Vinod Khosla would like all of us to be a lot more ambitious; even other VCs are too risk averse in his mind. In his new paper, Black Swans Thesis of Energy Transformation he argues that
The looming twin challenges of climate change and energy production are too big to be tacked by known solutions and time-honored traditions. Incremental remedies are fine for incremental problems, but they are insufficient for monumental, potentially life-altering threats, which need to be approached with a disruptive mindset.
By this Khosla means, don’t get too excited about the latest thin-film technology or the lithium-ion battery that is powering your electric car. These are only going to provide marginal improvements that won’t be transformative enough to solve the climate crisis. He thinks we need to chase after Black Swans, outliers that lie “outside the realm of traditional expectations.” He is hoping that these breakthrough technologies will ”upend assumptions in oil, electricity, materials, storage, agriculture and the like.”
On one hand, the report is exciting, because it is one person’s vision for how we might tackle the climate crisis. I think it will also help to encourage a new generation of energy entrepreneurs to dream big. When oil hit $150 per barrel it shook people up and inspired many young engineers and scientists to try to find solutions to our energy problems. Maybe this paper will focus their efforts on even loftier projects than they would have pursued otherwise.
However, the more difficult challenge will be to change the mind of his fellow VCs. Khosla admits that he doesn’t look at internal rate of return when he makes an investment. That sort of thinking doesn’t find you the next Google according to him, which is what he wants to do in the field of energy. During the whole green euphoria of a few years back, there was supposed to be too much money chasing too few good investments. Khosla doesn’t say this directly, but I guess he would argue investors were going after the wrong sort of investments – ie, too safe and without the potential to really solve our environmental problems.
It’s rare to see a truly disruptive technology in the energy field where the powers of incumbency are quite great. If you think about it, most of the central technologies we use today have been around in some form or another for at least a century. The big exception being nuclear. But that took the Manhattan Project to get it off the ground and also massive government subsidies to make it profitable ever since.
Khosla isn’t saying that we need a Manhattan Project for green energy – although it wouldn’t hurt. But we do need a level playing field. And we will need lot’s of different people making their own investments in technologies that might change the world. Khosla thinks the technologies that will eventually solve our energy problems are unpredictable today. So rather than a single Manhattan Project, it will have to be thousands of brilliant minds chasing after thousands of different visions. In that way, we’ll get our next green Google or Facebook.
To win over some of his doubters, there is one question Khosla should answer: Is he chasing after highly risky investments because our problems are so great or is it truly the best investment strategy for VCs? It would be nice if it were the latter, but some skeptics might think it is the former.
Incremental investments are more easily justified, because the payoff is sooner and more clear. But sometimes even small changes can start to make a difference. It wasn’t that long ago that Detroit was scoffing at the potential for electric cars and lithium-ion battery technology. But investment dollars driven largely by the consumer electronics industry led to a new way to power our vehicles and not just our laptops. This wasn’t a Black Swan in the sense that Khosla means, but it is the beginning of remarkable transformation, even if he thinks it won’t be the answer to all of our problems.
However it happens, change is good.