TechHui

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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 Leighton K. Chong on September 9, 2009 at 5:35am
Thanks Ken, Peter, and Wayne for your suggestions. I will work on editing the survey questions, and also add an intro why we are doing the survey and explaining the options we face re Act 221 and SPIF. I have two points to ask about and would appreciate your feedback.

1. Surveys that allow user input other than multiple choice are very hard to collate, especially one of this potential size (1300 TechHui members). Surveys that can be collated into percentile results are very useful as supporting evidence for legislative hearings and testimony. While your suggestions to add choices beyond a standard (a) - (e) or to allow free-style input would help us to learn what our members are thinking, it would make the survey results far less useful as evidentiary data. I think we should stick with a standard (a) - (e) choices which can be tallied in even percentiles, and let "Other" suffice in place of free-style input.

2. As for querying the demographics of tech community respondents, that has many inter-related economic, circumstantial, and personal preference factors that can only be done properly in a separate survey by itself. Perhaps TechHui may want to undertake that. In this proposed survey, the 3 initial questions as to the respondents tech role/status, location, and company/business type should be sufficient to identify their background with respect to venture capital needs. Do you agree?
Comment by Peter Kay on September 8, 2009 at 8:18pm
My suggestions:

1. Which category best describes you in your present role as a member of Hawaii’s tech community:
(a) Inventor (I have >=1 patents that have been sold to 3rd parties)
(b) Entrepreneur (I’ve founded >= 3 successful companies)
(c) Principal, Start-up Company (less than 2 years old)
(d) Principal, Existing Company (over 2 years old)
(e) Techie (and also currently working with one of the above).
(f) Other:


4. Which category best describes the funding that your tech business has achieved to date:
(a) Research grant
(b) Angel investment - non Act 221
(c) VC investment - non Act 221
(d) Act 221 investment
(e) Personal funds, friends, family and yes, perhaps fools too
(f) Other (corporate partner, business alliance partner, etc.)

5,7
add: (f) Other (please elaborate):

8,9,10 add:
(f) I don’t feel I have sufficient knowledge about this question to give a confident answer.


Survey reproduced below with all changes incorporated for your convenience:

1. Which category best describes you in your present role as a member of Hawaii’s tech community:
(a) Inventor (I have >=1 patents that have been sold to 3rd parties)
(b) Entrepreneur (I’ve founded >= 3 successful companies)
(c) Principal, Start-up Company (less than 2 years old)
(d) Principal, Existing Company (over 2 years old)
(e) Techie (and also currently working with one of the above).
(F) Other:


2. What is the location of your tech business in Hawaii:
(a) Honolulu, Oahu
(b) West Oahu
(c) Kauai
(d) Maui
(e) Hawaii Island


3. What is the total level of funding that your tech business has achieved to date:
(a) Less than $200K
(b) $200K - $500K
(c) $500K - $2 Million
(d) $2 Million - $5 Million
(e) Over $5 Million


4. Which category best describes the funding that your tech business has achieved to date:
(a) Research grant
(b) Angel investment - non Act 221
(c) VC investment - non Act 221
(d) Act 221 investment
(e) Personal funds, friends, family and yes, perhaps fools too
(f) Other (corporate partner, business alliance partner, etc.)


5. What do you believe is the greatest obstacle to the success of a tech business such as yours 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
(f) Other (please elaborate):


6. What do you believe is the most important solution to promote tech businesses such as yours 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. If you would like to see more State government support for the HI tech industry, would it best be in the form of:
(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.
(f) Other (please elaborate):


8. What is your preference for what the State should do with Act 221 allowing investors to claim 100% tax credits for investment in qualified high technology companies:
(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 replace it with the State Private Investment Fund (SPIF fund-of-funds) by implementation under already enacted Act 215 (see blog on TechHui - http://www.techhui.com/profiles/blogs/a-new-model-for-venture)
(e) Allow Act 221 to sunset and replace it with some other form of State support
(f) I don’t feel I have sufficient knowledge about this question to give a confident answer.


