Green Tech

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.

Vinod Khosla

(Credit: Martin LaMonica/CNET)

As part of the expansion, the investment company said it has hired Gideon Yu, the former chief financial officer of Facebook, and venture capital investor Jim Kim, who joined from CMEA Ventures.

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.

This post was updated at 8:30 a.m. PDT with additional material from Khosla's speech on Wednesday and photo from the event.

CAMBRIDGE, Mass.--Famed investor Vinod Khosla is one of the clean-tech industry's most vocal cheerleaders. But most of today's clean technologies fall short of his 1-billion-car test.

"If it doesn't scale, it doesn't matter," says Khosla. "Most of what we talk about today--hybrid, biodiesel, ethanol, solar photovoltaics, geothermal--I believe are irrelevant to the scale of the problem" of climate change.

Vinod Khosla speaking at the EmTech conference at MIT.

(Credit: Martin LaMonica/CNET Networks)

Khosla delivered the keynote speech at the EmTech08 conference (formerly called the Emerging Technology Conference) at the Massachusetts Institute of Technology on Wednesday, where he talked about energy, policy, and investment.

On Monday, he spoke to MIT student energy fellows covering many of the same topics.

On the whole, Khosla is highly optimistic about the potential for technology to address climate change and other environmental problems. He challenges people to imagine cars and cement factories that actually remove, rather than add, carbon dioxide from the air.

But he views climate change as a global problem that requires an overhaul to today's energy infrastructure. That means displacing oil and coal in a world where consumers from Asia and other fast-growing regions will be adopting a more energy-intensive lifestyle similar to that in the West.

"We will ship a billion cars on this planet in the next 15 years or so. Unless a low-carbon technology gets into 80 percent of those 1 billion cars and over time causes an 80 percent reduction of carbon per mile driven, it's not going to be a solution. Everything else is just a toy," he said Monday.

He places wind and solar photovoltaics in the "toy" category because, without storage, they will remain a small fraction of electricity production, only 5 percent to 15 percent.

That's because, without a breakthrough in storage technology, solar and wind power cannot replace "baseload" electricity during peak times because of their intermittent nature.

FORT BAKER, Calif.--Silicon Valley investor Vinod Khosla has a message for and about the clean-tech industry: it's not about style, it's about substance.

San Francisco, for example, likes to show off its solar-panel installation at the Moscone convention center, he said. "But it's a foggy city," Khosla quipped here during a talk Tuesday at the GoingGreen confab. Toyota's Prius hybrid may be a hit in Hollywood, but he said, it's less carbon efficient than biofuel-powered cars and likely won't penetrate markets in India and China.

"The Prius sells well, but so do Gucci bags," he said.

Vinod Khosla, head of Khosla Ventures

(Credit: Martin LaMonica/CNET News)

Finally, he'd like people to stop paying attention to the musician Sheryl Crow's public message about using only one square of toilet paper. "This is about real stuff, not fashion."

"The new green is about engines, lighting, appliances, batteries, gasoline diesel," Khosla said. "It's not about clean tech, it's about main tech. If you're going to find climate change solutions, it's got to be about main tech."

Khosla delivered a keynote speech on the first full day of the Always On GoingGreen conference, a three-day event focused on clean technology topics. Khosla, the founding CEO of Sun Microsystems who's risen to green-tech fame by investing in companies through his firm Khosla Ventures, spent a good portion of his talk pooh-poohing technologies he believes won't work in the long term.

For example, he criticized investor T. Boone Pickens' plan for natural gas-powered cars and targeting only a 20 percent reduction in carbon emissions within 10 years.

"This planet needs at least 80 percent reduction in carbon emissions. Natural gas is still a fossil fuel. I just don't think it makes sense," Khosla said.

On another front, Khosla said he likes nuclear as a renewable energy source, but it takes 15 years to try out new nuclear technology.

He also estimated that hybrids--versus cars that run on cellulosic fuel, E85--have a larger carbon footprint per mile driven. "It's not that I don't like hybrids--we'll probably look for new investments. But if you're going to change this business, we need to improve batteries," he said.

He said that the Tata Nano has sold millions in India, and the Honda Civic Hybrid has sold in thousands. "How do we make this car (the Nano) low carbon at $2,500? The technologies not only have to be fashionable but they have to be relevant at scale," he said.

So what's the answer? He said his firm is concentrated on investments in energy efficiency, biofuels, electricity, and new materials. For example, it has money in lighting technology for home and outdoors. It is investing in materials like water infrastructure tech, bioplastics, and cement that can sequester carbon. It is also backing companies working on energy-efficient engines, such as EcoMotors.

