Khosla Clobbers Conventional Wisdom

By Kennedy Maize

Washington, D.C., June 12, 2011 – Venture capitalist Vinod Khosla appears to relish the role of contrarian, something the world of “green” and “smart” energy, whatever those terms mean, lacks in abundance.

So it was that Khosla recently appeared at the annual Energy Storage Association meeting and made a presentation that led Eric Wesoff of Greentech Media to bet that Khosla won’t be invited back. Khosla debunked much of the dogma of those on the smart and green street (not to be confused with Sydney Greenstreet) in his talk.

Before getting into the content, let’s establish Khosla’s credentials. The details are available from his Khosla Ventures website. But here’s the Cliff’s Notes version: Electrical engineering degree from the Indian Institute of Technology, master’s in biomedical engineering from Carnegie-Mellon, Stanford MBA (1980), founded Sun Microsystems, which was financed by legendary venture capitalist John Doerr of Kleiner Perkins. Joined Kleiner Perkins as general partner in 1986. Started his own venture capital firm in 2004.

In short, Khosla is no dummy and is technically savvy and sophisticated. So what this billionaire says about high-tech ventures, such as smart grids and energy storage, carries considerable weight.

And here are some of the things he said to the grid storage gurus.

  • The smart grid is “smart hype.” In other events, Khosla has asked his audiences: “If your air conditioner used 80 percent less energy, would you care if it was ‘smart’ or not?” Hooray! As dedicated readers of this blog (there might be at least one of you) know, I’ve been grousing about smart grids for years. I’ve argued that a strong grid is more important than a smart grid, particularly when the smart grid makes the U.S. electrical system more vulnerable to solar storms and cyber criminals.
  • Storage is an important and under-appreciated aspect of electricity’s future. If the ability to easily and cheaply store electricity develops, the entire game changes. Demand response becomes far less significant (customers want electricity and will do without only as a second-best alternative). Khosla has said repeatedly, “If you have highly efficient systems, energy storage or distributed generation, you don’t need demand response.” Storage also solves the inherent problems of wind and sun by providing a way to dispatch them.
  • Lithium ion batteries won’t make it for grid-scale storage. The technology “can’t be deployed at scale” and requires too much human attention. Among other problems, lithium ion batteries can catch fire and blow up far too easily. He predicted that the lithium ion battery venture A123 Systems, which has been getting a lot of publicity recently, won’t be around in 10 years. This, Greentech Media reported, left some of the energy storage executives at the meeting “aghast.”

But the market has justified Khosla’s views of A123. Last Thursday, two days after his talk to the energy storage meeting, the company’s stock hit a 52-week low, trading at $5.11/share, down from a high of $11.53. The shares have fallen over 44% this year. The Street website has tagged a “sell” recommendation on A123, commenting, “The company’s weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.”

Last month, Khosla filed papers with the Securities and Exchange Commission announcing he is raising over $1 billion for a new fund, Khosla Ventures IV, similar in amount to a fund he raised in September 2009.

Here are some words of wisdom from the Khosla Ventures website:

“Change depends on unreasonable people. Don’t assume–analyze. Brutal honesty trumps hypocritical politeness. Have courage. Build companies instead of cutting deals. Thrive on technological risk. Ignore the nonsense of conventional wisdom.”