Vinod Khosla: VC Discounting

Vinod Khosla is the founder of Khosla Ventures, a Silicon Valley venture capital firm. His firm invests in experimental technologies such as biomedicine and robotics. Khosla co-founded computer hardware firm Sun Microsystems in 1982 with Andy Bechtolsheim, Bill Joy and Scott McNealy. He spent 18 years at venture capital firm Kleiner Perkins Caufield & Byers (now called Kleiner Perkins) before launching his own fund.

Would you say that you’re a venture capitalist?

You’ll never find me saying that we’re venture capitalists. If you look at the tagline on our website, in fact, probably since the 80s, I’ve never called myself a venture capitalist, I always say, I’m a venture assistant. That's what the tagline on our website says, since the day we started, because our focus is in trying to help with these kinds of issues, and the funding is incidental. 

We’re trying to figure out how much we are expected to discount from the listed price. What was your experience at Sun with this? Have you seen your Portfolio companies go through some of this?

Sun was a long time ago, a very different place. But there are a few lessons from there. One lesson I haven’t mentioned, people always asked me how to maximize market. I had this discussion today with a couple of them. I said, don't worry about marketing, what you want is to get the customer to love you, because most of the money you'll get from them will come later in other negotiation. So the first negotiation is, you get in the door and they become dependent on you, love your technology. Even zero margin businesses are fine initially, if it reduces your cost of sales.

So if making it attractive reduces the sales cycle from six or nine months to three months, do it every time, because you engage faster. You learn faster, what you think is a complete product is almost certainly very incomplete. The customer says, can you do that, can you do this. You’ve seen this. You want that learning to get incorporated into your product as quickly as possible. So that three or six-months delay in selling because you're trying to keep up your price point is worse than just losing the margin. You are also learning to create a better product faster. 

So get that first product refined in use, and you will hear this repeatedly, I’m a total experimentalist. You can't do a business plan, you can discover a business plan. You can’t define a product, you can discover product requirements by interacting and engaging. So I’m a total experimentalist on all these things. People have a tendency, especially when they don't know an area and entrepreneurs generally don't know the areas they're going after, to rely on experts.

I have watched a lot of my peers’ pitches. All the pitches seem like there's a prisoner's dilemma going on. They all get exaggerated to the point that they’re near uniform, and the VCs discount them all again, and there's no signal happening, where everyone says, we have an amazing team and a huge market and this enormous promise of traction. What concrete things do you do to try to get a signal out of that noise?

Especially at the seed stage, there's a lot that's not knowable, as I was saying earlier. What's most important to us is not the plan, but the quality of the thinking behind the plan, and judging because you can tell from the quality of thinking, how people approach a problem. When we ask for an answer, we're not looking for an answer, we're looking at how somebody thinks about the question. At least that's what I did. If somebody is trying to, you can have a big number. If you go to YC day, if you’re talking about hair salons, it's 10s of billions of dollars. If you’re talking about shoelaces, it's exactly the same number. So those numbers aren't really the issue. 

One of the things you realize if you've been in the venture business long enough, is that very few companies end up executing on their plans. Their plans three years later look very different. So you're looking at how people think, how do they respond to things they don't know, do they pretend they know, or, are they actually much better able to admit what they don't know, and how fast do they learn. Sometimes we talk to companies for a long time, it can be two months. We'll see what their learning is in those two months. 

When we talk to YCombinator or Alchemist Accelerator about, over the two months or three months, we look at how much has somebody changed. That’s maybe at the seed stage, the most important question I look for, because it tells me how fast they’ll keep learning in the next two years or three years. I'd rather have an athlete than somebody who knows the domain. 

Somebody may not be a great, wide receiver, to those of you who are football fans, but they had great zero to 40 times, they learn to be a wide receiver. It takes them six months longer. But over the course of five years of a startup they’re investing in, they'll be far ahead of somebody who's a better wide receiver, but not a great athlete. That, by the way is also thinks about who you should try to hire in any function.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.