In the last six months, he has also proposed that the government or public interest groups adopt a method called "Claw" for measuring biofuels, giving each a rating much like an LEED rating for buildings. He said in an interview that he's tried to talk to the Natural Resources Defense Council and others to take up the cause.

"What I have proposed is that we measure biofuels with a rating--a carbon rating, a land rating, air quality rating, and water quality rating. (Claw) measures all environmental impacts of biofuels and puts a scientific basis about measuring this industry," he said.

"Once we have such a measurement, we can focus on the right fuel," he added.

The California Public Employees' Retirement System (Calpers) is expected to commit up to $640 million to clean tech-focused firm Khosla Ventures, according to a report at Private Equity Hub which cited two sources.

Calpers has already created a $400 million clean-tech fund which launched last year.

Vinod Khosla, head of Khosla Ventures.

(Credit: Martin LaMonica/CNET News.com)

But a capital commitment the size of $640 million to a venture capital fund is significant as it can provide the capital required to scale up energy industry start-ups.

Ethanol companies, for example, need hundreds of millions of dollars to prove out their technologies at a commercial scale.

Khosla Ventures has invested in a number of ethanol companies including Range Fuels and Mascoma, which both require money to build beyond their initial pilot plants.

Billions of dollars have gone into clean-tech start-ups. But many industry observers expect many of those to falter in the face of a "funding gap," or "Valley of Death," between technology development and commercial production.

Until now, Khosla Ventures has been funded by family money from billionaire Vinod Khosla.

CORONADO, Calif.--Looming energy problems present noteworthy challenges for the world, but big thinkers in science, business, and technology know they have to compete with the status quo without a helping hand.

The Future in Review conference has always been about sketching a picture of the technology and business landscape five years into the future. But this year, attendees and presenters are focused on a more pressing issue: the need for alternative energy sources to replace fossil fuels sooner, rather than later.

Stephen Evans of the BBC, Elon Musk of SpaceX, and Lyndon Rive of SolarCity (left to right) discuss solar power.

(Credit: Tom Krazit/CNET News.com)

As such, the early talk at the Hotel Del Coronado is all about alternative energy, whether that's cellulosic biofuels, photovoltaic panels, and carbon-reduction strategies. Vinod Khosla of Khosla Ventures kicked off the conference Tuesday night with an after-dinner speech urging the technologists, venture capitalists, and entreprenuers in attendance to focus on greener technologies that make economic sense, rather than crowd-pleasers like hybrid cars or Sheryl Crow's toilet-paper reduction strategy.

Khosla is plunging his dollars into technologies like enhanced geothermal, cellulosic ethanol, and efforts to improve the efficiency of products we already use, like engines and light bulbs. The key investment decision, in his mind, is whether these alternative technologies can work at utility-grade levels.

"(Alternative fuels) have to compete with the cost of fossil fuels without subsidies," he said, and they also have to be scalable. Technologies like food-based ethanol, wind power, and regular geothermal aren't scalable to meet the needs of a huge energy provider like PG&E, but if we could perfect ways to create ethanol from non-food sources, effectively store the energy generated by wind power, or drill geothermal plants anywhere on the surface of the planet, that goal of scalability comes into sight.

The other goal is that alternative sources of energy have to be price-competitive with current sources of energy such as oil, coal, and natural gas. The public will embrace cleaner, sustainable energy sources as long as they don't have to pay for it, Khosla said.

Martin Tobias of Ignition Partners, Erik Blachford of TerraPass, and David Morris of EcoVerdance talk about carbon-trading systems.

(Credit: Tom Krazit/CNET News.com)

Khosla is betting on the future, but he thinks that significant changes could arrive in the energy market as soon as five years from now. Other presenters on Wednesday morning discussed their current businesses, such as Lyndon Rive of SolarCity and David Morris of EcoVerdance.

Rive has a thriving business installing solar panels on California homes but is working overtime to try to ramp up the supply of solar technologies to meet demand, which illustrates Khosla's scalability issue: prices are way, way too high.

Morris' company is working on carbon trading by allowing businesses to purchase credits for a chemical called Accele-Gro-M, which is then given away to farmers in developing economies. This "all-natural plant growth enhancer," according to EcoVerdence's site, is used to boost crops yields; 1 gallon can treat 12.5 acres, Morris said. The increased yields not only improve the food supply in those areas, the additional plants take carbon dioxide out of the atmosphere.

Carbon-trading markets have a bad reputation because many people feel they don't work to actually offset carbon production and give carbon producers ways to feel better about their production without really solving the problem. Morris' co-panelist, Erik Blachford of TerraPass, agreed that carbon-trading markets aren't perfect, "but they work."

Morris agreed. "The most costly thing we can do is nothing," he said. The FIRe conference runs through Friday, and several more panels will discuss the energy opportunity from several different points of view.

