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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 Ken Berkun on September 10, 2009 at 7:26am
Leighton, I asked my wife about "other", here are her responses:



If many answers will be qualified by write-in comments, then the response choices are poorly selected.




You can of course tabulate write-in responses. It will take some work and thought though to categorize them.




Provided the answers cover what the vast majority of people will want to select
Comment by Leighton K. Chong on September 10, 2009 at 5:44am
Hi Peter & Ken:

Thanks for your comments. The expansion on VCs raises complex issues that require more of a background and discussion. I see this survey as just a first step, a call to action on SPIF and preparing for the Jan 2010 Legislative session, only 4 months away. Again, adding a write-in line on the questions will disqualify the questions from collation of results since many answers will be qualified by write-in comments. If we want to be able to say that "an informal poll taken of TechHui members shows that 80% favor XYZ", then we have to be able to tabulate the results. The intro asks the respondent to select the best answer that applies.

I've edited the intro for stylistic edits and to remove the opposition of Act 221 to Act 215 since it is unnecessary. I've also changed the last question to what legislative action is the respondent willing to take, which hopefully will get people to reflect on the level of participation by the tech community. I've sent the final revised Q/As to Dan and he has replied that he can set it up as a forum poll sometime next week. I will ask him to remove the editorial comment in 9a. Thanks for your input on this.


Aloha, TechHui Member:

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.

In particular, the already enacted State Private Investment Fund (SPIF) under Act 215 awaits legislative implementation. Act 215 authorized the Hawaii Strategic Development Corp. (HSDC) to use up to $38 million in state tax credits to attract loans and investments to create a revolving “fund-of-funds”. The SPIF fund would then make investments in qualified venture capital firms which are to be leveraged by private capital in order to multiply the total investment pool available to invest in promising tech companies. Vocal support from the tech community will be needed to push for Legislative approval of HSDC’s implementation plan and appropriation of SPIF tax credits in order to implement SPIF. A more complete background on SPIF and proposal for venture capital alternatives for tech companies in Hawaii can be read in Leighton Chong’s blog article at: http://hawaiitechnology.blogspot.com/

This survey is to poll TechHui members as to what near-term tech-supportive measures you would support in the upcoming January 2010 Legislative session, and in particular your opinion on whether and how SPIF should be implemented. For tallying the survey responses, please select one choice that best answers each question below. A comment box is provided at the end for any additional comments or insights you may want to contribute on the survey.

YOUR RESPONSE IS IMPORTANT! PLEASE COMPLETE THE SURVEY!!!

1. Which category best describes your current role as a member of Hawaii’s tech community:
(a) Student
(b) Researcher, teacher, academic (university, federal, private R&D)
(c) Tech business owner, founder, principal, or investor
(d) Tech business employee, contractor, service provider
(e) Other (including professional services, government, related industries)

2. What is the location of the business you work with or are associated with in Hawaii:
(a) Honolulu, Oahu
(b) West Oahu
(c) Kauai
(d) Maui
(e) Hawaii Island

3. If your business is a Hawaii tech company that has relied on outside investment to start-up or expand, what level of funding has your tech company achieved to date:
(a) Less than $200K
(b) $200K - $1 Million
(c) $1 Million - $5 Million
(d) More than $5 Million
(e) Does not apply to me

4. If your business is a Hawaii tech company as in Question #3, which category best describes the investment funding that your tech company has achieved to date:
(a) Government or research grant
(b) Angel investment - non Act 221
(c) VC investment - non Act 221
(d) Act 221 investment
(e) Personal funds (your own, friends, family)

5. What do you believe is the biggest obstacle to the success of tech companies in Hawaii:
(a) Insufficient availability of venture capital in HI
(b) Lack of venture capital interested in investing in HI tech companies
(c) Geographical remoteness from the U.S. Mainland and Asia markets
(d) Lack of business infrastructure (manufacturing, distribution, shipping, etc.)
(e) Low skills or education level of employees from Hawaii compared to U.S. Mainland

6. What do you believe is the best way in the near-term to support tech companies in Hawaii:
(a) State government support for the HI tech industry
(b) Private sector support for the HI tech industry
(c) U.S. government support for the HI tech industry
(d) Improvement in the HI educational system
(e) There is no solution - Hawaii is hopeless!

