grease, and demand something in return. Either cash, or more likely, fuel.

But as long as people are interested, we'll hopefully see a change.

Label everything

Good naming schemes are difficult.

But they’re important


And as rudimentary as this information is, it will help an investor remember who you are.

Name, contact info should be everywhere.

I mean everywhere, bottom of every page, logo in top right hand corner, etc. Pages get lost, things get misprinted, the last thing you want is for someone to like your idea, and not be able to contact you

On files you send, have your company name and then “Marketing plan”
On all emails, include your company name in the title
At the foot/signature of every email, have your company name and contact info
Business cards should have your company name and contact info
Web pages should have your company name and contact info

Investors remember names of companies before names of CEOs
Investors remember what you do, not who you are.
Investors remember the benefits of your business, not how you do it.

If you know what's important, you know how to stand out.

Distributed energy generation

In the US, the distributed generation focus is on the Off-grid market. In Europe it seems to be more grid stability, augmentation, and robustness. But in both instances, the main purpose is to provide local energy, close to the usage.

In trying to understand the greatest value of an additional generation site, I'll turn to network theory. Here's a bit from IEEE. So metcalf’s law of n^2 for the value of the network could be reasonable. Since more nodes you have on the network, the greater the robustness, and harder it is to create a catastrophic failure.

In a well distributed grid, the advantage is the ability of any node to cover and take a bit of the load of a dead node. So there are no crucial points.

That's great in theory.

In practice, there ends up being a chokepoint or two. Making sure these critical paths don't exist in the final product takes some effort, but the reliability and value from doing it right is enourmous.

International VC's in the US

Redherring's article on how international VC's prefer the US.

This is not to say that there are not good opportunities overseas. It's just that the opportunities, liquidity and transparency available in the US make it more attractive. In other areas of the world, there are good companies, and good investments. But without the stable infrastructure that's familiar to investors, the returns must compensate for the additional risk and hassle. Thus the returns from these companies end up needing to be very good.

Any risk/trouble/problem can be compensated for with the right return. Overseas, the return has to be right, in order for it to be a good deal.

That's why everyone's running outside the boarders, looking for something that doesn't exist in their domestic market.

Ethanol the new Real Estate?

From the New York Times, is ethanol the new real estate?

At these current prices? probably.

Companies that were a deal at $6/share, may not be such a good deal at $40/share. And with everyone trying to build an ethanol plant, it's going to be hard to see the premiums that we're seeing today.

Again, Brazil can change all the equations.

But as long as the corn based ethanol plants are getting hyped up and bought up to crazy levels, I'll be on the sidelines waiting.

If you're going to be a me too business, expect to crash when everyone else does.

7 Jack Welsh Rules

This bit on the new rules of business.

Be agile
Find a niche
Customers
Look out
Passion
Courage
Soul

Nice, but about as useful as seeing 7 pictures of circles, and saying it’s all one sphere.

You get the idea. The overriding message is keep your company alive. The regulatory rules keep changing, the metrics are moving, and the simple numbers we all followed are not enough to give a complete view on the health of the company. New rules are needed, new measurements reign in our next "new economy"

Just as double entry accounting opened up a new way of thinking, away from just cash in the bank. Some of these new rules are honing in on the realities of a thriving company. There is a new way of thinking and appreciating companies.

But don’t forget the stark reality: Bankruptcy is awful.

New rules don’t remove that fact.

And no matter how nicely those 7 pictures of circles are, they still can’t roll like a ball.

What's news

Here's an interesting article on how long news pages/articles last on the web.

Not that long, it turns out.

36 hours.

If you're going to put information out there, then keep the stuff fresh. If not, you have one and a half days to update, before it's obsolete.

When marketing, or promoting your company with a blog, make sure the information is fresh.

It's hard work, so understand what you're getting into.

It's another instance where you won't get much credit for doing it right, but a lot of grief if you do it wrong.

The only good news is, once you're yesterday's news, you're finished.

Picking investors

During the full examination that occurs when an investor looks at your company, you should also examine the credentials of the investor. It’s more than the ability to write a check with lots of zeroes.

The best way to do your due diligence? Call up the portfolio companies. The VC should be OK with you contacting their portfolio. If the VC says you can’t, this should be taken as a warning sign.

The CEO’s will be the best source of information.