WASHINGTON--Famed venture capitalist Vinod Khosla told energy and environmental ministers from around the world they greatly underestimate how rapidly energy is moving toward renewable sources.

Khosla was a speaker during the ministerial plenary at the Washington International Renewable Energy Conference (WIREC) 2008 here on Tuesday, where he argued that the energy industry is undergoing a technology disruption, much the way that telecom and computing did decades ago.

Vinod Khosla argues that people underestimate the pace of technology change in energy.

(Credit: Martin LaMonica/CNET Networks)

The reason people don't appreciate the pace of change is faulty projections, he said. Government officials and businesspeople trust market forecasts which have consistently been far off-base.

People believed that it would take decades for mobile phones to become widespread, but it happened much quicker because they had mistakenly assumed that the phones would remain the same as the original clunky prototypes. McKinsey forecast that there would be less than 1 million cell phones sold between 1980 and 2000, when the actual number was more like 109 million.

"We are repeating the same mistakes in energy," Khosla said. "It's hard for people to imagine what energy will look like in 10 or 15 years."

Because technology change happens faster than most people anticipate, he believes that several renewable energy technologies will become cost-competitive within five or ten years.

He forecast electricity production at the same price as fossil fuel power plants, biofuels from non-food sources at $1 a gallon, high-efficiency engines and lighting, and carbon neutral cement production.

"All these technologies are in development today. Oil will have to be $35 per gallon to compete," he said.

Underlying his assumptions, however, is a rapid adoption of these energy technologies.

To achieve these cost efficiencies, new energy technologies have to pass what Khosla calls the "Chindia test." That is, the need to be cheap enough for China, India, and other developing countries to purchase.

That scale will accelerate technology development and adoption, he argued. Expensive products like plug-in hybrid cars, which may be the darlings of environmentalists, simply won't drive large-scale change, he said.

"Plug-in hybrids are irrelevant because they are too expensive. Unless you can make 500 million or 800 million of those, it won't matter," he said.

His contention that plug-in hybrids are irrelevant, or "toys," a case he made late last year at a conference, brought fierce criticism from environmentalists.

Although a longtime denizen of Silicon Valley, Khosla is no stranger to Washington, D.C., where he has presented to congresspeople and lobbied for supportive policies.

The U.S. government should boost investment in research and technology and implement regulations that put a price on carbon emissions, he said.

Clearly an optimist, Khosla ticked off a number of technologies he has invested in that could shift the energy industry from fossil fuels, including solar thermal power, cellulosic ethanol, advanced geothermal, synthetic liquid fuels, and energy efficiency.

"We are mounting a war on oil, a war on coal, a war for efficiency and renewable materials," he said.

Updated 2:30 p.m. PST with funding amount.

Khosla Ventures, the venture capital firm of Sun Microsystems co-founder Vinod Khosla, has invested in Pax Streamline, maker of turbines, heating and air-conditioning systems, and aerospace technologies.

Khosla and Pax Streamline CEO Jay Harman did not disclose the amount of the investment, which was formally announced Friday, but Harman said the funding is "substantial." According to a source familiar with the deal, Khosla invested an estimated $6 million in a series A round of financing; and if the company meets certain business goals, the VC firm will put in another $6 million.

Khosla partner Ford Tamer will sit on the board of Pax Streamline, and Harman will serve as interim CEO.

Jay Harman

Pax Streamline is a relatively recent spinoff of Pax Scientific, an 11-year-old research and development company based in San Rafael, Calif. Pax Scientific was founded on the premise that design in nature could improve the efficiency of industrial design of everything from air conditioning fans to water pumps to and computer cooling systems. Harman's design for fans, pumps, and propellers mimic the geometries of spiraling whirlpools--and industry experts believe these designs can reduce friction, wasted energy, noise, and unwanted heat.

Pax's projects take a cue from a design theory called biomimicry, coined by Janine Benyus. Biomimicry argues that nature uses only the energy it needs, fits form to function, and recycles everything.

Pax Scientific, which has numerous private investors, has already spun out companies for computer systems (PaxIT), wastewater management systems (Pax Water Technologies), and car cooling systems (PaxAuto). Paul Hawken, co-founder of garden retailer Smith and Hawken, is CEO of three Pax spinoffs. The company formed Pax Streamline within the last two months to address new markets for turbines and aerospace technologies, according to Harman.

He said that Khosla's investment will open doors for the company.

"There's no one that doesn't answer Vinod Khosla's phone call," he said. "It's very helpful when you have new technology and are looking for attention from Fortune 100 companies. He is a real visionary."

It's sort of like an organ transplant for cars.