7. What do you think is the best way for State government to support the HI tech industry:
(a) Direct State subsidies for the HI tech industry, such as thru research or startup grants
(b) Indirect State subsidies for the HI tech industry, such as thru State tax credits to investors
(c) State agencies taking on functions for tech companies, such as export marketing, etc.
(d) State funding for improved science and technology education and training in HI
(e) State investment in tech infrastructure, such as research labs, industry facilities, etc.

8. What do you think should be done with Act 221:
(a) Allow Act 221 to sunset by end of 2010 without renewal or anything else
(b) Renew Act 221 but with significant fixes for its problems
(c) Change Act 221 to investor tax credits tailored to requirements of specific tech industries
(d) Allow Act 221 to sunset and implement the State Private Investment Fund under Act 215
(e) Allow Act 221 to sunset and replace it with some other form of State support

9. How do you think the SPIF fund-of-funds can best be administered by Hawaii Strategic Development Corp. (HSDC):
(a) HSDC cannot administer the fund – no State agency can be trusted
(b) Investments made by HSDC from SPIF should be subject to Legislative approval
(c) Investments made by HSDC from SPIF should be subject to State competitive bidding rules
(d) Investments made by HSDC from SPIF should be subject to legislatively-approved guidelines
(e) HSDC should be allowed to exercise agency decision-making without requiring legislative approval, competitive bidding, or fixed guidelines for all investment decisions

10. How successful do you think Hawaii venture capital firms have been in investing in tech companies:
(a) VCs in HI do not know what they are doing - we should find some other form of tech investment
(b) VCs in HI have been reasonably successful given the economic climate
(c) VCs in HI should partner with Mainland firms for better expertise
(d) VCs in HI are should use the R&D company model for funding HI tech companies
(e) VCs in HI should find some other, more effective investment model for HI tech companies

11. If the VC investment climate in HI is not improved soon, what are you inclined to do:
(a) Leave Hawaii for a place more conducive for tech companies
(b) Find other sources of funding besides VCs
(c) Get involved politically to enact legislation more helpful for funding tech companies
(d) Outreach to Mainland sources of funding
(e) Give up on technology businesses in HI and do something else

12. What is the most active level you would be willing to participate in to promote tech-supportive measures in the upcoming January 2010 Legislative session:
(a) Take surveys and sign petitions
(b) Send letters and email to legislators
(c) Give testimony in legislative hearings
(d) Work with legislative committees to draft or revise legislation
(e) Other

[Comment box for respondent write-in comments]
Comment by Ken Berkun on September 9, 2009 at 8:35pm
I have no problem adding that.
Comment by Peter Kay on September 9, 2009 at 7:45pm
After reviewing this my comment is that by not putting "I don't know" choices (like in 5-12) you're missing an opportunity to determine if more education/communicaiton is required of given topic.
Comment by Ken Berkun on September 9, 2009 at 7:18pm
My wife, Gay Armsden, PhD (full credit to her!) did a quick re-work of the questions (with input from me). She has suggested that several of the questions allow the respondent to rank the answers or at least pick the top 2. These are so noted (someone will have to decide whether to allow ranking or just top 2). Also the editorial comment on the competencies of state agencies should probably be removed.

I have her original red-lined version, which I can email to anyone who wants to see the roughed-out changes.



------------
1. Which category best describes your current role as a member of Hawaii’s tech community:
(a) Student
(b) Researcher, teacher, academic (university, federal, private R&D)
(c) Tech business owner, founder, principal, or investor
(d) Tech business employee, contractor, service provider
(e) Other (including professional services, government, related industries)____________________________


2. What is the location of the business you work with or are associated with in Hawaii:
(a) Honolulu, Oahu
(b) West Oahu
(c) Windward, North Shore or other part of Oahu
(d) Kauai
(e) Maui
(f) Hawaii Island


