Khosla Ventures announces $1.1 billion cleantech funds

Finally, on 1 Sep 2009, Khosla Ventures has announced that it had raised more than $1 billion for 2 new funds focused on cleantech and renewable energy. Khosla Ventures III and Khosla Ventures Seed raised more than their targets of $750 million and $250 million respectively. The investors include the California Public Employees’ Retirement System, Michigan’s State Employees’ Retirement System and the Regents of the University of California, Vinod Khosla said in an interview.

The $800 million KVIII fund will make initial investments of $5 million to $15 million in early and mid-stage clean energy and information technology companies. The $275 million KV Seed fund will finance what Khosla called high-risk “science experiments” that may exist only in a university laboratory with investments of about $2 million. About two-thirds of the investments will be devoted to green tech, with the remainder invested in more traditional technology firms.

The new funds fly in the face of two of the prevailing investment philosophies in Silicon Valley. In response to diminishing venture capital returns, investors have been advocating small funds of only a few hundred million dollars and staying away from high-cost, high-risk alternative energy companies. Khosla advocates precisely the opposite. Harnessing technology to address climate change will require the big risks that venture capitalists were once known for, he said. “We’re really about reinventing the infrastructure of society, which is the only way we’ll get the carbon footprint down, and we’re not afraid to fail.”

This is the largest amount raised by a VC firm since 2007 and the largest first-time fund raised since 1999, according to the National Venture Capital Association. This was also the first time Khosla Ventures has raised funds from outside investors. Previously the VC firm had invested hundreds of millions of dollars on behalf of its partners, including Khosla himself (which is quite unusual for a VC firm).

But Khosla is more interested in uncovering technology breakthroughs than in latching onto the latest green trend. “Things that are too much in fashion are things that I would shy away from,” he said in an interview. “Whatever the press calls hot are areas that I’m less interested in.” “I like to call it ‘main tech,’ not clean tech,” Khosla said. “We’re doing bioplastics, lighting, engines, water and air conditioning — almost anything that can be made renewable, sustainable, more efficient and cheaper.” “There’s an opportunity basically where technology innovation changes economics. In our business you can’t get in and out when the markets are bad. In some sense, when most people aren’t investing, it’s a good time to invest.”

The chance to invest in a broad-based portfolio was attractive to CalPERS. “Vinod Khosla’s opportunity set is larger than anyone else in the business because it goes beyond alternative energy to materials, water and other areas,” said CalPERS spokesman Clark McKinley. “There’s high risk, but high return. Some companies won’t pan out, but there could be great returns if he’s able to create the next Exxon of the alternative energy field or the next great concrete company.”

“The terms I used to describe our seed fund were, ‘We don’t expect to be fiduciary all the time. We will often invest in things that have a high probability of failure,’ ” Khosla said. Yet to his surprise, there was more interest in that fund than the other. “We insisted on being in a fund like that,” said Joncarlo Mark, head of private equity investing for CalPERS which invested $60 million in Khosla’s riskier small fund and $200 million in the big fund. “The opportunity to partner with Vinod in his science experiments to us is as attractive as having a later-stage fund investing in more established businesses.” One reason Khosla’s investors are comfortable with the firm’s high-risk bets is that the partners have invested at least $100 million of their own money in the fund, Mr. Mark said.

In addition, Khosla Ventures is bringing on 2 new partners to help manage investments: former Facebook CFO Gideon Yu, and former senior partner with CMEA Capital, Jim Kim. Kim has a cleantech background, having worked with A123 Systems, Danotek and Solyndra at CMEA and before that GE Capital. Yu will probably look closely at IT startups, which will get part of the new Khosla funds.

See my previous blogs:
CalPERS invests $60m in Khosla’s closed $250m seed-stage fund
Khosla Ventures

Khosla Announces $1B in Funds, Partner From Facebook
Khosla raises $1 billion for renewables, cleantech
Khosla Raises More Than $1 Billion for Energy Funds
Khosla Ventures raises $1.1 billion to invest in green technology
Venture Firm’s ‘Green’ Funds Top $1 Billion