ON THE RECORD: VINOD KHOSLA

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ON THE RECORD: VINOD KHOSLA

Sunday, May 11, 2008
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Vinod Khosla. Chronicle photo by Paul Chinn Vinod Khosla says it's
important to look beyond tradition...
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Flush with money and determined to save the world, the green-tech
industry stands in full flower of its giddy youth.

Venture capitalists are pumping billions into startups trying to
create new fuels or energy sources. Politicians are looking to the
industry for ways to fight climate change without wrecking the world's
economy.

[Podcast: Listen in on Vinod Khosla.]

It's a heady time. Yet great uncertainty remains about which of the
new technologies will work. And biofuels, one of the industry's main
obsessions, have come under fierce attack lately as a possible cause
of food shortages.

Enter Vinod Khosla, one of green tech's most prominent investors. He
has funded entrepreneurs building solar power plants that will dwarf
football fields and companies that will make ethanol from wood chips.

Khosla met recently with a group of Chronicle reporters to talk about
the future of green tech and discuss which technologies will thrive
while others die. The following has been edited for length and
clarity.

Q: Some people are concerned that the great boom in green technology
and green investing might be creating a bubble of investment, and
there might be too much froth. Are we looking at a green-tech bubble?

A: Every strong investment cycle results in a bubble, unfortunately. I
hope we can get smarter, but I'm not hopeful.

I always point to the 1830s, when railroads started expanding in
England. If you got permission to build a rail link between two towns,
you could offer scrips on the market. And people started going public.
Doesn't this sound very much like the dot-com bubble? Or the telecom
bubble? Or the PC bubble in the '80s?

There was a bubble, there was a crash in the 1830s, and in the
following 10 years, more railroads were built after the crash than
before the crash. The important message is: We had a dot-com crash,
and if you look at actual Internet traffic after 2001, it didn't take
a dip. It kept growing and growing and growing.

Hopefully what we are talking about here is a fundamental change in
the infrastructure of society. How these companies will be valued will
vacillate all over the place. It will hit highs and lows, and
hopefully we can avoid the excesses.

Q: Do you feel there's a natural selection process involved in that,
too, when you have a possible over-investment in a number of companies
in one field? Does that help seed a larger array of products, and then
the best rise to the top?

A: That absolutely happens. Lots of experiments get seeded, and most
fail. There were hundreds if not thousands of PC companies in the
'80s. A few made it big. There were lots of Internet bubble companies,
but Google, eBay and Yahoo all did well in the end, even after the
crash. So the important thing I like to say is that most investments
will fail, but more money will be made than was invested.

The experimentation is very important because without that funding, a
Facebook would never have emerged. It would never have shown up on the
product plans of a big company, because big companies don't innovate.

I like to take a classic example of a company like Amyris. Instead of
doing biodiesel from soybeans, they're trying to go to other feed
stocks. They're producing diesel by fermentation, in a completely
different process, and the goal is to go to nonfood crops.

Here was a company with a grant from the Gates Foundation to work on
malaria drugs. It used the same technology to produce fuels and
diesel. No large company would ever allow that kind of a radical
shift. But small innovative companies that turn on a dime? Heck, let's
do it.

Q: We've seen a lot of stories in the past couple of weeks about food
prices going through the roof around the world, to the point where we
had riots in Haiti, and demonstrations in Bangladesh and in Egypt. The
focus has been placed on biofuel as a possible culprit. Do you think
that connection's overblown?

A: The connection is overblown. First, long term, we can't solve our
fuel problem by making fuel from food. It doesn't work. Two, we don't
need to because there are much better alternatives. Much better in
that not only are they more desirable, they're much cheaper. Why would
anyone use corn when you can make fuel from forest waste?

I have no question that in 10 years, there's no way oil will be able
to compete with biofuels. Even in five years. Now it will take a long
time to scale biofuels, but I'm the only one in the world forecasting
oil dropping in price to $35 a barrel by 2030. I'll put it on the
record: Oil will not be able to compete with cellulosic biofuels. If
you do it from food, the food will get so expensive you can't make
fuel out of it.

Food prices have been going up. Biofuels are a very minor contributor
to that. But there are massive PR campaigns trying to ascribe most of
the blame to biofuels. The fact is, by far the largest contributor to
food-price inflation is oil prices. Biofuels are less than 15 percent
of it.