3. If your business is a Hawaii tech company that has relied on outside investment to start up or expand, what level of funding has your tech company achieved to date:
(a) Less than $200K
(b) $200K - $999K
(c) $1 Million - $4.999 Million
(d) More than $5 Million
(e) Does not apply to me /Don’t know


4. If your business is a Hawaii tech company as in Question #3, which category best describes the investment funding that your tech company has achieved to date:
(a) Government or research grant
(b)Personal funds (your own, friends, family)
(c) Angel investment - non Act 221
(d) VC investment - non Act 221
(e) Act 221 investment
(f) Does not apply to me/Don’t know


5. What is the biggest obstacle to the success of tech companies in Hawaii.
Pick the top 2 or rank these from biggest to smallest:
(a) Insufficient availability of venture capital in HI
(b) Geographical remoteness from the U.S. Mainland and Asia
(c) Lack of venture capital interested in investing in HI tech companies (other than geographical reasons)
(d) Lack of business infrastructure (manufacturing, distribution, shipping, etc.)
(e) Low skills or education level of job applicants or employees from Hawaii compared to U.S. Mainland
(f) Other (please explain):____________________________________________________________


6. What is the best way in the near-term to support tech companies in Hawaii.
Pick the top 2 or rank these from biggest to smallest:
(a) State government support (i.e., direct financial support of companies as in Act 221)
(b) Private sector support
(c) U.S. government support
(d) Improvement in the HI educational system
(e) Institutional promotion of hi-tech careers (as, for example Hawaii Tourism Authority)
(e) There is no solution - Hawaii is hopeless!
(f) Other (please explain):____________________________________________________________


7. What is the best way for state government to support the HI tech industry.
Pick the top 2 or rank these from biggest to smallest:
(a) Direct subsidies such as research or startup grants
(b) Indirect subsidies, such as state tax credits to investors
(c) State agencies taking on functions for tech companies, such as export marketing, etc.
(d) Funding for improved science and technology education and training in HI
(e) Investment in tech infrastructure, such as research labs, industry facilities, etc.
(f) Other (please explain):____________________________________________________________


8. What should be done with Act 221:
(a) Change Act 221 to investor tax credits tailored to requirements of specific tech industries (including removing movie/TV industries)
(b) Renew Act 221 but with significant fixes for its problems, in addition to (a).
(c) Allow Act 221 to sunset and implement the State Private Investment Fund under Act 215
(d) Allow Act 221 to sunset and replace it with some other form of State support
(e) Allow Act 221 to sunset by end of 2010 without renewal or anything else

9. How can the SPIF fund-of-funds best be administered by Hawaii Strategic Development Corp. (HSDC):
(a) HSDC should not administer the fund – no state agency can be trusted (probably should eliminate the editorial comment)
(b) Investments made by HSDC from SPIF should be subject to legislatively-approved guidelines
(c) Investments made by HSDC from SPIF should be subject to legislative approval
(d) Investments made by HSDC from SPIF should be subject to state competitive bidding rules
(e) HSDC should be allowed to exercise agency decision-making without requiring legislative approval, competitive bidding, or fixed guidelines for all investment decisions

10. How successful do you think Hawaii venture capital firms have been in investing in tech companies:
(a) VCs in HI do not know what they are doing - we should find some other form of tech investment
(b) VCs in HI have been reasonably successful given the economic climate
(c) VCs in HI have done the best the can given their limited access to funds
(d) VCs in HI have not managed their limited funds as effectively as possible
(e) Other________________________________________________________________


11. VCs in HI should do the following things to improve their work in HI.
Pick the top 2 or rank these from biggest to smallest:
(a) VCs in HI should focus on early-stage companies so that more companies have an opportunity to get established
(b) VCs in HI should focus on investing in later-stage companies that have more trouble raising larger amounts, rather than distributing money in dribs and drabs.
(c) VCs in HI should partner with Mainland firms for better expertise
(d) VCs in HI are should use the R&D company model for funding HI tech companies
(e) VCs in HI should find some other, more effective investment model for HI tech companies


