Daniel Englander

Khosla Ventures Picks Up Backing from CalPERS June 6, 2008 at 9:08 AM

The $244 billion California Public Employees’ Retirement System has staked $640 million in Khosla Ventures. Up to this point, Khosla Ventures was backed entirely by Vinod Khosla himself, who formed his VC firm in 2004 after a stint as a GP at Kleiner Perkins. Vinod’s greentech picks have tended toward the capital-intensive, including major funding of four of the leading cellulosic ethanol companies: Mascoma, Range Fuels, Cilion, and Coskata. The Sun Microsystem founder has taken some flack for his trumpeting of biofuel companies, sometimes in these pages, but also from the Wall Street Journal Op-Ed page. My personal favorite is the ongoing fight between Joseph Romm and Vinod Khosla over whether hybrids are toys or ethanol is a crime against humanity

CalPERS’s stake makes it one of the largest LPs going in the VC game. However, the commitment also seems like its part of the growing of trend of VC firms raising increasingly large funds that are most likely targeted toward later-stage investments or expansion capital. This week RockPort Capital announced it had closed a $453 million late-stage fund with the goal of pumping higher rounds into a smaller amount of companies. The effect on median deal size will be noticeable, and the question of justifiable valuations remains on the table. However, the goal of pushing larger investments into later-stage companies is exit-focused commercialization and scaled production. With the IPO markets dryer than Lake Lanier, VC firms may need to seek refuge with hedge funds and heavily committed institutional investors in order to push their companies into attractive positions for potential M&As.

The commitment, which began six weeks ago when Khosla made a trip out to the CalPERS office, probably has something to do with the capital constraints faced by some of Khosla’s biofuels bets. While Coskata will probably follow a technology licensing strategy instead of going for full scale production, Mascoma and Range are both building commercial biorefineries. Those don’t come cheap, but they’re nothing a $640 million bet can’t solve.

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