Vinod Khosla and Warren Buffett are at opposite ends of the investing spectrum. In an exclusive interview, the legendary VC reveals the 3 key principles they both follow, why valuations don’t…

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Vinod Khosla
Vinod Khosla.

  • Vinod Khosla discussed Warren Buffett, valuations, and bubbles in an exclusive interview.
  • Both Khosla and Buffett seek to make long-term bets on quality businesses with great managers.
  • Valuations and market swings don’t matter if you make the right investments, Khosla said.
  • See more stories on Insider’s business page.

Legendary investor Vinod Khosla revealed the core investing principles he shares with Warren Buffett, outlined why he doesn’t stress about valuations, and explained why he isn’t worried about asset bubbles and market crashes in an exclusive interview with Insider this week.

Khosla cofounded Sun Microsystems and worked at Kleiner Perkins before launching his own venture-capital firm, Khosla Ventures, in 2004. He counts Square, Stripe, DoorDash, and Instacart among his past investments.

Shared philosophy – with a twist

Khosla and Buffett operate at opposite ends of the investing spectrum. Khosla makes early, high-risk bets on scores of technology startups in the hope that one or two of them will become billion-dollar companies. Buffett mostly backs dominant, profitable companies in industries he understands, like Coca-Cola and Kraft Heinz.

Yet Buffett’s philosophy of buying into great businesses run by sound management and holding them for the long term strikes a chord with Khosla.

“We are doing the same thing in a very different market,” Khosla said. He summed up his strategy as making the “right investments in the right founders in the right markets,” then waiting the better part of a decade to see a return.

However, Khosla is far less concerned than Buffett about the price he pays. “The hard part isn’t the valuation, the hard part is picking which of 100 companies will have a huge impact on society and be worth tens of billions of dollars,” he said.

“What we do is option-value investing – either the money expires or you build a really great company,” Khosla continued. “If you’re right, valuations don’t matter.”

Khosla pointed to his early bet on Square, the payment-processing company led by Twitter CEO Jack Dorsey that boasts a $116 billion market capitalization today. “We bet on Jack,” he said, describing his wager as an option on Dorsey transforming small business.

It was a similar story with alternative meat-producer Impossible Foods, which Khosla plowed a few million dollars into back in 2011. “People thought venture capitalists investing in hamburgers was crazy,” he said, as they couldn’t imagine the food industry shifting from meat to plant-based protein.

Impossible was privately valued at $4 billion last year. “It wouldn’t have mattered if we paid twice as much,” Khosla said.

Buffett has had similar experiences. He nearly passed on buying See’s Candies in 1972 because the seller wanted $30 million and he was loath to go above $25 million. Buffett got his way, but his discount proved to be a rounding error. See’s has required only $40 million in investment to generate well over $2 billion in pre-tax income under his ownership.

Along with Buffett’s buy-and-hold approach, Khosla admires the Berkshire Hathaway CEO’s unwavering faith in his investing style, his ability to ignore hype and resist the easy option, and the fact that his billions have barely changed his lifestyle.

Khosla also gave kudos to Buffett for his massive Apple investment, which has more than tripled in value to north of $120 billion in the space of five years. “He’s realized that tech is transforming society in very large, fundamental ways,” he said.

The 66-year-old hopes to keep working as long as Buffett, who turns 91 next month. “If you love what you do, then keep doing it,” he said. “I believe you grow old when you retire, you don’t retire when you grow old.”

Forget about the market

Leading investors such as Michael Burry of “The Big Short” and GMO cofounder Jeremy Grantham have warned asset prices are in a bubble and a historic crash is coming. Others including Bill Ackman expect a post-pandemic boom. Khosla is deeply skeptical of those types of forecasts.

“Anybody who thinks they know where the market is gonna go – they’re not very smart,” Khosla said, adding that he has “no clue” what will happen.

Public-market investors can feel like the world is ending when a bubble bursts, but that’s not the case in the VC sphere, Khosla said. When you’re betting on a company to transform an industry and chasing a 10x or 100x return over the next decade, a 30% or 50% fall in value today is no big deal – and you might see three booms and three busts before it’s time to exit, he added.

Once again, Khosla and Buffett are on the same page. The Berkshire chief has often told investors to ignore daily stock-price moves, and only invest in things they would happily own if the market closed for a decade.

https://markets.businessinsider.com/news/stocks/vinod-khosla-ventures-warren-buffett-investing-principles-market-bubbles-crashes-2021-7

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