Like Michael Jordan Playing Baseball
What 60 Minutes Got Right
Following the recent 60 Minutes story The Cleantech Crash, Katie Fehrenbacher at Gigaom wrote a very good article called What 60 Minutes got right and wrong in its story on the “cleantech crash”.
In contrast to some who reacted with righteous indignation against the notion of any troubles in the world of cleantech, Katie noted, “60 Minutes got some key things right in the story”, notably that cleantech HAS crashed from a venture capital (VC) perspective.
Cleantech often requires much longer time horizons and higher capital expenditures before a VC has a chance of seeing a return on the investment. And as I have explained in the past, you can’t really afford to have a 10 percent success rate if that entails building 10 capital intensive biofuel plants before achieving success. It’s a very different model than a couple of guys starting an Internet company in their garage. You run out of money pretty quickly when building plants that fail to perform.
VCs lost a lot of money investing in cleantech before figuring out that the sector didn’t fit the conventional model that had served them so well in Silicon Valley (a point also driven home by Jigar Shah in this article). 60 Minutes could have put together a solid story on just the VC angle. But the criticism of the 60 Minutes story is that they tried to make their conclusions too sweeping; that while there were some good subplots that could have been developed into different stories, tying them all together — while ignoring any positives — and then declaring that cleantech is dead was a bridge too far.
The Vinod Khosla Subplot
Or, if they had only stuck to the role of the most famous cleantech VC of them all, Vinod Khosla, they could have had a solid story.
I could see after the story aired that Khosla was the main reason they brought me in. After all, I have been a critic of his for years. In the wake of the story, many people have asked why I have been so critical of Mr. Khosla. Let me explain.
For fans of Khosla, he is the guy putting down his money to make the world a better place. He represents everything that we should be doing to advance renewable energy, so he is to be praised, not criticized.
Many of Khosla’s critics would paint a different picture; one of someone who naively and arrogantly believed that the real problem in the energy business was that it lacked Silicon Valley know-how. Because of his previous success in Silicon Valley, he was afforded instant credibility by some members of Congress. He was called to testify on which energy policies we should have in place, and he influenced our energy policy at the highest levels of government. He helped create an atmosphere that ultimately seriously damaged the credibility of cleantech.
There are elements of truth in both narratives. I do believe Khosla wants to make the world a better place, and he has wagered (and lost) a lot of his own money (as well as mine and yours). But his claims helped generate unrealistic advanced biofuels mandates, and encouraged an atmosphere where entrepreneurs were forced to make increasingly unrealistic claims of what they could deliver in order to secure funding. Thus, the $1/gallon fuel that the politicians and the public were promised never materialized, and the advanced biofuel sector lost credibility for repeatedly failing to deliver on wild promises.
One of my first criticisms of Khosla’s approach was in 2006 when I wrote Vinod Khosla Debunked. He had been writing editorials left and right, testifying before Congress, and giving speeches about what needed to be done to win a war on oil. I took exception to some of his claims, and began to criticize them.
Vinod called me at home twice to discuss my criticisms, and we exchanged a number of emails on the topic. We even discussed writing a white paper together. I became convinced that he was sincerely trying to do something positive for the environment, but I strongly disagreed with his tactics, which I was sure would ultimately backfire (as they did). We were at an impasse on several points.
We talked about the measure of success. He said that his primary objective wasn’t to make money (although that is necessary to drive investment), but rather to make a real impact in the energy markets. Paraphrasing, he said that he was very concerned about the threat of climate change, and that he wanted to provide affordable, low-carbon fuels on a big scale. Thus, his metric of success was whether he actually became competitive, at scale, so he could have an impact on carbon dioxide emissions. (For more background on “success” in cleantech, see Thiel vs. Khosla on Cleantech: Who is Right?)
For Khosla, the end has always justified the means. Exaggeration is OK in his book. Repeating rumors in a public forum to smear an opponent is fine. He criticizes those who criticize him, just as he did in the 60 Minutes piece. For example:
Lesley Stahl: What about this criticism that what it takes to be successful in Silicon Valley does not translate into the energy business? It’s such a completely different field.
Vinod Khosla: That’s fair criticism. But I am learning. And I am trying. [RR: So far, so good. But here comes classic Vinod Khosla]. And they’re sitting there doing nothing. They’re being the nay-sayers, the pundits who say why it can’t be done. But they won’t try. Now, sure we’ve done lots of things that failed in energy. But every time, we learned. Picked ourselves up and tried something new.
