Investing in Big Ideas-Full Transcript
Visionary investor Vinod Khosla shares why he backs entrepreneurs with radical thinking
Investor and technologist Vinod Khosla gives StartUp Health the lowdown on breaking the mold for venture capital investing, making an entrepreneur successful and harnessing the network effect.
Key takeaways from this episode of StartUp Health NOW can be found here.
[0:00] Intro Music
[0:43] Steven Krein: You are not a typical venture capitalist. In fact, as an entrepreneur for probably more years than you were a venture capitalist, you’ve transformed industries. I think you, even as an investor, are not investing in the typical things that investors invest in. Without a doubt, there is no underlying mold that you’re following.
[1:07] Steven: In fact, you broke the mold for venture capital investing in this sector. I’d love to ask you about how you view today, this moment, the opportunity to think different as an investor and venture capitalist, and how you’re thinking about this moment in time that we’re in.
[1:32] Vinod Khosla: Thanks, and thanks very much for having me and everybody here. It’s always fun to talk to entrepreneurs and people trying to change the system.
[1:44] Vinod: Now, I feel like I’m more of a troll than an investor, because I like changing things. Whatever occurs, you try and disrupt it and be a little painful, and it’s fun.
[1:57] Vinod: To me, there’s two kinds of healthcare investors. There’s investors who the first question they ask is, “What is billing codes,” or, “How does this fit into today’s systems?” That may be interesting to a lot of people, and there’s a lot of money floating around, a lot of inefficiency, and a lot of money can be made.
[2:20] Vinod: Frankly, it’s completely uninteresting to me. I’m very interested in inventing new stuff, finding new ways to treat things, approaching things where it changes practice very radically. The time is exactly right.
[2:43] Vinod: First, one thing people forget is the US is a very small part of the global healthcare system. It is some single‑digit percentage of the global population that needs healthcare, and so we should collect CPT codes and billing codes or procedures, change that.
[3:02] Vinod: Most people don’t care about them, and their healthcare doesn’t depend on it. First, I love taking a global perspective. Also, it’s very hard to change any system from the inside. If you look at who changed automobiles, it wasn’t General Motors, it was Tesla and maybe Google with driverless cars.
[3:31] Vinod: If you look at who changed media, it wasn’t NBC or CBS, it was YouTube and things like that. If you look at who changed space, it wasn’t Lockheed or Boeing, it was SpaceX. If you look at retailing, it wasn’t WalMart, it was Amazon. I can’t think of a single area where innovation came from the inside.
[3:55] Vinod: That’s good news for people who are trying to work outside the system and find excuses to be compatible. You have to be. You have to find, hack your way into the system and existing practice. That’s very important, but that’s a tactic, not the mission.
[4:15] Vinod: People who are trying to change things are the ones that are really, really interesting to me, do things in a radical way. I’ll give you a few examples. If you are a cardiac patient, other than your acute care when you had a heart attack or some event, you’re seeing your cardiologist for 10, 15, 20 minutes a year.
[4:43] Vinod: What happens the rest of the time, 365 days, most, 99.95 percent of the time? You’re not being monitored. That’s really interesting.
[4:53] Vinod: Talk to anybody who’s had a cardiac event, and they’re always worried. Now, can you meet that need, give them peace of mind, do early detection if they’re going to have another attack, or a stroke, or event? That’s really interesting and it’s new science because cardiologists weren’t trained in that.
[5:13] Vinod: Take mental health. You might get a psychiatrist. You have a problem, you seek somebody out, in three weeks you get an appointment. That’s a really bad way to do things.
[5:29] Vinod: If you can monitor somebody’s cellphone, and see how long they’re take to respond to a text message or how often they look at their Twitter or Facebook messages, or where they’re going, or if they got out of bed because you know where the phone is, you can monitor mental health 24/7.
[5:52] Vinod: You can be predictive of when they’re starting a bipolar episode or a manic depressive episode. That’s new science applied to medicine to make medicine much better. Also, incidentally, much cheaper.
[6:05] Vinod: Whenever you rely on humans, you’re not going to get the quality and consistency that you can get with these 24/7 really inexpensive monitoring. No matter which area you look at, there’s really interesting value to be added that doesn’t change traditional practice of what a doctor does yet.
[6:28] Vinod: But it does enhance it significantly, make it much better. I can’t imagine why you’d need a radiologist to read a chart, or an imaging study, machines do that much better.
