Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by Tom Benson on January 7, 2009 at 6:39am

These are all good comments. Let me respond a bit...

First, just so you know, the spinoff we are envisioning would be a software-only company, not be a hardware company, and would not be a kitchen robot company. That was our research project but not necessarily be our first choice for profitable venture, for the very reasons you bring up! At some point in the future I hope to talk about it in more detail.

But, your comments also illustrate the central dilemma of venture funding. You say that "such and such is risky". Well, yes of course. It IS risky. That's what venture capital is. The return for that risk is that you get an entirely new industry that can create 1000X more jobs than "filling potholes". The incredible job-creation engine of high-tech industry is based on that high-risk, high-reward formula. Yes there are many failures, but the successes are so enormous that they dwarf the failures.

If you don't "get" that formula, then stay out of the high tech industry, stick to tourism and other fields that are more dependable. I'm not saying that to be harsh, I'm just saying....that's the formula. If you want to be successful you have to grit your teeth and endure it.

Also it's a challenge to predict what is or isn't going to be that big success. Right now, much of the tech industry is just recycling the same old reliable concepts. It's very easy to do that, but sooner or later they start to peter out. Somebody has to take the big risk of trying something absolutely new and disruptive and unexpected, like an entirely new vision for robotics, which is our goal. My argument is that now, in this recession, is the time that those totally new visions are the most important to create the next 30 years of economic growth and new jobs.

Finally there is the issue of "critical mass". Hawaii as a state already is pushing to build a viable robotics industry, and because of your historic ties to the Asian markets, you are the perfect place for a robotics industry. That's a very "up and coming" industry, with signifiant demographic and political tailwinds pushing it. So if Hawaii is going to try to become a robotics center, then it should be pushing to get every robotics startup it can lay it's hands on.

From that perspective, the question of "will it last more than 5 years" should be less important.(Of course I have no intention of letting it fail, since it's my neck on the chopping block, it WILL succeed!! :) But in any case, if it helps build momentum for the state and builds a perception of the state as a center for development for this field, then it's a net win for the state.

John, your comments about "VCs should take the risk" is very true. However those VCs aren't in Hawaii. They are in Silicon Valley and Boston. If I want to use traditional VCs, I can't move to Hawaii, I have to stay in the Bay Area where the VCs can breath down my neck when they want to. My understanding of the 221/215 bill was intended to help get Hawaii a bit of momentum, to make it more of a player in the tech world, by narrowing that VC gap.

Finally, Lawrence your point about Equity is very well-taken. I wouldn't have any problem at all sharing Equity with whoever it should go to. What I've heard, the big complaints about 221/215 is the the investors...the high-net worth taxpayers... are investing money in companies not because they want equity in a "going concern" but just because they want the tax credit. So in a way, firms like mine, that are "real", are at a disadvantage, because we are going to be focused on building equity value in the long term, while other ventures who are pursuing 221/215 funds are just trying to pump as much money as possible back to the investor, with no concern about long-term equity value.

So I'd agree that the 221/215 formula needs to be tweaked, if you want to keep it. Or maybe it's dropped and the state gives up on this vision.

Or my favorite is, you go to the Obama administration and encourage them to invest some of that bailout money in a national-scale 221/215 plan, with the Hawaii experiences providing a guide of how to do it and what traps to avoid. Hey, if they want to spend as much money as possible in the next year (which seems to be the prevailing mood in DC) why not spend it on new ventures? But, I'm just dreaming here.

Thanks for listening to my long winded response :)

Comment by Daniel Leuck on January 6, 2009 at 11:32pm

Act 221 is one of the reasons we decided to come back to Hawaii. We made the decision to start a new company when we were living in London. It was between Honolulu, Tokyo and New York. There were other factors such as my fondness for the people, culture, quality of life, etc. Anyway, I'm not that important in the big scheme of things, but if there are 500 people that make the same decision its probably worth taking note.

Comment by Laurence A. Lee on January 6, 2009 at 8:29pm

ReadyBot looks like a fun project to work on, and I welcome the opportunity for a new company to come in and hire local Robotics developers to dive in and help create it.