Q: Oil for transportation?

A: Transportation and fertilizer. Fertilizer comes from the
petrochemical industry. Oil would be 15 percent higher if there were
no biofuels and food would cost more.

The second piece is this: There is a dramatic increase in the
worldwide demand for food. In places like India and China, when you
get 9 or 10 percent economic growth, among poor people the biggest
increase in the allocation of the family budget goes to food. We
(also) have seen in the last year or two dramatic droughts.

If corn ethanol was a large part of the worldwide food crisis, we
would have seen corn exports from this country decline. Not so. In
2006, 2007, they have actually increased.

Q: You mentioned a PR campaign to blame corn for the food problems.
Who's behind the campaign?

A: Well, lots of people. Clearly, the American Petroleum Institute has
been very, very concerned about food prices, and you wonder why.

I'll mention another thing. For the last 10 years, poor countries like
India and Brazil have been trying to get higher food prices. In fact,
the subsidies to food in this country reduce the price of food to the
point where their farmers can't stay in business.

I'm concerned about the people making less than a dollar a day, three-
quarters of them live in rural areas, make their income off of
subsistence farming or farm-related labor in villages. And they would
benefit dramatically from higher food prices, because their incomes
would go up.

Now, there's one-quarter of the population which lives in urban slums
in developing countries whose food prices will go up without their
income going up. That's why this issue is so complex.

Q: It sounds like you're critical of the food-based biofuels, while
there are other kinds of biofuels that you're supporting and investing
in. Could you give us a sense of the different directions that that
research is going in?

A: Calling everything biofuels and asking "Are they good or bad?" is
like asking me "Are drugs good or bad?" I have to ask you whether
you're talking about cocaine or aspirin.

Certain food-based biofuels like biodiesel have always been a bad
idea. Others like corn ethanol have served a useful purpose and
essentially are obsoleting themselves. We have eight or nine companies
producing alternatives to corn ethanol that will be dramatically
cheaper. And I just don't see how corn ethanol producers stay in
business. So why worry about it?

Let's focus our energy on the research and development and innovation
that allows us to produce a $1-a-gallon fuel. There's no question
about it, we can produce it for $1 a gallon and retail it at Wal-Mart
for $1.99 a gallon and create a competitor for oil. Oil is a monopoly.
It leads to an energy crisis, it leads to a terrorism crisis and it
leads to an environmental crisis. So we have to replace it.

Others talk about things like electric cars. Nice cars. In fact, we
can make money on them and are investing in electric hybrid batteries
and things like that. But they will not make a dent in either
worldwide oil consumption or carbon reduction in the next 20 years.
And that's why we have to be clear about nice, (patchwork) solutions
that make people feel good.

People say, "Priuses are selling a lot, people want them." Yeah, but
so are Gucci bags. You know, they make people feel good, they're great
fashion statements. Do they reduce carbon emissions enough? If you do
a critical analysis, a hybrid reduces carbon emissions about the same
as corn ethanol, and costs 100 times more. So what's the point?

I drive a hybrid, and I can afford it. But in the next 15 years, we're
going to ship a billion cars. Unless a technology can reduce carbon
emissions dramatically for 50 to 80 percent of those cars, we haven't
made a dent in the climate change problem. And too many politicians
are focused on silly ideas like that, because politically it sounds
good.

Take San Francisco, for instance. Putting solar cells on anybody's
roof is absolutely silly, in a foggy city like San Francisco. If
somebody wants to do it with their own money, that' s great. Do it.
But don't do it with other people's money.

Q: When you talk about price and market penetration, you're really
getting to one of the most basic questions I think everybody has about
climate change and the energy problem. Namely, can we solve this
without significantly changing our lifestyle, the way we live?

A: This is where the environmental community goes wrong. They say, "No
matter what the cost, we've got to do this." Or, even worse, "Let's
get people out of their SUVs. Or let's not have them drive."

Anything that requires people to change their habits has a low
probability of success. It's been proven over and over again that
people don't inconvenience themselves. You know, it's not like GM just
wants to make big cars. People want to buy big cars, so GM makes them.
And some people have genuine reasons. I've got four kids and two dogs,
and wherever I go on a weekend, I need a car to take all of them.