[6:42] Steven: So…
[6:43] Vinod: Sorry. I went on and forever.
[laughs] [6:44] Steven: No, it’s fantastic. Playing off this a little bit…
[6:47] Vinod: I didn’t know what questions he’d ask, so I…
[6:51] Steven: Do you think entrepreneurs in this sector are being bold enough?
[6:57] Vinod: I would say about 20 percent are, and they’re trying to do new things. Now Jerry’s here, so I can say this, traditional media was driven by advertising. The world had a view, and then online data science completely changed that.
[7:25] Vinod: I know what shade of blue to use to increase the probability of click by half a percent. You can’t do that complexity, or behavior characterization, any other way but for this, with machine learning.
[7:43] Vinod: That and data science can do the same for every detail of medicine. It’s silly that we have a diabetes drug for all of the billions of people on this planet who need it each with different genomics.
[7:58] Vinod: I saw a diabetes study out of Israel that said, “Based on your microbiome, they can predict your blood sugar, two hours in advance, or hours in advance, if we both had the same meal, how ours would be different, and what it would be.”
[8:17] Vinod: For their benchmark they used an expert dietitian to predict what the sugar would be. That expert dietitian had a accuracy of roughly about mid‑30s in terms of percent.
[8:34] Vinod: The machine learning system had north of 75 percent accuracy in predicting your glycemic response to a meal, and they’d make a different prediction for you than for me based on data.
[8:49] Vinod: That’s the boldness we need. It really means new science, new medicine, not old medicine feeding into hospital systems or currently billing codes. There’s room for that too, and frankly I don’t really understand that. I’m pretty naÔve about that.
[9:08] Vinod: I like this new stuff because nobody’s an expert.
[9:11] Steven: If an entrepreneur walks in the door and happens to get a meeting with you, or you meet someone, and they’re thinking about the traditional challenges and questions they get from traditional thinking venture capitals and investors.
[9:26] Steven: Which, I think a lot of entrepreneurs get beat up every day by those, looking for answers to how things fit into today’s system…
[9:33] Steven: Is it a “No thank you,” or do you try to tap into your entrepreneurial origins and collaborate with them to help figure out how to be 10 or 20 times more bold with how they’re thinking about solving the problem?
[9:49] Vinod: I love doing that. My funnest meetings are where somebody comes in prepped on how to speak to healthcare investors and they do all this traditional stuff. Then they will meekly say something on the side and I will say, “Tell me more.”
[10:06] Vinod: Then they will admit they were told not to talk about what they believed and how to package their idea around what’s expected in which billing code it fits. I love those meetings to think outside the box. People are frankly discouraged from doing what they really should be doing.
[10:24] Vinod: Where the really large innovations are, where the large games are had. If you’re an investor, I can see how you want to just invest in the next version of GM’s car. And you won’t take the bet that a test lab with no expertise in building cars could do something new or different.
[10:46] Vinod: To me, that’s much more interesting, it’s much riskier, but it’s where all the large impact happens. Two of my favorite quotes. One was from Martin Luther King, which said, “Human progress depends on the socially maladjusted.”
[11:07] Vinod: The other one was from George Bernard Shaw, who said, “Reasonable people fit themselves into the world, unreasonable people try and fit the world to themselves. Hence human progress depends on the unreasonable men.” He should have said man or woman, but…
[11:27] Vinod: That’s true of every area which is why almost no large innovation came out of a traditional business. No matter whether General Motors, or GE, or Wal‑Mart. It almost always comes from outside.
[11:45] Steven: As you think about those who think that way, the entrepreneurs who think the way you’re describing, we call the entrepreneurs at StartUp Health Healthcare Transformers and they all walk around with this pen and self‑identify.
[11:58] Steven: There is without a doubt a healthcare transformer mindset that makes the kinds of entrepreneurs that are really going to transform this industry, and in particular, different. Not talking about your companies, but talking about the entrepreneurs that you are having the most fun with.
[12:17] Steven: What are some of the characteristics, their mindset and other things, that would help you say, if you could multiply your rubber stamp to some of those characteristics into other entrepreneurs, you would be making more investments?
[12:29] Vinod: First, generally not always, they’re deeply knowledgeable in some area. Often, again not always, they’re naive about healthcare, and so they’re able to think outside the box and they’re not too constrained.