Instead of explaining what he has learned and talking about his mistakes, he chastises those who would criticize him as do-nothing naysayers. These people do not have the right to criticize him, because, you know, he has actually accomplished stuff. (Here is my CV in case he needs to be reminded that I have actually done a few things). And sometimes pundits say “it can’t be done” because they understand the laws of physics and chemistry. It isn’t necessarily because they lack his vision.
Failure is a Virtue – Just Ask Michael Jordan
Two quotes are prominently featured on the homepage of Khosla Ventures:
“Our willingness to fail gives us the ability and opportunity to succeed where others may fear to tread.”
“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” —Michael Jordan
Khosla likes to portray failure as a virtue, sometimes citing Michael Jordan or Babe Ruth and the shots they missed and the times they struck out. They failed, you see, because they tried. But they also succeeded on a grand scale because they were fearless.
I can think of a more appropriate analogy than Michael Jordan’s basketball success. Everyone knows that Michael Jordan was one of the greatest basketball players in NBA history. But one season, Jordan decided to take his game to the baseball diamond.
Now there’s nothing wrong with Jordan trying something new. He was pursuing a dream. I am sure his presence in the minor league sold lots of tickets. But he was playing the wrong game for his skill set, and after a mediocre season in the minors, he went back to the NBA. Vinod Khosla in the energy sector has been akin to Michael Jordan the baseball player. He struck out because he was out of his element. If a baseball team had been built itself around his skill set, it would have failed miserably.
Although I hear both men can dunk, one difference between Michael Jordan and Vinod Khosla is that Jordan didn’t go into baseball with the belief that he could revolutionize the game with his superior talent. Khosla has embraced this notion that he is a visionary cleantech pioneer (the 60 Minutes story called him the “father of the Cleantech revolution”), but he hasn’t owned his failures.
Failure because of ineffective due diligence — which is the case with several Vinod Khosla ventures — is not a virtue. Yes, Babe Ruth did strike out a lot, but it wasn’t because he failed to locate the batter’s box.
A Sampling of Misses
People who knew the energy business knew Khosla was way out of his depth when he wrote “My Big Biofuels Bet” in 2006. He talked about old technologies as if they were new, and cited a (nonexistent) Moore’s Law for biofuels that promised to make biofuels more abundant, more efficient, and more affordable. In that article he wrote positively about:
- E3 Biofuels (went bankrupt)
- Kergy (became Range Fuels, went bankrupt)
- LS9 (recently sold for ~$40 million plus additional considerations after $75 million in public funding rounds was raised; still not commercially viable)
- Greenfuel Technologies (went bankrupt)
- Mascoma (withdrew an IPO due to weak financials)
- Celunol (became Verenium, was headed toward bankruptcy before assets were bought by BP, who later scrapped plans to commercialize)
Note that not all of these are Khosla companies, but these are companies that he felt had real potential. Now, more than 7 years after he wrote that article, it is clear that he wasn’t a very good judge of potential.
When Khosla talked up his companies, journalists wrote gushing articles, and generally failed to ask critical questions. As his companies began to fail, Khosla of course said he expects to fail, but he also tried to distance himself from them, downplay his role, and even say “We tried to tell them to do it differently.”
With Range Fuels, he later claimed that he tried to convince them to change to a fermentation process, but they wouldn’t listen. That’s sort of like telling a toy manufacturer that they should switch to making pharmaceuticals — very different processes. If you want to make pharmaceuticals, invest in a pharmaceutical company. And his latest claim regarding Range Fuels — and the first time I heard him say this was in response to the 60 Minutes piece — is that he urged them not to accept federal money. So it’s not his fault tax dollars were thrown away.
He did the same thing with Cello Energy, a company he backed that was later determined by a jury to be a fraud. After the court ruled against Cello, Khosla downplayed his investment as: “a relatively small amount”, “a non-equity relationship”, “blind insurance”, “a tiny amount.” Court documents showed that Khosla believed in the technology, and thought the investment would pay off. But the court record also showed very shoddy due diligence. The resulting failure is one you have when you are Michael Jordan playing baseball. (See my article Setting the Record Straight on Cello Energy and E3 Biofuels).
Neither Range Fuels nor Cello Energy exist today, and neither ever produced any qualifying fuel for sale despite spending a lot of money to do so. But the vast majority of the EPA’s 2010 advanced biofuel mandate of 100 million gallons was to come from these two companies based on what they claimed they could do. (The mandate was put in place by Congress, but final volumes were determined by the EPA). So the EPA gave us fantasy-based advanced biofuel targets, and escalated them from there. Khosla was attracted to companies that made outrageous claims, but he was unable to separate hype from reality. He then went out and repeated the hype, and the media uncritically lapped it up.
