STONE: You’ve said the VC industry is driven by greed and fear. Where are we now? KHOSLA: The capital-allocation system in this country is driven by those two emotions. It’s a little bit like democracy. There’s lots of things wrong with it, but there isn’t a better system. When the investment area becomes attractive, everybody rushes to it. So you get overinvestment. And then you get missed expectations and lower rates of return, and everybody gets out. And then you have a fear cycle, which is what we are in now. But people forget that stock markets don’t relate to how business is doing. There are plenty of businesses that are doing just fine whose stock is not in favor.

How far along are we in the fear cycle?

Because we had such a large excess cycle, we’re going to have a longer negative cycle. But it is one of the better times to start companies. We are seeing as many really good ideas as we ever saw. We’re just not seeing very many of the not-so-great ones.

So why are so many VC firms complaining there’s nowhere to put their money?

That’s because the same opportunity, through a different-colored glass, looks different. All opportunities should have gotten more critical review in the past.

Do you regret any of the hype the venture business, and especially Kleiner Perkins, received in the ’90s?

The press always wants a story to write about… But you can’t lament something that is just a natural phenomenon. It’s like the fear-and-greed cycle. You can’t do much about them. The other way is the Russian economy, and no one likes that.

Where do you see the most opportunity?

There is still this danger of people chasing what looks “hot.” Part of the Internet problem was that everybody viewed every Internet opportunity as a good opportunity.

Which areas of tech innovation are the most interesting?

Material sciences are seeing a lot of changes. The whole area of personalized medicine [tailoring drugs to an individual’s genetic makeup] is seeing a lot of changes.

How about wireless?

No… I haven’t seen a lot of fundamental innovation, and the bigger companies, not the start-ups, are in a better position to leverage incremental improvements.

Biotech?

One has to be cautious. The problem is, because the biotech companies do better in the stock market, everyone starts investing in biotech. One has to go with fundamental innovation. Especially since, when you invest in a start-up, you are not going to take the company public for four or five years.

Stock market aside, do you see positive indications about the economy?

My general view is that the economy is stabilizing, not getting better. But stabilizing is better than getting worse.

Is the venture business still fun?

Yes, particularly now. Back during the bubble, there were plenty of situations where other people would come in with billion-dollar funds. When a company called Centrata came to me in 2000 I said, “I’ll put a million dollars in.” And another firm said, “We’ll put in 10 million at a higher valuation.” I told the founders, “Your business plan is not good enough yet.” And so the Centrata guys took a million instead of 10. And if you talk to them today, they’ll tell you they would’ve gone out of business if they’d taken 10 and spent it. More people today are focused on how they can build a better business plan than throwing money at a problem. That’s why I say I’m having more fun. What I do is appreciated a lot more than it was two years ago. Our business is about helping ventures, not capitalizing ventures. I never call myself a venture capitalist–I call myself a venture assistant.