Vinod Khosla on Operating and Scaling a Business

Oct 29, 2014
3 Min Read

I spoke to Vinod Khosla, co-founder of Sun Microsystems, who has run his own venture capital firm, Khosla Ventures, since 2004, following nearly two decades at VC firm Kleiner Perkins. His highest-profile investments have lately been in clean tech: wood-based biofuel, new types of batteries and water purification. He studied engineering in India, then at age 20 tried and failed to start a soy-milk company. Khosla moved to the U.S., got a Stanford MBA, then co-founded Sun Microsystems in 1982. In September 2014 a judge ruled that Khosla must let the public access his private beach near Half Moon Bay in California. In the following brief interview, Khosla talks about what makes a startup successful, how employees can best collaborate, the scalability issues that occur, and what most companies get wrong when it comes to operating a business.

Dan Schawbel: Can you tell me what was different between those startups that worked and didn’t work out, and specifically what was different operationally?

Vinod Khosla: The biggest mistake I see entrepreneurs make is not knowing what they don’t know. That leads startups to focus on the wrong incentives, ask the wrong questions, and over the long run, they are unable to remove the key risks and build a large sustainable business.  That being said, I wouldn't discount the impact of luck and timing for startups. They both play a large role, and assuming otherwise is folly. Often the single biggest differentiator of success is the founder and their entrepreneurial skills, their clarity of vision, their focus on only what is critical, on their leadership and their persistence and openness to learning.

Schawbel: Assuming you’ve hired the right people, how do you get them to collaborate efficiently, especially if distributed?

Khosla: That first assumption is the most important part though, so I would like to focus there. Hiring the right and the best people is incredibly difficult to do, and very few startups get this exactly right. I firmly believe a company becomes the people it hires, and a lot of the other pieces (including collaboration, distributed teams, etc.) will work themselves out with a great team. A great startup team is resourceful and willing to iterate and experiment on all things (not just their product / business model, but also their internal collaboration). Having said that, it is the CEO’s job to provide leadership and ensure that the team operates as a team and has shared and aligned goals.

At Khosla Ventures, we spend a lot of time focused on working with entrepreneurs to develop the right “gene pool” as we like to call it. In fact, we have a whole section on our website dedicated to team building for startups, or gene pool engineering.

Schawbel: What scalability issues occur after the first hundred employees are hired?

Khosla: As a company scales, by default, more structure will need to be added to keep a well functioning organization. This naturally could lead to increased collaboration problems, hierarchy issues, politics, etc. You need process but you cannot let process win over entrepreneurial culture. I would rather have too little management than too much.

To keep a company thinking like a startup, building out your gene pool with the same principles as before is important. For example, Scott Cook talked about a direction change at Intuit for middle managers as “guiding experimentation” rather than “managing projects."

Schawbel: How do you know what types of functions to build out in an organization as it scales?

Khosla: "You cannot. You have to assume plans will change, and build teams with that flexibility in mind. Planning is important to understand the quality of thinking of a team and to have them consider all the factors that affect a business. But as the thing to meet at all costs it is mythical targets. Sometimes I see companies meet plans at the expense of building real value on what will make them successful in the long run."

Schawbel: What do most companies get wrong when it comes to business operations?

Khosla: Going back to the beginning – companies tend to have blind spots because they don’t’ know what they don’t know. It’s impossible to completely correct for, but missing those critical questions can lead to problems in recruiting, team building (which can manifest years later), sales strategy, product building, etc. There are many tactical and strategic issues that different companies can get wrong (e.g. scale before product-market fit, solve a problem no one will pay for, etc.) but those typically are manifestations of the original issue. I am always surprised how many organizations know what they are doing but have not formally and critically asked why they are doing it and is that the most efficient thing to do.

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