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Silicon Valley's Mr. Green

Vinod Khosla made a fortune as an Internet and IT venture capitalist. Now he's setting his sights on clean technology--and national energy policy.

Vinod Khosla is a man on a mission. And this time, it's more than just making lots of money.

The venture capitalist, who helped to co-found Sun Microsystems and who also became a partner at investment heavyweight Kleiner Perkins Caufield & Byers, went out on his own in 2004 with Khosla Ventures.

Rather than stick to his comfort zone in Internet computing, Khosla has turned his eye to clean technology, investing in start-ups involved in solar electric technology, batteries, ethanol and coal gasification.

In addition to making his money work for him, Khosla is trying to shape the dialogue and direction of energy policy in California and at the federal level.

He has become a vocal advocate of ethanol over other transportation fuels, attracting criticism along the way. His view is that ethanol is the most realistic replacement for gasoline in the U.S., if manufacturers build new . That's something already happening on a large scale in Brazil, for instance.

Khosla argues that ethanol also gives the country more independence from foreign fuel providers, since it can be produced in the U.S. Naturally, that's attracted the attention of politicians.

On Thursday, Khosla spoke to CNET about the buzz around clean technology at the Cleantech Venture Forum in New York City.

Q: When I heard in 2004 that you were interested in clean technology, I tried to interview you, but you weren't ready to talk. What drew you to the area, and why are talking now?

Vinod Khosla: First, I do care about the environment, but I was also looking at how you get large payback. Essentially, all the environment stuff in the past was based on the idea that you should get a subsidy, or you should do it because it's good to do. It's great to do good stuff--it feels great. But you can't do anything at scale until it meets a "return on investment" objective for Wall Street.

Listen up

Silicon Valley's Mr. Green Venture capitalist Vinod Khosla spoke to CNET about the clean-tech sector and his desire to shape the national dialogue on energy policy.

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So part of my public speaking is this whole notion that we have to get Wall Street interested, because the investment opportunities exist. Many of these (companies) stand side by side with any Silicon Valley venture, and they have a matching rate of return. You can make as much money here. In fact, I would say you could probably make a little bit more here (in clean tech) because there's not as much competition.

I'm encouraging competition because I think there should be more experiments tried. Just like Internet start-ups, there's so many experiments. With chip start-ups, there's so many experiments. We should do that in clean tech, too. And the big ones will be really big, too. These are huge markets, generally, on an economic basis. I'm not a big believer in subsidies and these types of things. Sometimes, to get started, (subsidies are OK). My view is that everything should be market-competitive in five years or less and not be subsidized.

Looking at clean tech, do you think we'll have the same explosion in technology development and adoption that we've had in the computer industry over the past 20 years?
Khosla: Absolutely. I was at the Clinton Global Initiative--that's the other conference I was speaking at this morning--and (Virgin Group Chairman) Richard Branson announced that 100 percent of all the profits from all their airlines and all their train operations over the next 10 years, which is expected to be about $3 billion, will go into clean tech. That's an amazing, amazing story.

Is there interest? Yes. Are these economically viable? Yes. Will people lose money? Absolutely. It happens in Silicon Valley every day. I do believe the profile will look as good as or better than the traditional Silicon Valley semiconductor or Internet start-up. If you do a sector-by-sector analysis, I'm saying this sector should stack up on rates of return.

Is it stacking up yet or it should in coming years?
Khosla: "Yet" is a hard thing, because it's just starting. The typical maturation of a Silicon Valley start-up is four or five years, so we'll know by 2010.

You're obviously interested in economic return, and you say you care about the environment. Getting to this Oil Drum discussion (where Khosla responded to critics of his ethanol advocacy), in your response you put a lot of value on reducing greenhouse gas emissions and the environmental effects. Are people ready to put a value on that, even before there's a carbon tax?
Khosla: What I'm saying is--first, there is a carbon tax in California now. It is the law (a mandate to cut greenhouse gas emissions, equal to 25 percent by 2020). People don't know it is a carbon tax, but it is a carbon tax, and that is a great thing. I'm a big fan of that.

But the fact is, with or without carbon taxes, this has a great rate of return. All I'm saying is with a carbon tax, more projects will qualify.

Similarly, what if oil prices go down? Doesn't that trash a lot of business plans out there?
Khosla: That's a big risk for the oil-based start-ups. That's not a risk, for example, for solar, because solar competes with coal and electricity. So for transportation fuels, that is a risk. Now, there is also an upside: If there is a national carbon tax, those things go through the roof. So there is a risk and reward just like any other business, and you measure those risks. I believe these things are very competitive all the way down to $40 a barrel of oil. Can it go to 30 or 35 (dollars)? Yes, it can--you judge the risk of that happening.

It's the same as saying that there's a slight chance that Intel will come out with a Wi-Fi chip that costs $3. Sure, it can be done. In fact, they're probably working on it. So you're taking these risks every day, and there's no one reason to invest or not invest. It's usually a portfolio risk management, even within one venture.

The way I look at a typical chip venture is there's financial risk--can we fund it? There's marketing risk--can we be competitive in the marketplace? Who else can come out with what? There's a technical risk--can we develop it? What are likely delays? And then there are people risks. And you balance those risks. Clean tech is absolutely the same--you balance all the risks.

You say that people aren't asking the right questions when they are doing comparisons between different transportation fuels (such as ethanol and gasoline). So what are the right questions?
Khosla: Energy balance (the amount of energy required to produce a unit of fuel) is a silly question to ask. Why does it matter? It's really a substitute for two questions that are real questions that can be objectives at the personal level and at the national level.

First, well, of course, cost is always a question. You don't sell it if it's not cost-competitive. Period.

The more important question is: Does it cause a reduction in petroleum use? Petroleum use is a big problem. That is a national objective. So the national debate should be focused on petroleum use reduction. Even the worst ethanol plant has about a 90 percent reduction in petroleum use.

The second question is: What are the greenhouse gas emissions reductions per mile driven?

Those are relevant questions because you know those are the things you are trying to control as a country, as a planet, as a city, as a state. You want less petroleum use.

So ask those questions, and answers to those are very different than trying to measure some academic, hypothetical--some academic paper done some years ago (by Pimentel & Paztek analyzing ethanol energy balance). And people keep using it when it's not relevant to what we are trying to achieve.

Are you concerned that government interest will wane?
Khosla: You know there's always a danger. I'm very optimistic that this will be a key issue in the 2008 presidential election.

Do you mean energy policy overall?
Khosla: Yes, energy policy, energy security and greenhouse gases. So it's fortunate for my point of view that every presidential candidate has to go through Iowa (an agriculture-intensive state which has an economic interest in ethanol). It forces them to address the issue of the environment.

I'm not just talking about biofuels. You can't have a presidential candidate not take a position, one way or the other, on energy policy and environmental issues--energy and greenhouse gas emissions. So I think this will be a serious debate over the next two years, and I think that's a really good thing. It will stay in the public spotlight. Now the politics of this (are) the Democrats love it and the Republicans love it. That's really good news.

So can they lose interest? Sure. We could have an Iran instead of an Iraq in the next few years and spend our time worrying about North Korea or Iran. And there are people who would love to see us doing that, instead of talking about the economy, or the environment, or whatever else we should be talking about.