Tell them your current position, that you’re looking to get financing from one of their investors, and are making your calls, while the investor makes his.

3 things to do.

Ask open ended questions
Listen
Take notes

Things not to do:

Ask for dirt on the investor

Things to listen for:
Which partners are really worth their salt in your industry
Who sits on the board and represents the investor
How much help has the investor been in growing the business

Ask for examples.

If you meet the CEO face to face, smile.

You’ll be amazed at what you will hear.

Old Friends

Met an old friend today.

He'd gone to college after high school, and ended up doing the high tech life. Worked at a start-up, and is currently at a think-tank. He'd done the west coast trip, and finally settled down with a wife, kid and dog.

It was great to catch up, but unfortunate that I had lost contact for so long.

It was interesting to see the perspective from another point of view. Especially one that was so different from my own.

He has contacts from around the world, and could help me out in filling out a job slot. But having lost contact, I was unable to leverage his experience and circle of friends. Now, I can help him out, and he can do the same for me. But keeping contacts fresh is important. It's too easy to let them lapse.

Peak Oil: Limited resources?

There is confusion out there on what is a limited resource, and what’s available as a substitute. A lot of talk about “Peak Oil”, and how that means we’re going to run out.

Peak Oil is that point/gallon/drop when the oil well is half empty.

We have estimates, models and formulae to try and determine when that half way point will be. And some of these models have been pretty accurate.

The simplistic idea of, “If we’re half way there, then we can just double the time we’ve been drilling, and we’ll be OK.” Is a false mentality. The current wells have not been running at full capacity for their entire lives up to this point. There’s enough demand in the world that it is reasonable to presume the wells will run at full capacity for as long as they last. So we can’t just double the years and walk away.

Also, there’s more in those wells than just crude oil. The easy stuff, the stuff that comes out of the ground on its own, is just one form of fossil fuel they can find down there. There’s a spectrum of densities in the rock, and attempts to get the other forms of fuel out are just beginning.

Does this push back peak oil? Not really, the formulae are meant to calculate the crude oil, not the shale/tar sands/etc. that’s also down there. Does it push back the closure date for the ENTIRE amount of fossil fuel that’s coming out of the well? Yes. Fisher-Tropsh processes are being investigated to try and convert the gas and other dense fuel coming out of the wells into liquid transportation fuels.

How big/deep are these resources? I don’t know.

Middle Eastern governments have for years claimed that their oil reserves were a state secret. I’ll guess that will apply to all fossil fuels.

US/Canada/China/India and even Australia are sources of coal. Former Soviet Union also has their supply of fossil fuels. A Saudi prince is credited with saying that the oil age won’t end because we run out of oil. In a sense he’s correct. We will have fossil fuels with us for a long time, the price might rise higher, but even at $3.00/gal we’re paying. At $5.00/gal we’ll still pay.

But doesn’t that $5/gal number make paying $1/gal for ethanol look a whole lot better? Can’t get that from the heartland, but we CAN get it from Brazil, today.

Can't buy happiness

Washington Post article on how being rich doesn't mean you'll be happy.

Similar to the earlier article on happiness, and how people get to that point. Here, money doesn't buy happiness, but giving it away can provide a feel good effect.

I will admit that working with non-profits does provide a reward that venture capital doesn't. Both provide their own benefits, and each is a distinct task from the other.

This article goes to say that you should focus on more than just the salary.

How you do this as an entrepreneur is important.

Given the amount of time it will take before you strike it big. You will have to be getting some other benefits from the job, other than just money.

Grease as Gas

Here's a Washington Post article on some folks using yellow grease as fuel. Converted diesel engines, with a filter to catch the big stuff is what they're doing.

Like any niche solution, this is best as a secret/unblelieved solution. While restaurants are giving away used cooking oil for free, this is a great solution. But as soon as the grease is used in large quantities, what was once free turns out to have economic value. Something more expensive than free.

And then the economics change.

The more I run into these companies, the more I believe the source of feedstock and end user of fuel should be the same entity. This ends up being governments, not end user consumers, at least not in the US.

Martime diesel usage is also a big win for biodiesel. Leaks are unavoidable, if the fuel or lubricants that are spilled are biodegradable, then the environmental impact of ports and ships is greatly decreased.

As a niche solution, it must be nice to receive free fuel. But the long term solution will be something else.