12. If the VC investment climate in HI is not improved soon, which of the following are you inclined to do:
Pick the top 2 or rank these from biggest to smallest:
(a)Leave Hawaii for a place more conducive for tech companies
(b) Find other sources of funding besides VCs
(c) Get involved politically to enact legislation more helpful for funding tech companies
(d) Outreach to Mainland sources of funding
(e) Give up on technology businesses in HI and do something else
(f) Other________________________________________________


13. Which of the following entities do you have the most confidence in to represent the concerns of tech companies in HI:
(a) Hawaii Science & Technology Council
(b) Hawaii Venture Capital Association
(c)Hawaii Technology Development Corporation
(d) Think Tech Hawaii
(e) Tech Hui
(f) Other (please explain):_____________________________
Comment by Bruce M. Bird on September 9, 2009 at 4:01pm
Hi, Ken. One of my colleagues at work creates surveys for statistically-based research projects. There's a lot more to it than people think. I agree with you that this is more of an informal poll.
Comment by Ken Berkun on September 9, 2009 at 9:51am
Thanks Leighton. I've sent a copy to my wife. Since this is really an informal poll, sampling is less important.
Comment by Leighton K. Chong on September 9, 2009 at 9:47am
OK, here is my redraft of the survey with an intro to state its purpose.

Aloha, TechHui Member:

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 reach a consensus as to what measure(s) we would support to make investment capital for funding tech companies available again. The important lessons learned in the past go-rounds with the Legislature is how little political (voter) clout the tech industry has because we do not make our voices heard in the political process. A tech community consensus should be obtained as soon as possible 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.

One of our members, Leighton Chong, posted a blog on TechHui’s site “A New Model for Venture Capital Investment for Tech Companies in Hawaii” which advocates ceasing efforts to revive or renew Act 221, and instead implementing the State Private Investment Fund (SPIF) under Act 215 which authorized the Hawaii Strategic Development Corp. (HSDC) to use up to $38 million in state tax credits to attract loans and investments to create a revolving “fund-of-funds”. The SPIF fund would then make investments in qualified venture capital firms which are to be leveraged by private capital in order to multiply the total investment pool available to invest in promising tech companies. SPIF was enacted under Act 215 in 2006, but Legislative approval of HSDC’s implementation plan and authorization for the SPIF tax credits are required to implement SPIF. Leighton also advocated that the SPIF-supported venture capital firms extend the reach of the investment pool and try to achieve better investment outcomes by shifting from making relatively large investments in a few tech companies trying to emulate the Silicon Valley “exponential sales growth model” to making many more smaller and less risky investments in tech companies based on the R&D company model. Leighton’s complete blog article on these proposals can be read at: http://hawaiitechnology.blogspot.com/

This survey is to poll TechHui members as to what near-term tech-supportive measures they want to see introduced in the upcoming January 2010 Legislative session, and in particular whether and how SPIF should be implemented. Please select one enumerated answer that best fits your answer to each question below. A comment box is provided at the end for any additional comments or insights you may want to contribute on the survey.


1. Which category best describes your current role as a member of Hawaii’s tech community:
(a) Student
(b) Researcher, teacher, academic (university, federal, private R&D)
(c) Tech business owner, founder, principal, or investor
(d) Tech business employee, contractor, service provider
(e) Other (including professional services, government, related industries)


2. What is the location of the business you work with or are associated with in Hawaii:
(a) Honolulu, Oahu
(b) West Oahu
(c) Kauai
(d) Maui
(e) Hawaii Island


3. If your business is a Hawaii tech company that has relied on outside investment to start-up or expand, what level of funding has your tech company achieved to date:
(a) Less than $200K
(b) $200K - $1 Million
(c) $1 Million - $5 Million
(d) More than $5 Million
(e) Does not apply to me


4. If your business is a Hawaii tech company as in Question #3, which category best describes the investment funding that your tech company has achieved to date:
(a) Government or research grant
(b) Angel investment - non Act 221
(c) VC investment - non Act 221
(d) Act 221 investment
(e) Personal funds (your own, friends, family)


5. What do you believe is the biggest obstacle to the success of tech companies in Hawaii:
(a) Insufficient availability of venture capital in HI
(b) Lack of venture capital interested in investing in HI tech companies
(c) Geographical remoteness from the U.S. Mainland and Asia markets
(d) Lack of business infrastructure (manufacturing, distribution, shipping, etc.)
(e) Low skills or education level of employees from Hawaii compared to U.S. Mainland


6. What do you believe is the best way in the near-term to support tech companies in Hawaii:
(a) State government support for the HI tech industry
(b) Private sector support for the HI tech industry
(c) U.S. government support for the HI tech industry
(d) Improvement in the HI educational system
(e) There is no solution - Hawaii is hopeless!


