The Green-Tech Venture Capitalist

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Vinod Khosla knows how to balance risk and reward. The billionaire venture capitalist built his career making improbable technology bets — and more often than not getting it right. As a founder of Sun Microsystems and partner at Silicon Valley's storied venture capital firm Kleiner Perkins Caufield & Byers, Khosla and his colleagues backed some of the Internet's biggest sensations, like Google, Amazon, Excite and Netscape. Today, his deals assume a completely different type of risk: kicking America's dirty oil habit.

The next tech boom, if Khosla gets it right again, will be all about clean energy: developing affordable, eco-friendly alternatives like solar, wind and biofuels. It's not earthy-crunchy, feel-good philanthropy. Clean tech, as he sees it, promises serious returns that could rival any Internet success. In fact, Khosla wagers that the Googles and Yahoos of clean tech have yet to emerge. "Energy is subject to the same sort of scientific breakthroughs, innovation and entrepreneurial efforts that have characterized Silicon Valley's impact in microprocessors, PCs, biotechnology, telecommunications and the Internet," Khosla tells TIME. The promise of today's green tech boom, however, isn't just sky-high IPOs. Khosla is betting that his investments, along with his own bold policy ideas, will speed the creation of a clean tech economy and drive energy independence.

Since starting his own investment firm in 2004, the 51-year-old engineer has become a self-styled green maverick in Silicon Valley, pouring tens of millions of his own fortune into clean energy startups and spurring infusions of private capital from Wall Street and other venture capitalists into alternative energy ventures. "We can replace all of our gasoline with ethanol-like fuels," Khosla says. His timeline: 25 years. But he's not waiting for the feds to hand out grants; he's investing in promising startups like Amyris Biotechnologies in Emeryville, Calif., which is bioengineering microbes that produce alternative fuels, and teaming up with Bill Gates and Sir Richard Branson to build ethanol refineries. Instead of corn, their "cellulosic" ethanol will come from non-edible plant matter like grasses, algae, wood chips and rice hulls. Biofuels, an area Khosla is betting heavily on, is expected to be a $52 billion market by 2015, up from $15 billion today. In another project, Khosla and former President Bill Clinton are working to raise over $1 billion dollars for a profit-seeking "Green Fund."

Clean tech is gaining traction. In the first half of this year it has attracted $1.4 billion in venture funding, almost twice the amount invested in the first half of 2005, according to the CleanTech Venture Network, an industry-watcher. In May, NASDAQ launched its Clean Edge U.S. Index to follow 47 publicly traded clean-energy stocks. Institutional investors are finally catching on, too. Investment banks, hedge funds and state pension funds like CalPERS (the California Public Employees' Retirement System), which has put $700 million toward renewable energy technologies, have helped make clean energy tech's fastest-growing sector.

Khosla applauds the momentum. "The only place we will see innovative solutions come from is the private sector," he says. "And the only way we will see them funded is by Wall Street. The government doesn't have enough money." That may be true. But Khosla, a self-described "free marketeer" and "fiscal Republican" opposed to subsidies, is co-chair and a contributor to Proposition 87, a statewide initiative that would impose a tax on oil companies for drilling in California — and use the $4 billion raised over 10 years to fund the development of "cleaner" and "cheaper" energy. "Proposition 87 is 100% a subsidy," says Cleantech blogger and energy investor Neal Dikeman, who is opposed to Prop. 87's call for the creation of a new state bureaucracy spending $4 billion on "an undefined bunch of renewable programs," and prefers that the money come from California's General Fund or by raising taxes. Khosla maintains that Prop. 87 is a "limited, one-time extraction fee" that levels the playing field for alternative energy by providing the same sort of incentives that big oil, natural gas and coal have long enjoyed. Politics aside, investors like Khosla know going green means there's far more at stake than heaps of risk capital.