Hawaiʻi's Technology Community
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
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
Views: 335
Comment
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Comment by Peter Kay on September 8, 2009 at 8:26am
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I think it's time the Tech Industry get involved in a broader dialog about policy going forward and it needs to be more than a "what kind of tax credits do we want now?" kind of discussion. I think 221-like credits and SPIF perhaps are two ends of the spectrum of a thoughtful discussion.
I think its time for another blog post to start off this topic. And like you say, soon.
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Comment by Leighton K. Chong on September 8, 2009 at 6:41am
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TechHui, here is a step forward. Make sure you attend this and participate:
Re: SEPTEMBER 24, 2009 LUNCHEON ANNOUNCEMENT - HAWAII VENTURE CAPITAL ASSOCIATION
Here is the Luncheon Announcement and Newsletter for September 24, 2009:
Meet The State's Chief Venture Capitalist
Karl Fooks, HSDC's New Director
http://www.hvca.org/display.aspx?base=Luncheons&ID=84
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Glad to see your support for implementing SPIF, Peter. I wonder if others at TechHui also support SPIF? If so, I think we should get a representative group together to start a dialog going with our tech industry advocates Lisa Gibson (HSTC), Bill Spencer (HVCA), Jay Fidell (Think Tech), and Rob Robinson (Hawaii Angels). These advocates have been so committed to saving Act 221 that perhaps they are not convinced to get behind SPIF and Act 215 yet. If we want this to be on the Legislative agenda for the Jan 2010 session, we have to get things going quickly! The one advice Sen. Fukunaga underlined in her talk on what is next for the tech community in the Legislature is that we need to build consensus for what we want to see passed before the Legislature is in session. Are there others at TechHui who want to participate in moving this forward?
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Seems to me the tech community could do itself a world of good by implementing SPIF which already enjoys strong consensus and does not require further legislation.
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Comment by Bruce M. Bird on September 7, 2009 at 7:02am
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Hi, Leighton. Thanks for the info.
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Bruce, Act 215 is already enacted, but requires HSDC to obtain approval from the Legislature for its plan to implement SPIF. Act 215 also authorized a total of $38 million in state tax credits to be issued by HSDC for SPIF, and also set a ceiling of $12 million of credits that may be issued in any one year. The Legislature can approve appropriations only for biennial periods. HSDC must obtain Legislative approval to appropriate state tax credits within these limits and conforming to an approved plan. Therefore, no additional legislation is required, only a vote of Legislative approval of HSDC's plan and requested amount of tax credits for the biennial fiscal period.
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Hi, Leighton.
HSDC is authorized to administer the SPIF. The SPIF is currently unfunded. Legislation is needed to fund it.
Is that about right?
P.S. -- Also, you have written elsewhere about $38 million being involved. Please elaborate.
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Sorry, I need to correct one point in my prescription for what the tech industry needs to do:
All that is needed to get this going is for the tech industry to:
(1) stop the noise about renewing or revising Act 221,
(2) discuss with HSDC an optimal way to implement SPIF,
(3) obtain tech industry consensus to support implementation of Act 215 in the next Legislative session (approval of HSDC plan and appropriation authority for tax credits needed), and
(4) make our presence felt (testimony, lobbying) in support of implementation of Act 215 at the start of the Jan 2010 Legislative session.
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Alex, you are exactly right. On the plus side, Karl Fooks, the new Director of Hawaii Strategic Development Corp. (HSDC), which is authorized to administer the SPIF "fund-of-funds", is very interested in reaching out to Mainland VCs and tech investment funds to not only bring their investments here but also for HI companies to benefit from their larger network of industry contacts and domain expertise.
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Bruce, there is already a state tax incentive vehicle enacted as Act 215 in 2006. It is called the State Private Investment Fund (SPIF), which enables HSDC to use $38M in state tax credits to raise a revolving fund ("fund-of-funds") to sprinkle into tech investment firms on a leveraged basis.
All that is needed to get this going is for the tech industry to:
(1) stop the noise about renewing or revising Act 221,
(2) discuss with HSDC an optimal way to implement SPIF,
(3) obtain tech industry consensus to support implementation of Act 221 in the next Legislative session (approval of HSDC plan and appropriation authority for tax credits needed), and
(4) make our presence felt (testimony, lobbying) in support of implementation at the start of the Jan 2010 Legislative session.
See my complete blog article at: www.hawaiitechnology.blogspot.com.
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