To be brutally honest, though, I can't imagine there would be a sustainable demand for a kitchen-cleaning robot. Perhaps I lack a longer-term vision.

My thinking is that I cringed at the $150 price tag on a high-end KitchenAid food processor. Is there a market for a $1000+ (a best-guest MSRP I admit to making up) kitchen device that isn't doing something fundamentally essential, like keeping food cold?

My fear for the State is high-risk companies with no foreseeable sustainable market would take advantage of 221/215 to incubate the founding of the business and product lines (at the State's expense and risk); then after 5 years when the economic conditions change and Credits have matured, they will leave for the Mainland to chase after secondary Funding.

With State-Funded Product Lines they can demonstrate, and a State-Funded Intellectual Property portfolio, it will be easier to secure that 2nd Round of VC funding and keep the Business alive.

The way Act 221/215 is written, there is No Equity given to the State as an investor. That's something I find very difficult to swallow as a Hawaii Taxpayer.

I'm not saying that ReadyBot will do that -- I'm just pointing out that the potential for the State to get the shaft is way too high with the currently written law.

Comment by John on January 6, 2009 at 8:00pm

Hi Tom,

I think 221/215 will be a great benefit to your company. Also, given your promotional videos I am sure a lot of people in Hawaii will be excited about your future.

Finally I agree that if you come here, this will create jobs in the short term.


The question, though, is this a good investment for the State. Here's the challenges I see:

1) Your company's risk seems high: (a) a number of competitors exist in robotics and (b) manufacturing robots at a price point and functionality level that customers are willing to buy large quantities cannot be trivial to accomplish [I am not a domain expert in robotics but these seem to be reasonable assumptions in emerging technologies]

2) Your company may need to relocate: for instance, selling to enterprises from Hawaii is hard (the cost and inconvenience is high) because almost all of your meetings demand long expensive ocean flights [speaking from experience here].

3) The state absorbs the most risk and has the least control and lowest direct benefit of your company's activities.

The State will essentially be a significant investor in your company. Yet the State will have no seats on the board of directors, no equity stake and no voice in the strategic path of your company.

Now, I am not saying that this is the solution. However, if any individual was making the type of financial contributions that the State is making, they absolutely would demand (and get) such terms.

Maybe your company is going to be a billion dollar mega-success. But it may also be that Silicon Valley VCs judge your company to be a poor investment, leaving the State of Hawaii to absorb a bad risk.

If the state simply wanted to create jobs during the recession, they could spend money on hiring people to fill potholes. The benefit to the State is that the startup (1) survives and (2) stays long term in Hawaii.

I don't know your company so my point is more general about making 221/215 investments. While jobs in the recession are helpful, it's critical that we effectively use our resources to build durable economic foundations.

Comment by Tom Benson on January 6, 2009 at 6:17pm

Hi everybody,

I was googling Hawaii tax credits and stumbled on this site… maybe could add a few comments.

I’m part of a group launching a new venture (robotics software, spinoff of a 5-year research project). We just recently agreed that Hawaii was first choice for the headquarters. There were several reasons…Hawaii is well-placed to service the asian markets, it has a strong robotics community, most of our people are willing to move, and there is a lot of local talent. But most important, the catalyst for our decision, was the potential to get 215/221-based venture capital. Without the tax credits, we probably couldn’t make the move. We’d have to stay local to Silicon Valley to be closer to the pools of money here.

A year ago, this probably wouldn’t have been as important…as others have pointed out, there are plenty of ways to start a tech venture, the old slow way. Have done it before, happy to do it again. But right now, venture capital for new and disruptive technologies (not just variations of existing markets, but entirely new markets) seems to have disappeared. Sales efforts are going to take time…nobody is buying anything, so bootstrapping from sales is unlikely to work.

I’m not a Hawaiian resident, so wouldn’t be qualified to express an opinion on the State’s best interests. Money is tight everywhere for sure. But to create new jobs in a recession, you need venture funding from somewhere!

