Venture capitalists back clean technologies, says VC Vinod Khosla

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As part of the expansion, the investment firm said it has recruited Gideon Yu, Facebook’s former chief financial officer, and venture capital investor Jim Kim of CMEA Ventures.

Khosla Ventures announced Tuesday that it has launched two funds to invest in environmental technology and IT startups. Khosla Ventures III has $750 million to invest in traditional early and mid-stage companies, while a newly created fund called Khosla Seed, which has $250 million, is looking for higher-risk projects.

Khosla, a co-founder of Sun Microsystems, is one of the highest-profile investors in green technologies and a proponent of changes in U.S. energy policy.

Many venture capital firms have been reluctant to invest in energy startups because they have been forced to invest more than they would have liked in order to fund expensive projects such as biofuel refineries or solar plants.

In an interview, Khosla said venture capitalists, many of whom have come to green tech from the biotech or IT industries, shouldn’t have funded large-scale projects, but instead should have focused on nurturing new businesses.

“This is 1980s-style venture capital – real technical risk with small amounts of money and small teams,” Khosla told the New York Times. “Clean tech companies that raise large amounts of money – that’s project finance, not technical risk. Most people have lost that distinction.”

The Khosla Seed Fund aims to fill a funding gap that many experts say is yawning: small companies in need of seed funding.

Venture capital funds are not typically structured to invest less than a few million dollars in a single company, as they seek a 10-fold return on investment within a few years. But many companies, including those in the green technology sector, would prefer to receive less money from investors and not give as many shares to outside investors, said Susan Preston, an angel investing expert who manages the CalCEF Angel Fund. Some businesses, such as service companies or companies focused on energy efficiency, can be good long-term investments but don’t lend themselves to the venture model, she said. And many banks have become conservative in their lending, making the gap even wider.

“There are a lot of very valuable and commercially viable businesses that have great cash flow but are not suitable for venture capital financing because the market potential is not very large – it could be that it’s a localized business,” she said. The fact that there are funds set up specifically for seed funding doesn’t necessarily mean venture capital is redundant. But those VCs with larger sums could come at a later stage of development.

“I’ve seen more smaller funds developed in the clean technology space than in any other sector because of the recognition of the need for this additional layer of funding,” Preston said. In a statement, Khosla said his seed fund will target companies that have their roots in university research and can’t find funding elsewhere.

Examples of the “radical approaches” Khosla Ventures has already cited include Calera, which sequesters carbon in the production of cement, and Kior and HCL, which use novel techniques to produce fuels from biomass. “We will continue to fund high-risk technological innovations and unproven but high-impact scientific experiments, now with greater resources,” Khosla said in a statement.

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