So it's really important that we find solutions that have a high
probability of effecting change and making a difference at scale. I
don't think hybrids make a difference at scale. Hydrogen has very
little chance of making a difference in the next 20 years. We should
stop spending public money on it.

Having said that, the other assumption that we have to pay more for
green or change our lifestyles is also wrong. And the answer lies in
innovation.

The other big area is coal and natural gas for power generation.
People have assumed coal is cheapest. Coal is no longer the cheapest.
Coal was the cheapest when we ignored the environmental damage it
caused.

For large-scale, utility grade power, you need a different technology
called solar thermal. We're building a 175 megawatt power plant for
PG&E in the Carrizo Plain in Central California. It will not be more
expensive than a natural gas plant, which is their alternative.

Q: You're talking a lot about cost-competitiveness. What is your
reaction to $4 gasoline? I mean, that sounds like great news for you.

A: The old green investing was about producing green stuff without
regard to cost. And that's why it has not been scalable. Unless we
produce stuff that is cheaper than fossil and also happens to be
greener, we're not going to get widespread adoption or scalability.
Having said that, $4 gas clearly helps alternatives get started.

Q: You're talking about price points for different fuels, but you
haven't talked about infrastructure at all. What about the capital
investment, the gas stations for example? How is that going to play
out? That's going to be a massive investment.

A: The answer is it's not that massive. The annual investment in
billions of dollars is probably no different from what we did in
telecom already, to switch the telecom infrastructure to Internet IP,
optical. The same thing will happen in energy. In Brazil it happened
in three years. Now Brazil's a much smaller scale, but it had a lot
less money, too.

Q: Can you explain what happened there?

A: Brazil adopted flex-fuel cars in the space of three years. In
January of 2003, flex-fuel cars had 3 percent market share of new car
sales, in January of '06, it had 75 percent market share of new car
sales. Why? Because the fuel there, ethanol, was cheaper.

That's how it happens. People started buying those cars, every pump
owner started putting in the pumps. We need selective mandates,
technology-neutral to the extent we can make them. For example,
instead of mandating electric cars in California, which we've just
backpedaled on, we should have said, "Every car should have two
sources of fuel." There's gasoline and a second. Let people decide
whether that second is electric, whether it's biofuel, whether it's
natural gas.

Q: Do you see the U.S. in general and California in particular getting
a lot of jobs from the emerging clean tech industries? Or is it just
going to be a few research and development and investment jobs?

A: California's clearly well positioned to get the R &D and investment
jobs, which are the best, high-paying jobs. On the average, green
investments probably create twice the number of jobs, or more,
compared with the same investment in fossil technology, whether you're
talking about a coal power plant for electric power generation or oil
exploration and refining jobs. Whether California can get those jobs
or not depends on California regulation.

Today, the bureaucracy in California for permitting is so large that
whenever we can, our companies for production move out of state.
They'd rather be in Nevada, they'd rather be in Arizona, they'd rather
be in Florida, in Georgia - every place except California.

During the 2001 energy crisis, we put in emergency cycles to approve
power plants in 90 days. We need to do that for renewable
technologies. We can't eliminate the environmental constraints, but we
need to have clear, simple checklists. Once you meet them, you're in,
you're permitted, you can go.

Q: Will the new green jobs be in the United States at all, or will the
manufacturing jobs that come out of this be in China or Asia?

A: You know, one of the great things about most renewable technologies
- not every technology, but many of them - is the jobs have to be
local. When you're talking about a power plant and power generation
using solar thermal technology, the jobs will be where the plant is.
They may be in Nevada or Arizona, but you can't move them to China and
ship power here from China. And by the way, the biggest beneficiary of
these will be the rural economies, because whether it's power plants
or biofuel plants, you're going to build them in agricultural areas.

Q: Whenever we write stories touching on this revolution that's
getting under way, we often get e-mail from readers saying, "You know,
this is fascinating, how do I invest in it?" And usually what we end
up typing back in response is, "Well, most of these companies are
private startups just getting going. You can't invest yet." For a
typical investor out there who really thinks this is going to be the
future, is there a way for them to get into this?

