Fundamentally nothing about the Internet and broadband is different today than it was five years ago. We are on a relentless path to increasing capacity usage. Even in today’s environment, it is the one segment in carriers that is growing. But independent of short-term up-and-down cycles, when overcapacity builds, followed by no demand for a while because of that overcapacity, we shouldn’t confuse the fact that over 10 years we are going to see increasing capacity. My forecast today is no different than it was two years ago.

But what about the victims on the road to success? What do we say to them?

You shouldn’t confuse good and bad business and lucky and unlucky business, because there are plenty of people who did well, but got unlucky — got caught in the wrong time frame.

I was involved with Corio at one point, which from my view was doing well, but from a stock market point of view did very poorly. Based on broadband, it’s a fundamentally good concept. The fact that the stock is under a dollar doesn’t change my belief that it is a valuable service and more economical than its alternatives. If it’s an economic system, it will do well, assuming it can get financed and that’s a big if. But you shouldn’t relate that to stock prices. Now, Corio is one of those examples of a lucky company, because they got their money before the market crashed. They are sitting with more than $90 million in cash and the stock price, in some sense, doesn’t matter because no one is using it for any purpose. In fact, all their competitors who weren’t financed have gone out of business. There’s no pricing pressure. So, the stock price collapse has actually substantially improved the economics of their business. Success still depends on Corio’s management, in terms of how well they execute their plans. If they do go a good job, they will be rewarded. That is just an example of why you shouldn’t confuse fundamentals with what’s hot, what the market likes and what some analyst thinks about it.

How much are we going to see a slowdown affect the amount of capital flowing into these companies? The public markets are cold and the venture capitalists have become very conservative. I am bringing into question your 2010 expectations.

No, it doesn’t change my expectations for 2010. But it clearly changes my expectations for the near term. I think in the last two years, we saw all sorts of excess and we will have to pay that price. Just as much as things were over-hyped, things will be under-hyped for a couple of years. It will probably be two to three years before things return to normal.

But that is the nature of a capitalist economy. When somebody starts generating good returns, too much capital flows in and then you have a cycle of under-performance.

The dot-com bust was not unique. In 1990, some biotech companies had $1 billion in revenue. By 1995, there was no amount of technology or business that could get anybody interested in investing in biotech. There was an under-investment cycle and some good companies got built without getting the value or returns. For the last two years, things have been great for biotech because now we are on the other side of the cycle. I think we are going to see that in other sectors as well.

Well, lets move forward to 2010. Which company will be still on its feet? Which has the management, the cash and the luck to be a major broadband player in 2010?

That’s a very broad question. In general, there will be more categories, or companies or segments, than there are today. I fundamentally believe that technology has an increasingly greater role to play in business, and hence the amount of business or GDP that goes into technology companies will keep increasing relentlessly not only in the next 10 years, but beyond.

I have sometimes been called outrageous when I make this forecast: The average corporation in America will spend 10 percent of its sales on information technology by 2010. That is three times higher than the percentage today, which is about 3.5 percent. Everybody looks at me and says, “Look, everyone is stopping investments in IT, how can you say that?”

Well, they’ve stopped investing in IT because they had over-invested in the last two years. Generally, as an entrepreneur, when you do something that everybody else is doing, you’re not going to get a differential return. When you believe something and make a contribution in areas that others aren’t exploring, or don’t believe in, that is when you get handsomely rewarded.

Are Juniper and Redback differentiated? Will they be around in 2010?

Clearly, in their categories they have established positions. Juniper is executing really well. Redback has screwed up sometimes in execution and they have to fix it. Is the category important? Absolutely. The category is huge and as far as I can tell, there’s nobody else playing in that category of IP services at the edge.

Juniper’s category is well defined; Redback’s is not. Both have the opportunity to be really large companies and be around in 2010.

I read an article recently that captured you on a beach in Hawaii in 1995 reading a textbook on optical communications and I thought to myself, “Boy I’d really like to know what Vinod Khosla is reading now.” Give us a little bit of a peek here.

There are lots of areas where there are pretty significant changes going on. The first thing I’d say is that every time you pick an area, something comes from that field that looks far more important than the one you picked. So, the key is to integrate it rapidly. But there are some real existing large problems and IT is one of those areas that has large existing problems, which, to me, means large existing opportunities.

There are probably two or three areas of IT infrastructure that are very important and will become major areas of investment. I don’t want to call them “hot” because “hot” is a term I don’t like in terms of investing or doing a deal.

As engineers, we design IT systems, computers and technology software. When you design a $2,000 PC, it costs an average corporation $15,000 to run it over a period of three years. So almost all systems cost far more to operationalize and run than they cost to buy, even when they are multimillion-dollar systems. That goes for PDAs too. I think there is a major opportunity to reduce these implementational costs. That is one area.

I call the other area the real-time enterprise. When any piece of information in any corporation that is not real time is entered — say when an order is placed over the phone — somebody has to take that signal and enter it into the system. Every manual process is inefficient. Look at Cisco and Lucent. Cisco has twice the revenue per employee than that of its competitors. Their information is much more real time. These kinds of efficiencies will happen across the board as corporations become more real time, in terms of connectivity and availability of information.