[12:49] Vinod: I find if an entrepreneur is like that, and you team him up with somebody who knows something about the healthcare system, so they can lay the caution flags out of why entrepreneurs fail and they fail often, that’s a very good combination.
[13:05] Vinod: But somebody who says, “I have a vision for how I’m going to transform something, often, for a personal reason. My father had a heart attack, my family is diabetic or has a history of Alzheimer’s, or, you pick your favorite.” That passion and knowledge‑driven entrepreneur, they are the ones who cause most of the change.
[13:28] Vinod: Those who do startups to make money get too pragmatic, too quickly and will not be trans‑formative in my view.
[13:36] Steven: Do you think there are other characteristics, or what are some of the other characteristics that you would use to describe again, go back to some of your current partners that you’re investing with, you’ve been investing in and developing.
[13:47] Steven: What are their characteristics now, looking at them with some pattern recognition, you’d say seem to be the ones you gravitate to?
[13:57] Vinod: There’s one question which is, what makes a successful entrepreneur? Another what I gravitate to and that’s a subset of great entrepreneurs. I want to be clear because there’s more than one way to be successful. Almost all the great entrepreneurs have great vision. They have a mission and a passion.
[14:23] Vinod: The reason that’s important is every startup runs into lots of scary problems. The ones who have a mission and a passion, almost a religion about it, they don’t give up.
[14:37] Vinod: When you have to bang your head against the wall and you’re running out of cash and nothing seems to be working, you need a religious fervor to break through those walls and keep banging your head till you punch through.
[14:51] Vinod: It’s hard being an entrepreneur. I find the people who are too pragmatic, find something else to do and the ones who are mission‑driven, drive through that wall. It’s one of those old sayings, you keep trying till you succeed and you don’t give up, that’s important.
[15:14] Vinod: Depth of knowledge and thoughtfulness are really important. Now, turns out there’s the dreamers with the big vision, that’s necessary, but it’s not sufficient. The really good entrepreneurs get very pragmatic.
[15:33] Vinod: Here’s the way I would describe that characteristic of an entrepreneur. If you’re trying to cross a stream, you have this mission to cross the stream, but if anybody is trying to do that across flowing waters, you almost never go direct.
[15:49] Vinod: You zigzag to the left, you find stepping stones, you might find a log. This zigzagging departs from the vision and the mission to be tactical. This schizophrenic personality between being mission‑driven and visionary, and being very tactical and pragmatic.
[16:11] Vinod: The way I like to think about it, good entrepreneurs use each stepping stone to gather the resources to get to the next stepping stone. The zigzagging is OK, but eventually, their goal is to get across. That to me is a really important description of what good entrepreneurs do, this pragmatism with mission.
[16:38] Vinod: Then there’s people with mission, vision and they tend not to be pragmatic. Then the people who are too pragmatic almost never make successful entrepreneurs. They get lucky sometimes, but very hard to see them. Too pragmatic is the wrong way to be a great entrepreneur, a trans‑formative entrepreneur.
[16:56] Vinod: Now, the ones I love, are the ones that are the science notes. I love going into deep science talking about a new approach to measuring something, a better sensor, better data science to detect something. A digital drug, how you could affect the brain and hence body function through behavior change.
[17:22] Vinod: I love science, and so I gravitate to that a lot. The very effective workflow stuff in hospitals and things, that’s a little less interesting to me.
[17:37] Steven: One of the things that our chairman Jerry Levin focused on very early on in the development, support and encouragement behind StartUp Health was the power of storytelling. I know you’re equally passionate about that. We were in a green room back there talking with Jerry and Vinod.
[17:56] Steven: They were sharing clips about the art of storytelling, and there’s a story behind everyone but also every genesis of every company. Can you talk about your views on the power of that and how that plays a role even in the interactions you have early on?
[18:12] Vinod: Mission and vision I’ve talked about, and that’s really important. But think of the practical day‑to‑day things you have to do. Driving up here, I was talking to somebody. They had a really great job, making a lot of money, and I’m saying, “Hey, drop that and join the six‑person team.” The wife was saying, “No way.”
[18:35] Vinod: Unless you’re good at communicating what you do, and that’s really storytelling. You’re not going to convince those people and when the going gets stopped. I’d like to say entrepreneurship is a roller coaster where the highs are high and the lows are really, really low.
