Vinod Khosla: Betting Big On Green

Since making a fortune as a founder of Sun Microsystems, Vinod Khosla has built on it as an investor with pre-eminent venture-capital firm Kleiner Perkins Caufield & Byers. Now he's emerged as Silicon Valley's biggest enthusiast of green technologies—no mean feat in an industry where nearly everyone is going gaga over green. Khosla has already invested millions in almost 30 clean tech start-ups in areas ranging from geothermal energy to synthetic biology. But his most notable bets have been on ethanol. Most ethanol comes from corn, but if the technology becomes readily available, nearly any biological material—even grass—could create a viable alternative fuel called cellulosic ethanol. At least that's the way ethanol proponents would have it. As the ethanol movement continues to grow, so does criticism from the likes of the Union of Concerned Scientists and the Sierra Club; they argue that ethanol will simply allow automakers to avoid making more-efficient vehicles. NEWSWEEK's Barrett Sheridan asked Khosla for his view of energy's future. Excerpts:

SHERIDAN: You started a new venture-capital firm, Khosla Ventures, in order to focus on clean technologies. And you're using your own money.
KHOSLA: Lots of people say lots of things about clean investing, but they don't put their money where their mouth is. It's easy to pontificate when you don't have to bet with your own money. I have to be really objective about what I believe, because otherwise I'll lose money.

Everyone's talking about corn ethanol. But its emissions aren't all that clean.
Even in our corn efforts, we try and achieve at least a 50 percent reduction in greenhouse-gas emissions, relative to oil. That's twice as much as a hybrid does.

Cellulosic ethanol is where the real potential lies. One of your companies, Range Fuels, is building a manufacturing center.
Yes, it's the first commercial-scale ethanol plant in the world, which should be operational in 2008. And we're already looking at the next five sites we'll be building.

Wow. That's much sooner than most expect.
Yes, wow. And they're going to make it from forest waste that's left on the floor during timber-mining operations, so there's no new land needed.

Range is getting a $76 million government grant. Doesn't that conflict with your business model of not relying on government subsidies?
We started building the plant before we won the government grant. We were committed to building it whether we got it or not, because it made commercial sense. But if the government is going to have a program, then there's no harm in competing. If our competitors are going to get it, then we might as well apply.

When your cellulosic-ethanol plant comes online, will it compete with gasoline?
It will be price-competitive with gasoline, assuming gasoline stays where it is. However, I have to make sure that it is price-competitive with gasoline when gasoline declines to the $30 to $35 range. There's no question that if you start to substitute a substantial portion of oil [for ethanol], it'll be below $35 within 20 years.

You know, people debate all this stuff. But if you get [cellulosic ethanol] working, the poverty situation in Africa will change dramatically, because biomass will have value and they can grow those grasses.

So your vision of revolutionizing energy includes revolutionizing the fight against poverty?
My vision is that biomass completely changes rural-urban development economics. Hundreds of billions of dollars are going into the Middle East today, often feeding terrorism. Those hundreds of billions of dollars should be going to rural America, rural Africa, rural China, and generating income off the land. That's the grander vision. The bulk of the land in Brazil and Argentina and places like that is pastureland that is underutilized.

You've had to deal with oil-company smear campaigns, particularly during your unsuccessful bid last year to pass an initiative that would have funded green projects in California by taxing oil producers. Did that loss dim your hopes for government encouragement of alternative fuels?
It was a battle, and we lost. But we will win the war. I spend a lot of time talking to policymakers. There are a lot that absolutely want to do the right thing, but frankly, they don't have enough information. So educating them is really critical.

In the end, I expect the oil companies will participate in this business. If I were Saudi Arabia or a Middle Eastern country trying to invest my dollars, I'd invest it in these newer technologies so they can be participants, and they win either way. If they take off, they win, if they don't take off, they win.

That seems pretty unlikely.
I don't see it happening yet, but this is a very new business. Last year, President Bush mentioned cellulosic ethanol in his State of the Union address, and 90 percent of the people didn't know what that was, or what it meant. This is very new. And a lot has happened in a year. Imagine how much can happen in the next three to five years. We're investing a lot of money—we lose money if it doesn't happen.