The third area grows from the fact that the basic infrastructure of standard computers and standard routers will change dramatically. Network Appliance is a good example of a company that was an early entrant in this area and built the storage appliance.

But to get back to the question, there are also areas of fundamental science that are important. I think we have started to see a stage in biotechnology where over the next five to seven years, we will make significant progress in treating diseases. I am reading about it because I am interested, and not because I am trying to be an expert. I think the whole area of nanotechnology will be the next level of engineering capability. I suspect that it’s an area that is starting to get so much attention that in a few years we will see a nano bubble. But that does not take away the fact that nanotechnology has some fundamental contributions to make.

Going back to broadband, when are we going to see demand pick up? When are we going to see Qwest and other companies start to see their business pick up?

I don’t see much of a pick up next year. The reason is very simple: Most large corporations do their budgeting in October. This year’s budgeting is over and so all the spending for next year is pretty much set. The next opportunity we have is in the next budgeting cycle and it depends on market perceptions then. We’ve had a technology-led recession. In the last month or two, we have wobbled on the edge with the consumer recession piled onto the technology recession. Which direction will it go? I don’t think anybody has a clue. All we can do is be prepared to respond when we have real data.

How would you compare Kleiner’s investment volume now to the 1998-1999 period?

It’s definitely a lot slower than it was back then. But I’d say that what is generally happening is that there are fewer [business] plans coming in, but the quality of the plans is much higher. We were in a mode where everybody said, “I’m going to start a company.” They would sit down and write a plan and send it in. But that’s not the right way. When you come up with a technical breakthrough or a significant idea that’s going to make an economic contribution, then you can build your business plan around that. That’s the right kind of business plan and the right kind of company to be funding.

How many dollars does Kleiner have lying around to be invested these days?

We don’t talk about how many dollars, but most of our current fund is uninvested.

When do you think you will be seeing the same level of activity again?

First, we should see the last two years as abnormal. Beyond that, I don’t think our rates have changed. I don’t think there was a hiatus at all for Kleiner Perkins. It’s no secret that we try to do one or two investments per partner per year. That has remained steady over the last 15 years I’ve been at the firm.

By and large people are shying away from funding second rounds and third rounds. I know it’s no consolation that three years from now the best returns will be from people who were funded in second and third rounds because, since nobody wants to do it, they will get the best prices. As an entrepreneur, you have to manage your cash. Don’t ramp up your burn rate and don’t plan on getting funded in 2002. If you have to be funded, you can, but the pricing is not going to be very attractive.

KPCB is obviously one of the blue chips, but in terms of other venture capital firms what is the future?

There are two types of investing. One is called investing and doing deals; the other is being in the business of building companies. And they are very different. Sequoia and Kleiner are in the business of building companies. We are not in the business of investing; we are not in the business of financials; we are not in the business of deals. There is no notion of “buy” or “sell.” You take the long-term view. There was very little of this in the last two years. There were way too many people not qualified to invest who were investing, just because there was money to go around.

Are we going to go back to pre-1995 perceptions about which company can go public?

For the next five years, absolutely. Companies will go public on lower and lower valuations based on reality. Then they will over-perform and then public investors will forget that we had this 2001 cycle. By 2005 we will start another cycle of irrational exuberance.

As you look at the spectrum of activity from the creation of a company by angels to further investing by VCs to the involvement of investment bankers, is there anything that is regrettable that took place over the last few years?

Last October, when things were at an absolute high, I think I said at a conference that 90 percent of the optical companies then trading, including the ones that I invested in, would trade below their current price in the next two years. I got a lot of flak from lots of companies for saying that. Collectively we are to blame, but I don’t think it can be avoided. I am sure there will be another cycle where people will get returns, then the press will hype it up and then everybody will get excited.

You’ve had a few hot potatoes lately. Broadband Office (BBO), for example, shut down. What were you doing there?

What is building a company about? It’s adding value and managing risk. Those are the only things you do. Depending upon the environment, you take risks. Currently companies cannot take the financial risk of a high burn rate and so they are taking a product risk in terms of R&D.

BBO was born when money was cheap and it ramped up to a very high burn rate. Then the rules changed and they really couldn’t get funded. When BBO was shut down, it was running at about 150 to 200 percent, depending upon which month you counted, of its revenue business plan, and so it was well ahead. But the market changed and the new situation wouldn’t support a company that had burn rates of $5 to $6 million. BBO is sort of the flip side of the Corio story.

Of course that’s not to say we haven’t screwed up in investing in many companies. But my answer to that is if we are not screwing up often enough, we are not taking enough risks. A big part of venture capital is about risks.

Why didn’t Kleiner put in the money that BBO needed?

Most people somehow have this impression that Kleiner invests large amounts of money. Our total investments are pretty small. Historically, they have been $5 to $6 million and in the last couple of years they got a bit larger. Juniper was a $200,000 that added up to about $5 million total from Kleiner over the course of three years.

Were you sure that BBO deserved the money that it needed to stay in business?

Absolutely. I believed in their business plan.

And you with your moral authority in this town couldn’t convince anyone?

I managed $100 million, but I couldn’t help raise the rest. Things happen and you move on. But our success rate is around 70 percent.