60 Minutes could have spent the entire segment just comparing Vinod Khosla’s claims to what his companies have delivered. Calera, another of his portfolio companies, is another example. Khosla once claimed coal power could be cleaner than solar power, calling Calera the “only viable solution to carbon sequestration, worth more than GE’s power plant business.” But there were some very basic problems with the chemistry of what the company claimed. The company’s claims were challenged in many places, including on my own site. After the initial CEO was replaced, the new CEO admitted that their fundamental assumptions about the process had been flawed. Now let his claim soak in for a minute: He thought the company could be “worth more than GE’s power plant business.” As with other Khosla’s energy ventures, Khosla invested, repeated the hype, and the company failed to deliver.
There is No Downside
Khosla’s style is to create a mystique around a company, but he fails to disclose any negatives associated with it. His pitches always sound too good to be true. Again, from his interview with Lesley Stahl:
Vinod Khosla: Nature takes a million years to produce our crude oil. KiOR can produce it in seconds.
Vinod Khosla: And we take that, add this magic catalyst-
Lesley Stahl: This is the secret sauce?
Vinod Khosla: Yeah…
Lesley Stahl: You make it sound almost – sorry – too good to be true. There must be a downside.
Vinod Khosla: There is no downside.
And that’s Vinod Khosla in a nutshell. His catalysts are “magic”, somehow cheating the laws of chemistry and physics. “There is no downside.” Yet there is a downside, it’s just that you won’t hear it from Khosla. But investors in his biofuel companies have learned the hard way.
Beyond my issue that some of Khosla’s early investments were overhyped, took tax dollars on the basis of that hype, and then failed (thus my claim that taxpayers funded his learning curve), I have a real concern when someone promotes advanced biofuels as “easy.” They are not. They are quite challenging to produce economically, for reasons that are well-understood. But when you run around claiming that they are easy and that there is no downside, you do a disservice to everyone who is working to bring them to fruition. Your “cheap and easy technology” may divert funding from approaches that have more merit. After all, why would someone invest in something that’s challenging, when your approach is a piece of cake with no downside? And then when you fail, not only did you perhaps prevent someone more deserving from being funded, the hit to the industry’s credibility means you may prevent future entrepreneurs from being funded.
A book could be written on Khosla’s cleantech missteps. Maybe some day one will be. Although his more recent biofuel IPOs have tanked, as a taxpayer this practice of raising funds via private investors is OK by me. I won’t criticize those failures (although I may advise investors to avoid the companies). I agree that failure is a normal part of trying new things, so don’t confuse my criticism of Khosla as criticism of failure. It is more akin to a criticism of misleading people, which then damages credibility of an entire sector.
It was Khosla’s decision to make a high-profile entrance into the energy arena, and that comes with some responsibilities. 60 Minutes could have held his feet to the fire. But by presenting the story that they did, 60 Minutes allowed him to wrap himself in righteous indignation. He fired off an open letter to 60 Minutes, and then later said he was “amazed” that they would ignore his criticisms.
In his open letter, he ironically wrote “The pontificators at 60 Minutes failed to do the most elementary fact checking and source qualification.” That’s sort of been the problem with so many of his schemes, like Range Fuels and Calera: Ineffective elementary fact-checking, followed by failure to deliver after he hypes a technology.
Khosla has come a long way since his early days in the energy sector, and is now usually more cautious with his claims. The challenges of the energy business are much clearer to him now (he is getting up the learning curve), but it took taxpayer money and some damage to the credibility of an emerging industry for him to get there. I don’t give him a free pass for that.
I am glad he is investing in the sector, but have long-wished he would trade in his style of promising the moon for one that is more sober in its assessment of the challenges. Claims like “No downside” are self-serving, untrue, and ultimately destroy credibility.
Lest you think I am a lone voice with an ax to grind, I can assure you that there are many people in the sector that feel Vinod Khosla has done more harm than good. But to paraphrase a great man, I am willing to write where others fear to tread. I am inspired by Michael Jordan, taking the shot (at Vinod Khosla) that others fear to take.
Link to Original Article: Like Michael Jordan Playing Baseball
Robert Rapier is a chemical engineer with 20 years of international engineering experience in the energy business. He holds several patents related to his work. Robert is the author of Power Plays: Energy Options in the Age of Peak Oil. He is also the author of the R-Squared Energy Column and is Chief Investment Strategist for Investing Daily’s Energy Strategist service. Robert has appeared ...
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