A: The first caution I would give is we are likely to see a bubble at
some point. I don't think we're in a bubble now, but we are likely to
see a bubble, so I tell people to be very, very cautious. And if
you've learned from dot-com, remember it. The second thing I would say
is most of the investments, or the best, most attractive investments,
are private. Most people are not qualified to make those investments,
because it requires a fairly deep knowledge of technology.

Q: Deep pockets, too, I believe.

A: And deep pockets. Having said that, there is a way to play in the
public markets. Solar photovoltaics have been a great return, and it's
a market that will probably still keep growing 30 percent a year. But
most of that is reflected in the current stock prices.

The safest way to play in this market is to take traditional
industries, take cars and engines and airlines or public power
utilities. Most people invest in public utilities. If you pick the
utilities that have lower carbon emissions as a basic part of their
strategy, you're much better off. If you're going to do airlines, pick
the more efficient fleets. If you're going to do industrials, pick the
companies that have lower energy costs because of higher energy
efficiency.

Now you can't ignore the other things, like how their business is
doing. So add carbon footprint to the five other things you use in
evaluating a company in making traditional investments. You don't have
to make an investment in a green technology company to be part of the
trend.

Q: To what extent do you try to influence the political process to
advance clean tech?

A: You know, for lack of time, I haven't spent much time in
Sacramento. For relatively unplanned reasons, I have gotten very
involved in Washington. Mostly because I get a lot of calls asking for
help and opinions. I'm not a political person. I'm a techie nerd, and
I enjoy the techie part. I mean, all my life, I've loved great
technology.

I get very deeply technical in each of these areas, I try to
understand the technology. That's why I write a lot, so other people
understand what I'm thinking. And it's valuable. I like good
criticism. I recently wrote a blog on Grist.org on why the Prius was
more greenwash than green. And I got thousands of comments.

Q: It's a hot-button issue.

A: It really was like insulting the pope. But of the thousands of
comments, there were probably 10 or 15 really important questions I
had forgotten to answer. So I went back, did research on those 10 or
15 questions, revised my paper and the final version is on my Web
site.

Q: So if you were going to pick three technologies that you think will
be successful 20 years from now, what would those be?

A: There's four major areas we invest in. We call one the war on oil -
to eliminate fossil oil. We have eight or nine investments in that
area. The second area is our war on coal, which is about power
generation. The third is efficiency. And the fourth area is new
materials.

We're doing new cement. I do believe cement is the third-largest
emitter of carbon, after coal for power generation and oil for
transportation. Instead of producing a ton of carbon dioxide per ton
of cement, we want to reduce a ton of carbon dioxide per ton of
cement.

We're doing new kinds of glass, up in Petaluma, that turns dark, so it
saves you a lot of heat gain or heat loss. We're doing solar power you
can deliver at night, because you can store it. Not just, "Hey if it's
cloudy today, I can't ship you power."

Q: Some people might not understand how cement is an emitter. Can you
explain?

A: Cement is made at 1,600 degrees centigrade. You basically burn up
limestone, and you're talking about billions of tons of limestone
heated up to 1,600 degrees. Very energy intensive, lots of carbon
emissions.

Frankly, if we just did oil, coal and cement, we would eliminate
completely the carbon problem on this planet. If you just did those
three things. And so we shouldn't be talking about 29 things. We
should focus on the three that are 75 percent or more of carbon
emissions on this planet. And if we can make them cheaper than fossil,
then fossil is history, and the carbon problem's solved, simple.

Q: Can I close it up with one question about the valley in general?
What is the future of Silicon Valley and its competitive state versus
the rest of the world?

A: I think the most powerful social force we have when it comes to
solving our problems and multiplying our resources is the
entrepreneurs and technologists and scientists. And the culture of
Silicon Valley. It is the solution and may be the only solution.
Policy can help. But policy doesn't work without technology
innovation.

Look, cement's a classic example. We're trying to do cement that would
be cheap enough to give away for free if carbon had a price. That
could change the world's carbon picture, with one technology. If solar
thermal is cheaper than coal, which is possible over the next five to
10 years, then coal would be in a very different place. Those ideas
come from technologists and scientists and serious entrepreneurs. And
that's why I'm actually hopeful that we can change the picture.

-- To read previous On the Record interviews, go to sfgate.com/
business

Chronicle Business Editor Al Saracevic and reporters David R. Baker,
Ilana DeBare and Deborah Gage participated in this interview.