When an investor or entrepreneur makes high-risk bets on early stage companies, failure is always part of the equation. For Kleiner Perkins Caufield & Byers Partner Bill Joy, he says more of the early-stage greentech startups he invests in with fail early, because he takes on riskier startups. But if those startups make it past the early stage, they can turn into something more meaningful and have a higher-impact on the industry and society.
“I try to have a first [investment] round that has a 50/50 mortality rate,” said Joy at MIT’s Emerging Technologies Conference on Wednesday. So essentially the early stage startups he likes to back have a 50-percent chance of not working. “Now a 90-percent mortality rate is not a good use of my time. That’s something for the government to back,” added Joy.
Joy has 10 to 12 startups he works with at anyone time, including companies like Siluria, which converts natural gas into ethylene (a key ingredient in plastics) and Renmatix, which makes sugar from biomass that can be turned into biofuel and biochemicals. Joy joined Kleiner six years ago after starting Sun Microsystems in the early ’80s.
The switch from IT to greentech has been “a learning experience,” and Joy says he’s learned enough about physics and chemistry “to not be too dangerous to our [firm’s] financial future.” Joy explained: “I felt like I’d done enough with computer industry. So I was happy to be allowed to pioneer for us in this area.”
Another key way to work with failure, is to fail cheaply. Joy says Kleiner will spend a couple million dollars backing an early stage risky company to see if they can help de-risk the investment and add value. But if the company ends up taking more like $20 million to fail, then that’s not good economics for them. Entrepreneur Bill Gross has explained the same thing before.
To find his investments, Joy said the Kleiner team thought about grand challenges that it wanted to solve, like desalinating water for 10 cents per cubic meter — today desalinating water costs closer to $1 per cubic liter, said Joy. Joy would then think about the best way to get to that goal (in the desalination problem, he points to using thermal energy instead of electricity) and then would start looking for scientists that are working on those innovations. Another way is to use the new tools that have been developed in the last decade — carbon nano tubes, robotics, ionic liquids — and apply those to older problems.
When looking at competing technologies, Joy says he uses the “secretary algorithm.” When you hire a new secretary, you can’t just pick the first one you interview because she seems pretty good — you have to get a sense of the quality of the population and then pick the one that stands out, said Joy.
At the end of the day, though, one of the problems with tackling high-risk problems and backing high-risk companies, is that some of these problems and innovations just aren’t scientifically possible. So it’s one of Joy’s jobs to determine at an early point if the company can’t be taken any farther with Kleiner’s funds. That’s the fail early part.
Image courtesy of hans.gerwitz.