[18:54] Steven: Sometimes, in the same day.
[18:54] Vinod: Sometimes, in the same day. When you are at the bottom of the roller coaster, storytelling can motivate your team to redouble the effects, efforts to bang your head against the wall.
[19:08] Vinod: Those are really important skills. If you’re an entrepreneur, you’re selling employees, you’re selling customers, you’re selling investors. You’re selling everybody all the time. Storytelling is a well‑established way to get people rallied, emotional, committed to you unreasonably.
[19:30] Vinod: It doesn’t make economic sense. The odds of success are low. They’re giving up a cooshy job. They’re giving up family time. There’s a lot of hard things you do as an entrepreneur, and storytelling is very important.
[19:42] Steven: I have a couple of more questions specifically around some different topics but very related. You’re incredibly passionate about peer support, trusted peer networks.
[19:55] Steven: One of the underlying components, really, of what I think has made StartUp Health so successful so quickly is the power of a community of entrepreneurs, like‑minded individuals, all acting like an army bound together, transforming healthcare together.
[20:11] Steven: What are your thoughts about the view that, that kind of community can do some great work together, acting both together and separately but harnessing the power of the network effect?
[20:24] Vinod: How many people here being entrepreneurs? Can I have a…I’d like to say building a successful startup is first figuring out all the wrong ways to do things.
[20:37] Vinod: Because it seems like you keep making mistakes and doing things wrong one after another until you figured out the only thing left is the right way to do it. If you’re persistent, you’d discover that one way.
[20:54] Vinod: Sometimes, I describe it as trying things long enough to give yourself a chance to get lucky. That really is the essence of entrepreneurship, this iterative learning. You make these mistakes, you fix them quickly, you learn from it, you try the next thing. Your next thing is a more intelligent guess at what to try.
[21:16] Vinod: If you’re innovating in new areas, there is no rules. There are no experts. You’re always in this learning mode. Iterating through learning very much the way evolutionary biology works, startups work the same way.
[21:33] Vinod: To your question, if you have an ecosystem around you of mistakes other people are making, you can learn a lot from them. If you’re making mistakes, they can ask you questions, that make you think harder.
[21:50] Vinod: Most of the time, I like to say, startups get the two or three macro things right pretty easily. There’s a hundred small things you get wrong. The only way you get past them is get lots of hard questions.
[22:09] Vinod: The sooner you get those questions, these are the questions you didn’t even know were questions or didn’t think about, then how many entrepreneurs have said a year later, “I wish I’d known this.”
[22:24] Vinod: If you get lots of hard questions around you, you learn faster and you increase your probability of success. Every single thing you do is about increasing your probability of success. Nothing guarantees success, and there is no right way.
[22:41] Vinod: Sometimes, I tell entrepreneurs, and don’t do this to me, but even if you don’t need funds, go talk to vc’s about funding because every criticism, when they tell you what you’re doing right and what they’re excited about. It isn’t going to help. You already know that.
[22:59] Vinod: When they tell you the things they’re concerned about, if you can pull that out of them, those are really valuable questions to put in your repertoire of questions to think about, ask, question yourself. The faster you ask those questions and communities really help for that.
[23:19] Steven: When you look at an entrepreneurial community, a trusted pure network, there’s the right way of leveraging it and the wrong way, what would you say is the most powerful way of actually activating the power of that network effect.
[23:33] Steven: If you’re an entrepreneur, either just becoming part of it or always been a part of it but never really tapping into the power of it. What would you say would be a strategy for them to think about?
[23:41] Vinod: There are two conflicting things I said. Some of you may have caught it, some of you didn’t. You’re always in selling mode. What you really want is the input on the things you’re doing wrong. It’s so easy to get defensive when somebody challenges your sales pitch.
[24:04] Vinod: You need to sell and convince people. At the same time, what’s really, really valuable is all the hard questions, the things you didn’t think about. Encouraging those questions, encouraging that feedback is very hard, because people are naturally averse to being impolite, challenging.
[24:27] Vinod: They want to be nice, they want to be liked, they have no stake. They’re not going to tell you you’re really screwed up about this assumption. Having a demeanor that encourages that feedback. One thing is, when I started Khosla Ventures, I put on my website, is I prefer brutal honesty to hypocritical politeness.