Transonic Combustion, which has been relatively secretive until now, has created a fuel injection system that will let diesel engines run on regular gasoline. Diesel engines get better mileage than regular gas engines, explained CEO Mike Cheiky in an interview. However, diesels typically emit more particulates. Gas is also far more readily available than diesel in the U.S. Insert Transonic's components into a diesel engine and you get the best of both worlds.

(Credit: Transonic Combustion)

Additionally, the company's fuel injection system dramatically increases the internal compression in an engine, which in turn increases efficiency and mileage, he said. A standard 2.3-liter diesel engine that gets 50 miles per gallon can get 100 miles per gallon when retrofitted with Transonic's components.

"This gives us a clean-burning engine at very high compression," he said.

The Camarillo, Calif.-based company has already retrofitted a couple of engines with its injection system and is currently building up a car around one of its engines to test how it works. The car tests, hopefully, can begin this summer.

The principles behind Transonic's technology can be traced back to Nicholas Leonard Sadi Carnot, an 18th-century French engineer, according to Cheiky. Carnot studied the output of heat engines and determined formulas for achieving maximum theoretical efficiency.

In a compression engine, efficiency is dominated by the compression ratio, or the ratio of the volume inside a cylinder when the piston is down and the volume when the piston is up.

"The higher compression ratio, the higher efficiency," said Cheiky. "That is fundamentally why diesels are more efficient than gas engines."

Ultimately, the company will approach car manufacturers about adopting its technology. First, however, Transonic wants to extensively test it. Car companies are notoriously conservative so there's no shortage of testing that can be accomplished.

Cheiky wouldn't say much more about the technology--there's a lot more that he's not disclosing--but that's more than in the past. Transonic popped up on the radar last May when Venrock Partners, Rustic Canyon Partners, and Khosla Ventures announced investments in the company. (At the time, Transonic has single cylinder prototypes.) Details were scarce. Later in 2007, Transonic said it had set a goal of making an engine that can get 100 miles per gallon. The company said the engine could run on any type of fuel but didn't get into specifics on how it worked. More details might come out in the second or third quarter, he added.

One vague clue Cheiky gave me was that some of the technology in Transonic's device can be traced in part to his work in fuel cells and batteries. Cheiky helped start battery company Zinc Matrix Power. (He has 45 patents to his name. Some are in the cellular industry.)

Transonic isn't the only company citing historical sources. EcoMotors, another Khosla company, is working on an opposed cylinder/opposed piston motor that it says could make 100 mpg cars real. The engine design was tried in the 1930s, but it never caught on because of manufacturing costs.

EcoMotors is working on a futuristic diesel engine that's similar in concept to something Charles Lindbergh may have once used.

The company, which came out of stealth mode over the weekend, wants to bring what is called an opposed piston/opposed cylinder diesel engine to market. In ordinary engines, pistons pop up and down (or back and forth if laying down) inside an individual cylinder capped by a cylinder head. Gas is injected into the chamber and gets combusted by the action of the piston, among other factors.

A prototype engine from APT

(Credit: APT )

In EcoMotors' engine, there is a double-length cylinder with a piston at each end. (There are no cylinder heads in-between.) A single-engine module consists of four pistons and two cylinders, said COO John Coletti. The pistons and cylinders are horizontal too, so car and engine manufacturers can stack them.

The unusual configuration results in several advantages. Mileage can be boosted by 40 percent to 50 percent, when a two-module engine is compared with a standard diesel. The engine also can be made 30 percent lighter. Because the engine modules are horizontal, cars can be more aerodynamic.

Coletti predicted that a 2.5-liter engine from his company will provide the same power as one of the 6.5-liter engines used by truck manufacturers today, but weigh 300 pounds less.

Another advantage: the arrangement of the cylinders causes the vibrations from the engine to cancel each other out. The engine is also well-balanced, he said.

EcoMotors has licensed the concept for an opposed cylinder/opposed piston engine from Advanced Propulsion Technologies, which has been working on the concept for years. (Peter Hofbauer, chairman of APT, is also CEO of EcoMotors). Another licensee of APT will develop engines for the military. That company is expected to deliver a prototype to the Defense Department in May.

"This engine can be used in almost any application. Cars, trucks," said Coletti. The same type of engines could also be used in helicopters, he said.

So, the aircraft bit? Junkers & Co., which designed planes in Germany in the '30s, also used an opposed cylinder/opposed piston design on some engines from 1934 through 1939, Coletti said. The concept never fully took off, however, because it wasn't easy to mass manufacture. APT has figured out ways to reduce parts. Thus, APT and EcoMotors have an engine that's similar in concept but it's different.

"It had two of everything," Colletti said. "This has a single crank shaft."

EcoMotors said in its press release that the company hopes to have something out around 2011, but Coletti said the release depends on a variety of factors.