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A New Model for Venture Capital Investment in Tech Companies in Hawaii

It is time that we put on our thinking caps and create a new model for venture capital investment more suited to our real circumstances in Hawaii. I advocate three major changes to the Hawaii venture capital model for tech companies:

1. Allow Act 221 to sunset, and implement the Act 215 State Private Investment Fund (SPIF) to be funded with up to $38 million in state tax credits that can be used to guarantee secured interest-bearing notes issued to lenders.

2. Have the SPIF act as a “fund-of-funds” to sector-focused tech investment firms required to raise 3:1 private equity funds to match SPIF investment, thereby multiplying by 4X the total investment pool available to invest in promising tech companies.

3. Encourage tech investment firms in Hawaii to shift away from the Silicon Valley model which has proved unworkable in Hawaii and toward the alternative R and D company model of direct monetization by tech transfer which plays to our strengths.

Given what we have learned from the Act 221 experience and the realities of the Hawaii business environment that our tech companies work within, we should consider this new model for venture capital investment in tech companies in Hawaii. Funding an SPIF revolving fund under Act 215 through secured loans paying an annual yield guaranteed by state tax credits opens the pool for tech investment to larger and more mainstream sources of capital, such as banks, insurance companies, real estate companies, and annuity funds. Using the SPIF vehicle as a “fund of funds” would leverage larger private investment funds and provide a more effective use of state tax credits. Targeting SPIF investments into a number of funds each focused on a promising tech sector would concentrate domain expertise, spread risk, cover more innovation, provide more knowledgeable vetting of potential deals, and enable sharing of industry-specific management expertise with portfolio companies. Finally, instead of pursuing a Silicon Valley model that has not worked in Hawaii, we can reorient tech investment into R and D companies that require lower amounts of capital, have lower business and market risk, have quicker, more achievable exits, and can provide comparable rates of returns for investors.

To read my complete blog article, go to:
Hawaii Technology Blog

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Comment by Rubén Peña on February 2, 2011 at 7:28am

Hawaii Technology Development Venture guided the forming of the Hawaii Dual Use Industry.

(courtesy of Ian Kitajima from OceanIt Laboratories)

 

"The Hawaii Technology Development Venture was established to assist in the development of technology for dual use. HTDV guided the forming of the Hawaii Dual Use Industry. This video is an overview of HTDV and the Hawaii Dual Use Industry."

 

Check out the video link here .....

http://www.youtube.com/watch?v=kTFcnEg8yvE

 

Mahalo,

Rubén

Comment by Leighton K. Chong on September 27, 2009 at 8:07am
Thanks for your comments, Keith. I agree with your first 3 points, which is why I find Karl Fooks' points on shifting toward sector-focused funds primed by angel investing very promising. As for compelling business model, before one can pitch, one has to know what would be compelling to pitch. Dr. Rob Yonover gave a wonderful book signing talk at Barnes & Noble yesterday ("Hardcore Inventing"), and had right on-target things to say about pitching innovations one is knowledgeable and passionate about. Highly recommended reading for all entrepreneurs in Hawaii. As for stats on the community, I think it would be very timely for TechHui or HSTC to conduct such a survey of tech companies in Hawaii. What is a Y-Combinator style model?
Comment by Keith Powers on September 27, 2009 at 7:48am
Greetings - just arrived. Just joined. Nice thread on this topic. My initial thoughts/questions:

1. Venture Capital as an asset class is at risk. No returns since 1999. Too many "VCs", Funds finding it harder to attract LPs. Low cost of entry for online business, reduced amount of co-investing, etc, etc.

2. Angel/Super Angel investment better path anyway for founders to get going.

3. Regardless of incentives, businesses will get funded by Angel's and VCs if there is a great team that has a compelling business model and an attractive market size. Exposure for those teams to angels/VCs is critical. Educating those founders/teams on how to pitch, etc is critical. Getting them an audience beyond HI is critical. etc

4. Stats on the community... some questions that I have as a newcomer are basic questions about the community. a) Have you ever founded a company before? b) did you raise any funds? c) how much? d) results? e) Reasons for success or failure? f) Nature of company? ie. app, tech, retail, energy, etc, g) how would you best describe yourself? entrepreneur/MBA/developer/engineer/marketer/etc... h) why do you want to start your own business or be part of a start-up?

