The Hard Times In Silicon Valley

If Kleiner Perkins Caufield & Byers is a big constellation in Silicon Valley's universe of venture capital, Vinod Khosla, 49, is its brightest star. Though partner John Doerr gets more publicity, the Indian-born Khosla has a better overall record, helping to found Sun Microsystems in 1982 and funneling money into telecom giants like Cisco. Recently, he talked with NEWSWEEK's Brad Stone about dreary times in the Valley:

STONE: You've said the VC industry is driven by greed and fear. Where are we now? KHOSLA: The capital-allocation system in this country is driven by those two emotions. It's a little bit like democracy. There's lots of things wrong with it, but there isn't a better system. When the investment area becomes attractive, everybody rushes to it. So you get overinvestment. And then you get missed expectations and lower rates of return, and everybody gets out. And then you have a fear cycle, which is what we are in now. But people forget that stock markets don't relate to how business is doing. There are plenty of businesses that are doing just fine whose stock is not in favor.

How far along are we in the fear cycle?

Because we had such a large excess cycle, we're going to have a longer negative cycle. But it is one of the better times to start companies. We are seeing as many really good ideas as we ever saw. We're just not seeing very many of the not-so-great ones.

So why are so many VC firms complaining there's nowhere to put their money?

That's because the same opportunity, through a different-colored glass, looks different. All opportunities should have gotten more critical review in the past.