Comment by John on January 6, 2009 at 2:58pm

Aaron has posted a response to this discussion on his blog. Anyone interested in this discussion should read it.

I'd like to ask some questions in the hope that Aaron will join this discussion:

Aaron states, "I don't think we need to have a Silicon Valley culture to make it in the tech world. We need to maximize the strengths of Hawaii to create a tech industry that thrives off of our own unique culture."

Can you explain how we can do this?

Aaron also suggests, "Perhaps its not the talent, its the leadership that sucks" and cites a quote: "You need to pay attention to relationships and how relationships are all connected here."

Can you explain the specific issues you see with the current leadership?

Comment by Laurence A. Lee on January 6, 2009 at 9:43am

I was kind of leaning toward the Student Employment Office's certification to help ensure the positions offered are applicable to the program. I agree, a grocery store should not receive credit for hiring a High-Tech student as a bag boy; but it should receive credit if that student is primarily engaged in software, website, or database development.

As for extending to any local business - my thinking is that there are High Tech jobs available in non-High-Tech companies. It would be great if such opportunities are extended and made visible to students. For example, Kaiser Permanente has a significantly-sized IT department and are using modern technologies, but I don't think they'd qualify as a High-Tech Company under the current rules.

Comment by John on January 6, 2009 at 9:09am

Hi Laurence,

I think this is good. The other advantage of placing the credits with students is that it rewards tech companies for hiring local students (as well as subsidizes cost of training/learning). One trend I see with the current 221 is that companies hire people from the mainland, they come here for 1-3 years and then they leave. If the credits were tied to hiring local students, this would significantly improve the likelihood of long terms benefits.

The one aspect I am not sure about is opening this up to ANY local business. To build a sustainable technology sector, we need companies that are exporting, that is are making money by selling to people outside of the state. As an example, I am not sure of the long term benefit of providing subsidies to companies by providing local PC repair.

Thoughts?

Comment by GB Hajim on January 6, 2009 at 9:03am

I think that is a great idea, but I think the business should be linked to the qualifications of the student graduating. For example: A grocery store shouldn't get a credit for hiring a student graduating with a biology degree. And they should be only available to businesses that pay a living wage to all their employees (above $15/hr).

Just my two cents.

Comment by Laurence A. Lee on January 6, 2009 at 8:50am

Actually, to grow the High-Tech Industry, I'd really like to see 221/215 (or its replacement, which is what I'm advocating) take things a step further: Allow Tax Credits to be stacked if QHTBs hire Students in Qualified High-Tech Majors (QHTMs) through the Student Employment Offices of local colleges.

This arrangement would encourage internships, give High-Tech opportunities some visibility to Qualified High-Tech Students(QHTSs), and most importantly, act as an incentive for Local Businesses to hire Students.

IMHO, the greatest hurdle students and recent graduates face is their lack of experience - as they compete against more seasoned people in the industry. With such an incentive-program in place, students have a fighting chance of landing positions within local companies, where they can prove themselves, establish working relationships, and hopefully work their way into permanent, full-time positions.

My vision of such a plan would provide:

1. Tax Credits to QHTBs (pretty much what we've been discussing and refining up to this point)
2. Any viable combination of Tax Credits, Grants, or Scholarships to Qualified Students of High-Tech Majors (with performance-based restrictions) - enough to defray all or a majority of a student's education expenses
3. Tax Credits to ANY local business (not just those that qualify as QHTBs) that hire Qualified Students through a college's Student Employment Office. We'd need to get the Student Employment Office to somehow certify the employment arrangement for the business to receive this credit. This arrangement allows local businesses to hire IT Students to help service their internal IT needs, and still receive Credit for doing so. QHTBs who hire under this arrangement are also allowed this Tax Credit, or possibly a higher-rate of Tax Credit, just for being a QHTB hiring a Qualified Student - which is what this is all about, IMHO.

I think an arrangement like this would achieve the best of both worlds: to groom and immerse Qualified High-Tech Students into the local workforce; and to encourage local Businesses (and QHTBs) to extend more internships and entry-level positions.

Thoughts?

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