7. What do you think is the best way for State government to support the HI tech industry:
(a) Direct State subsidies for the HI tech industry, such as thru research or startup grants
(b) Indirect State subsidies for the HI tech industry, such as thru State tax credits to investors
(c) State agencies taking on functions for tech companies, such as export marketing, etc.
(d) State funding for improved science and technology education and training in HI
(e) State investment in tech infrastructure, such as research labs, industry facilities, etc.


8. What do you think should be done with Act 221:
(a) Allow Act 221 to sunset by end of 2010 without renewal or anything else
(b) Renew Act 221 but with significant fixes for its problems
(c) Change Act 221 to investor tax credits tailored to requirements of specific tech industries
(d) Allow Act 221 to sunset and implement the State Private Investment Fund under Act 215
(e) Allow Act 221 to sunset and replace it with some other form of State support


9. How do you think the SPIF fund-of-funds can best be administered by Hawaii Strategic Development Corp. (HSDC):
(a) HSDC cannot administer the fund – no State agency can be trusted
(b) Investments made by HSDC from SPIF should be subject to Legislative approval
(c) Investments made by HSDC from SPIF should be subject to State competitive bidding rules
(d) Investments made by HSDC from SPIF should be subject to legislatively-approved guidelines
(e) HSDC should be allowed to exercise agency decision-making without requiring legislative approval, competitive bidding, or fixed guidelines for all investment decisions


10. How successful do you think Hawaii venture capital firms have been in investing in tech companies:
(a) VCs in HI do not know what they are doing - we should find some other form of tech investment
(b) VCs in HI have been reasonably successful given the economic climate
(c) VCs in HI should partner with Mainland firms for better expertise
(d) VCs in HI are should use the R&D company model for funding HI tech companies
(e) VCs in HI should find some other, more effective investment model for HI tech companies


11. If the VC investment climate in HI is not improved soon, what are you inclined to do:
(a) Leave Hawaii for a place more conducive for tech companies
(b) Find other sources of funding besides VCs
(c) Get involved politically to enact legislation more helpful for funding tech companies
(d) Outreach to Mainland sources of funding
(e) Give up on technology businesses in HI and do something else


12. Which entity do you have the most confidence in to represent the concerns of tech companies in HI:
(a) Hawaii Science & Technology Council
(b) Hawaii Venture Capital Association
(c) Think Tech Hawaii
(d) Tech Hui
(e) Other



[Comment box for respondent write-in comments]
Comment by Ken Berkun on September 9, 2009 at 9:03am
Please restate for me the exact purpose of this survey. If it is to gain insight for ourselves in order to ponder what to do next, then we don't need to lay as much groundwork. If it is to provide meaningful and powerful data for the legislature to make decisions then it must be a true scientific survey. I'm not a statistician, but I'm married to one. Actually she is a research psychologist who designs measures and performs a lot of statistics. She has volunteered to look at the questions, but agrees with me that you need to understand the population that you are surveying and must make an effort to get a good sample.

The first task is to understand the purpose of the survey. This has probably been stated earlier, but we're up to page 4 of comments so I think it best if Leighton or Peter could restate it for me.
Comment by Peter Kay on September 9, 2009 at 6:13am
Firstly, the TechHui targeted audience means that this survey will probably be highly biased. That being said it still will give us good insights. I went through the whole survey quite carefully and while I was going to give a lot more inputs and adjustments (like make it a lot shorter) it's good as is.

In regards to #1, it's good to have open ended comments to give you added input into areas you may not have considered. you can think of these open ended answers as statistically disregarded but highly educational.

I think #2 is fine.

Lets go for it.

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