5. Is there a Y-Combinator style model here in HI yet? If not, has anyone tried to start one? results?
Comment by Peter Kay on September 19, 2009 at 1:45pm
Nice job Leighton. I never met a survey I didn't want to change :) and am glad this puts something into the dialog.
Comment by Barry Weinman on September 19, 2009 at 11:41am
Aloha Leighton... I took the survey but found it to be very restrictive. Many US regions have built flourishing high tech communities with very little or no investment from government---it is called Private Equity & Venture Capital. Private, no guarentees, rewards commensurate with risk---a pretty simple concept but not so easy to do. Act 221 is the opposite of what successful regions have done---not to mention much more expensive and clearly not working. I think the survey didn't capture the real options to build a successful tech community but applaud your effort.
Comment by Leighton K. Chong on September 19, 2009 at 10:46am
How Do We Best Support an Innovation Economy?

Aloha TechHui Members:

We would like to hear your opinion on an important issue for tech companies in Hawaii. As you may know, the State Legislature enacted Act 199 a few months ago which placed certain restrictions on tech investment tax credits available under Act 221. This has disappointed many in the Hawaii tech community who see Act 221 as the best way to attract investment capital for tech companies in Hawaii, while others view the changes as necessary to restrain a tax incentive regime that distorted risk and value and would exacerbate the State’s continuing budget deficits.

Regardless of which view you subscribe to, the practical effect of Act 199 has been to sharply curtail investment capital for funding tech companies in Hawaii, a situation that may continue to the end of December 2010 when Act 221 sunsets and beyond. Our tech community needs to act urgently to support legislative measures to make investment capital for funding tech companies available again. The important lessons learned in past go-rounds with the Legislature is how little political (voter) clout the tech industry has had because we do not make our voices heard in the political process. This survey attempts to assess the tech community's preferences so that our tech industry advocates can start laying the groundwork to introduce appropriate tech-supportive bills in the next Legislative session in January 2010.

The survey is live. It takes about five minutes to complete. We welcome your input!
Comment by Leighton K. Chong on September 10, 2009 at 8:27am
Hi Dan:

Great to hear that the survey might segue into the ThinkTech panel discussion, and that the panel is intended to be forward-looking. My apolgies for mischaracterizing the topic of the event. I've never heard the expression "crying in one's nabe bowl" :>) Is that a new bon mot from Japan during the recession?

Leighton
Comment by Daniel Leuck on September 10, 2009 at 8:14am
Hi Leighton - As a member of the ThinkTech board (Jay's group that, among many other activities, organizes the aforementioned panel discussions), I'm happy to help coordinate efforts between this survey and the panel discussions. Note that the event is titled, "How to rebuild the economy in an election year" and is intended to be forward looking rather than an analysis of Act 221. Like you, we think its time for a new model for sci-tech capital formation. It isn't productive to cry in our collective nabe bowl :-)
Comment by Leighton K. Chong on September 10, 2009 at 7:50am
Hi Ken:


People often like to write-in comments not necessarily because the response choices are poor so much as that everyone's got their own spin on what's going on. I've done open-ended surveys before and they were horrible to try to tabulate. I agree that there will be compromises made and we cannot hope for scientific accuracy using simple 5-choice Q/As, but this is only an initial informal poll to gauge how the tech community stands on a near-term funding question that will be taken up by the Legislature in 4 months. This survey should be the beginning not the end of the discussion. HVCA is presenting Karl Fooks, HSDC Director, at their scheduled lunch talk on 9/24. Jay Fidell is putting on the Act 221 Update Seminar on 10/29. I've heard that Burt Lum is thinking of putting on a radio interview on this subject. I would like to see TechHui as well as others like HSTC build on the discussion to try to reach a consensus of what the tech community wants to see done in the next Legislative session.


Leighton
Comment by Daniel Leuck on September 10, 2009 at 7:47am
Hi Guys - The way we plan to implement this is a poll widget embedded in a forum post or new page with a link on the front page. This will allow comments about the poll in general, but comments per question isn't currently supported. Questions can have mutually exclusive or multiple answers (i.e. check boxes or radio buttons.) Answers are tallied and can be viewed by anyone, just like the current poll widget on the front page. That is the extent of the current functionality. Its in our work queue and can probably be posted next week.

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