How has the State's moves on ACT 221/ SB199 already affected your company?

Comment

Comment by Peter Kay on July 29, 2009 at 3:56pm

Good one, Bill. There's always 2 sides to a story.

Comment by Bill Dash on July 29, 2009 at 2:02pm

While I dont agree with this letter to the editor of the April Hawaii Business Magazine it does take a dfferent look at Hoku...
Another side of Shindo
To the casual observer, the news in the press and Hoku Scientific’s public releases give the impression that the high tech company is doing well. The reality is different, though, as the company loses millions year after year, sells off assets for operating cash and has taken out a short-term multimillion dollar loan to pay bills.

Led by Dustin Shindo (“Success Secrets of Nine Top Leaders,” December 2008), Hoku has lost more than $6 million over the past eight quarters and has had only one profitable year over the past five. FY 2009, ending March 31, appears likely to be in the red as well. In the past year, Hoku has sold real estate to generate more than $6 million of working capital and, on Oct. 1, it took out a short-term loan for $5 million from First Hawaiian Bank to meet expenses. While these losses were serious, the questionable viability of Hoku’s principal focus, the construction of a polysilicon manufacturing plant in Pocatello, Idaho, makes the above negative numbers seem trivial by comparison. With construction behind schedule and needing hundreds of millions more to complete the plant, Hoku appears to have difficulties lining up capital since previous investors like Merrill Lynch backed out. Add to that the cancellation and renegotiation of preproduction contracts by solar module manufacturers while market prices for polysilicon have fallen worldwide.

For years, Shindo has been praised by the Hawaii business media as an exemplary mover and shaker and is photographed in Hawaii Business basking in the sun next to a solar electric system. The reality is Shindo et al lose millions, pay themselves salaries in the hundreds of thousands, scramble for cash and publicly downplay the true financial state of Hoku while seeking new and unsuspecting customers.

Keola Kapono, via e-mail

Comment by Peter Kay on July 29, 2009 at 11:17am

Hoku Scientific just posted this page about it's net benefit to the state:

The fact that they (a) are net-positive and (b) a clean energy company, what's not to love about this success story?

Comment by Bruce M. Bird on July 27, 2009 at 12:30pm

Hi, Bill. Interesting stuff.

Please note that when I use the phrase "Son of Act 221", I mean "what's next after Act 221". I don't mean that it necessarily has to look anything like Act 221 (before or after the recent changes to it).

Also, your observation that Hawaii tech is competitive and has a lot of high quality people provides will make a lot of hard working people's day (in the non-Clint Eastwood sense, of course).

Comment by Daniel Leuck on July 27, 2009 at 12:10pm

Hi Bill - I agree. There was way too much emotion on all sides and often not enough hard analysis.

From what I've read about the Grove Street Partners approach, which is admittedly limited, it sounds like a good model. I think the challenge will be in getting a high quality Hawaii-adapted implementation in place, from research and legislation to involving the right investment organizations.

Comment by Bill Dash on July 27, 2009 at 11:13am

Dan...point well taken. Just my frustration showing through with the one sided articles I have read lately.
One other thought on the SPIF program. A professional VC friend of mine in Honolulu told me that in the 2003 ( maybe it was the 2002 or 2004 session) session the legislature was within a few days of paasing the SPIF legislation that called for ERS ( HIERS) to allocate 2% of their fund to the SPIF model. The ERS fund was about $7 Billion so that could have been a fund of funds focused on Hawaii of $100-200 Million. ERS Trustees were against this legislation because they have fiduciary responsability for their retires and are not responsible for economic development. At the time they had about $300 Million allocated to venture capital---none to Hawaii VC firms. Since Act 221 was the solution of all of Hawaii's high tech problems, ERS was able to convice the legislature---in the last week pof the session---not to pass the SPIF act. Instead ERS agreed to study Hawaii venture options and recently hired GKM Newport to invest $25 Million in venture funds---both local and mainland---that would look seriously at Hawaii tech deals. We will see if this works.
As to Bruce's question about due diligence: why do serious due diligence if you are getting 2X your investment? What you focus on is will the deal get non-tax money ( so you can get 2X), will it last a few years ( doesn't have to grow, or be profitable, or be of any quality) so you maximize the tax benefit. Act 221 "investors" don't have to hold management accountable---they just need to keep the company alive for 5 years ( even a PO Box works). Also, Act 221 "investors" tend to cpompare local deals with other local deals---the only way to get tax bennies. They should be comparing local companies to mainland and global companies if Hawaii tech companies are evre going to compete nationally or globally.From the angel deals I have looked at here, Hawaii tech is competitive and their are lot of high quality people. However, because so many companies received Act 221 money the high talent pool has been spread across way to many companies. No company gets critical mass of talent and capital. This is a prescription for failure. The best thing that can happen to Hawaii high tech is for Act 221 and its son die and and the focus shift to Leighton's thinking. Probably unlikely....

Comment by Bruce M. Bird on July 27, 2009 at 11:06am

Hi, Peter. I'm still thinking about your question.

I like your basic approach regarding not looking in the rear view mirror. However, I don't see anything wrong in referring to Act 221 when thinking out loud about what a new model should be.

Comment by Bruce M. Bird on July 27, 2009 at 10:46am

Hi, Bill. As a general proposition, I'm all for any model that leads to professional due diligence, good corporate governance, and accountability.

I think that you and Leighton are really on to something.

Bill, you mentioned in an earlier post about your frame of reference as a Route 128 VC when looking at Act 221 deals in which to possibly invest in Hawaii. What is your view as to the level and quality of the due diligence relating to these deals?

Comment by Peter Kay on July 27, 2009 at 10:23am

Nice reference/model, Bill. I echo Dan's comments on blanket statements. While clearly many 221 companies lacked some elements of quality venture-funded firms, the vast majority at certainly had the right intentions and actions to become successful.

That all being said, where we need to go from here is to think about what model we embrace going forward. And more importantly, lets not look in the rear view mirror. 221 doesn't need to be refactored. We need a clean sheet design.

Comment by Daniel Leuck on July 27, 2009 at 10:15am

Hi Bill - I like the idea. I'm all for involving quality VC firms. Simply put, doing due diligence on cutting edge tech companies is hard!

These are foreign concepts to the Act221 supporters.

If you don't mind a suggestion, I think its best to be careful with blanket statements about this group. First, there are a lot of people who believe there are issues with Act 221, but aren't happy about the way it was spun down (e.g. SB199.) In other words, there are more than two sides. I don't want to spend too much time on this subject, because at this point its really an academic argument, but I know many intelligent, well informed people (including angels and VCs) with differing opinions - pro 221, pro 221 with modifications, end 221 now, end 221 in a controlled manner over 6-12 months, etc.

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