The venture fund of famed venture capitalist Khosla Ventures is betting that today's science experiments will be the companies that reinvent industry.
Khosla Ventures on Tuesday said that it has raised two funds to invest in green-tech and IT-related start-ups. Khosla Ventures III has $750 million to invest in traditional early to mid-stage companies, while a newly created $250 million fund called Khosla Seed will seek out higher-risk projects.
Khosla, a co-founder of Sun Microsystems, has become one of the most high-profile investors in green technology and an advocate of changes in U.S. energy policies.
Many venture capital firms have cooled on energy-related start-ups because many were pulled into investing more than they were comfortable with to finance expensive endeavors, such as biofuel refineries or solar manufacturing plants.
In an interview, Khosla said that venture capitalists, many of whom joined green tech from biotech or IT, should not have been financing large-scale projects, but instead focusing on nurturing new companies.
"This is the 1980s style of venture capital--real technical risk with small amounts of money and small teams," Khosla told The New York Times. "Clean-tech companies taking large amounts of money--that's project finance, not technical risk. That's a differentiation most people have lost."
The Khosla Seed Fund is seeking to address what many experts say is a yawning funding gap: tiny firms that need seed funding.
Venture capital funds typically aren't structured to invest under a few million dollars in a single company as they are looking for a ten-fold return within a few years. Yet many companies, including those in green technology, would prefer to get less money from investors and not yield as much ownership to outside investors, said Susan Preston, an expert on angel investing who manages the CalCEF Angel Fund.
Some business, such as service businesses or companies that focus on energy efficiency, can be good long-term investments but not suit the venture model, she said. And many banks have become conservative in their lending, making the gap bigger.
"There are lots of very valuable and economically viable companies that have great cash flow but are not venture-backable because the market potential is not very large--it could be that it's a localized business," she said.
Having funds specifically set up for seed funding doesn't necessarily mean that venture capital is obsolete. But those VCs with larger dollars could come at a later stage of development.
"I've seen more development of smaller funds in clean tech than any other sector because there's a recognition of the need for this additional layer of funding," Preston said.
In a statement, Khosla said that its Seed fund will target those companies, which may have roots in university research, that can't find funding elsewhere.
"We will continue to foster high-risk technology innovation and unproven but high-impact science experiments, now with greater resources," Khosla said in a statement.
Some of the examples of the "radical approaches" that Khosla Ventures has already cited include Calera, which is sequestering carbon in the process of making cement, and Kior and HCL, which are using novel techniques to make fuels from biomass.