9. If you support the SPIF fund-of-funds to be administered by Hawaii Strategic Development Corp. (HSDC), how do you think HSDC can best administer the SPIF fund successfully:
(a) HSDC cannot administer the fund – no State agency can be trusted
(b) HSDC should implement SPIF, but every investment it makes should be subject to approval by the State Legislature
(c) HSDC should implement SPIF, but every investment it makes should be subject to State competitive bidding rules
(d) HSDC should implement SPIF, but every investment it makes should be subject to legislatively-approved qualification guidelines
(e) HSDC should be allowed to exercise expert decision-making without legislative approval, competitive bidding, or fixed guidelines
(f) I don’t feel I have sufficient knowledge about this question to give a confident answer.



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
(cc) VCs in HI must let Mainland firms take the lead for better expertise
(d) VCs in HI should change to the R&D company model for funding HI companies (see blog on TechHui - http://www.techhui.com/profiles/blogs/a-new-model-for-venture)
(e) VCs in HI should find some other, more effective business model for funding HI companies
(f) I don’t feel I have sufficient knowledge about this question to give a confident answer.



11. If the VC investment climate in HI is not fixed 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 as representing 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 by Ken Berkun on September 8, 2009 at 7:43pm
While I applaud the plan of moving forward with a poll, I think you will have to pair it with better education about SPIF. In addition you need a plan to be able to select a credible sample of people and companies. Part of what is required to move ahead in Hawaii is a good understanding of what the high tech population (people/companies/employees/etc) really is. These numbers remain unclear to me (although they may exist, I haven't seen them). In order for the poll to carry weight it must be convincing in its sampling technique.

I have some quibbles with some of the questions, do you want that level of editing here or by email or some other forum?


For instance question 1 is both redundant and misses some categories:

(a) Inventor
(b) Entrepreneur
(c) Principal, Start-up Company
(d) Principal, Existing Company
(e) Techie

I am 4 out of 5 of these and I would be hard pressed to choose one. Plus it omits Students and we would want to know if our results are being skewed by students (who might select techie but that could be anyone).
Comment by Daniel Leuck on September 8, 2009 at 6:26pm
Hi Peter, Thank you for the offer. We are about to complete the multi-question and multi-page functionality anyway, so it shouldn't be a problem. Hi Leighton, Please let us know when you feel you have agreement on a final set of questions and we will put the poll together.
Comment by Leighton K. Chong on September 8, 2009 at 6:16pm
Sorry, i came in 13 seconds ahead of your comment. Pls comment on the Q/As I've posted. You are right on point, we need to move NOW!
Comment by Peter Kay on September 8, 2009 at 6:08pm
Whoops, forget that "help you w/ the poll" comment. I was composing while you were publishing.

Dan, I've got a professional Surveymonkey account I can use for this poll if this is too much for Ooi's poller.
Comment by Peter Kay on September 8, 2009 at 6:06pm
Leighton, I'll work w/ you on the poll. Don't you think we need to start the dialog right now, before the 2010 leg session starts? 2010 Spring Hearings is essentially the very end of the process, no?

I would think we start the dialog now, communicate the consensus w/ our legislators, and then coordinate work to get the legislation passed.

What am I missing here?
Comment by Leighton K. Chong on September 8, 2009 at 6:06pm
Hi Dan:


Thanks so much for offering to post a poll on a New Model for VC Investment in Tech Companies in Hawaii. Here are my proposed Q/As. If anyone has comments for improvement, pls chime in:


1. Which category best describes you in your present role as a member of Hawaii’s tech community:
(a) Inventor
(b) Entrepreneur
(c) Principal, Start-up Company
(d) Principal, Existing Company
(e) Techie


2. What is the location of your tech business in Hawaii:
(a) Honolulu, Oahu
(b) West Oahu
(c) Kauai
(d) Maui
(e) Hawaii Island


3. What is the total level of funding that your tech business has achieved to date:
(a) Less than $200K
(b) $200K - $500K
(c) $500K - $2 Million
(d) $2 Million - $5 Million
(e) Over $5 Million


4. Which category best describes the funding that your tech business has achieved to date:
(a) Research grant
(b) Angel investment - non Act 221
(c) VC investment - non Act 221
(d) Act 221 investment
(e) Other (corporate partner, business alliance partner, etc.)