[24:49] Vinod: 95 percent of the time, 95 percent of the people will be hypocritically polite and make you feel good. That’s not what’s valuable. The invoice. Like, help me by telling me what’s wrong, not what’s right, inviting that is very, very important.
[25:07] Vinod: If you’ve read any book on group dynamics or staff meetings or group meetings, encouraging…This is why hierarchies in the companies don’t work, because people are afraid to speak up.
[25:19] Vinod: Encouraging that behavior, whether it’s in your own team, or in your community, or if you’re always looking for what you’re doing wrong as opposed to what you’re doing right and feels much better to look forward to what you’re doing right and not what you’re doing wrong, hugely valuable.
[25:37] Steven: What’s your unique ability?
[25:39] Vinod: That’s probably two things. I’ve done this long enough, but I feel like I’ve screwed up more often than anybody else. I feel like some days, I feel so stupid. Why didn’t I think of this earlier?
[25:55] Vinod: Accumulating a series of mistakes. I have a large library of things I’ve screwed up on. I think that’s really valuable. I never assume anything is true. I ask a lot of questions, and I’m always looking for what could be different.
[26:15] Vinod: In fact, I’m reading a book that I’ve started called “Mindset” by Carol Dweck on fixed mindsets and explanatory mindsets. It’s worth reading. Though, I’ll finish it and then see if I agree. The beginning of it is very good. With respect to, do you have a fixed mindset or open mindset?
[26:37] Steven: In fact, that’s one of the foundations of our program, that we’re rolling out as our 2016 curriculum is around the healthcare transformer mindset. What’s interesting is it doesn’t cost any money for a mindset. Oftentimes, what entrepreneurs don’t realize is the power of how they think about this.
[26:59] Steven: What would you…
[27:00] Vinod: I’m going to stop you there for a second, because you said something really important. I find people who have less money do better in building their startup.
[27:12] Vinod: Because they question many more things. If you got $50 million in the bank, you make a series of assumptions, you start executing on them. If you have 500,000, every $10,000 is valuable and you question a lot more to this learning process I talked about. Becomes much more important, and you’re likely to build a much better plan with less money. Many years ago, I don’t like talking to venture capitalists. The only time I went to…
[27:47] Steven: Who here likes talking to venture capitalists?
[27:51] Steven: We got a like‑minded people in here.
[27:53] Vinod: I maybe the only person on the venture capital business that isn’t member of the national venture capitalist association. I’ve gone to their meeting once. It was to talk about this issue. I analyzed all my venture investments across all time.
[28:10] Vinod: I found I made more absolute money even at the medium when I invested less than two million dollars and then when I invested more than 10. Think about it. I said, “Boy, that’s really puzzling.” What happened is, when it’s less than two, you’re engaging with the entrepreneur more. It’s not a board meeting.
[28:32] Vinod: It’s a phone conversation. It’s a much more open dialogue than a pre‑prepared presentation. You start getting to the crux much more easily and you get much better plans.
[28:44] Vinod: Between a much better plan that has many more assumptions vetted and more money, I’d pick the much better plan every single time. I was shocked at this analysis.
[28:55] Steven: Do you think, when you look at the decisions on those companies that were less than two million, were they first time entrepreneurs, second time, or do you look at the stage of that entrepreneur in their career as any determination of either the success or failure of those investments?
[29:14] Vinod: Most of those were early stage. Because if there were second or third time, there is a lot more money generally. The big ideas all came up of smaller financings and much more interactive evolution of the business plan or evolution of the team, this is a big risk, hire that person to go address this risk.
[29:40] Vinod: How many people build their team based on the risks as opposed to function? I need a marketing guy, or I need an engineering guy, or I need a sales guy. If your risk is in one place, you have that dialogue. The same thing if you go to lots of VCs and they critique the risk and you say “This is what I am worried about,” go address that risk first on small amount of money, so if you fail, you’ll fail small, if you succeed, you’ll have eliminated the risks early with small amounts of money.
[30:13] Steven: You truly embody…although you plead ignorance on all things healthcare, we do all believe that you are going to be one of the reasons why a decade from now we look back and this industry doesn’t look like it does today. So thank you for spending today with us.
[30:31] Steven: Thank you for being an active member, and your firm being an active member of the StartUp Health network, and as I know everybody here today enjoyed. Thank you so much for sharing your view and your wisdom with us. We look forward to doing it again, hopefully sooner than two years.
[30:46] Vinod: Great. Thank you everybody.