5. What do you believe is the greatest obstacle to the success of a tech business such as yours in Hawaii:
(a) Insufficient availability of venture capital in HI
(b) Lack of venture capital interested in investing in HI tech companies
(cc) 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 most important solution to promote tech businesses such as yours 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. If you would like to see more State government support for the HI tech industry, would it best be in the form of:
(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 is your preference for what the State should do with Act 221 allowing investors to claim 100% tax credits for investment in qualified high technology companies:
(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 replace it with the State Private Investment Fund (SPIF fund-of-funds) by implementation under already enacted Act 215 (see blog on TechHui - http://www.techhui.com/profiles/blogs/a-new-model-for-venture)
(e) Allow Act 221 to sunset and replace it with some other form of State support


9. If you support the SPIF fund-of-funds to be administered by Hawaii Strategic Development Corp. (HSDC), how do you think HSDC can best administer the SPIF fund successfully:
(a) HSDC cannot administer the fund – no State agency can be trusted
(b) HSDC should implement SPIF, but every investment it makes should be subject to approval by the State Legislature
(c) HSDC should implement SPIF, but every investment it makes should be subject to State competitive bidding rules
(d) HSDC should implement SPIF, but every investment it makes should be subject to legislatively-approved qualification guidelines
(e) HSDC should be allowed to exercise expert decision-making without legislative approval, competitive bidding, or fixed guidelines


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
(cc) VCs in HI must let Mainland firms take the lead for better expertise
(d) VCs in HI should change to the R&D company model for funding HI companies (see blog on TechHui - http://www.techhui.com/profiles/blogs/a-new-model-for-venture)
(e) VCs in HI should find some other, more effective business model for funding HI companies


11. If the VC investment climate in HI is not fixed 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 as representing the concerns of tech companies in HI:
(a) Hawaii Science & Technology Council
(b) Hawaii Venture Capital Association
(cc) Think Tech Hawaii
(d) Tech Hui
(e) Other
Comment by Daniel Leuck on September 8, 2009 at 2:48pm
Leighton K. Chong: Does TechHui have a member polling function? Can we put out an e-survey on Act 215 to TechHui members to find out what they will support?
Yes. Ooi provides TechHui's poll functionality such as the "Where will your next web app live" poll on the front page. If you send me the question and options we will post the poll.
Comment by Leighton K. Chong on September 8, 2009 at 8:55am
I agree that we need a broader dialog on how best to support the growth and vitality of the tech industry in Hawaii. But first things should come first, and I would rather see that broader dialog started after the Spring 2010 Legislative hearings are completed. Unless something is done quickly, tech companies would find it difficult to get any angel or VC funding for the next 2-3 years because Act 221 has become disfunctional already. We should focus on getting the SPIF in Act 215 implemented in the 2010 Legislative Session to start filling the gap in funding for tech companies by the end of 2010. The important lessons learned in the past go-rounds with the Legislature is how little political (voter) clout the tech industry exhibits because we're all so busy doing our work and do not make our voices heard in the political process. And showing up for last-minute demonstrations and bill amendments once legislative hearings are in session is way too late to get heard above the free-for-all. The tech community needs to reach a consensus on what is needed now and make sure our tech industry advocates are laying the groundwork to have our voices heard in the 2010 Legislative session. Does TechHui have a member polling function? Can we put out an e-survey on Act 215 to TechHui members to find out what they will support?

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