Hawaii’s Tech Industry After Act 221

The tax credit nurturing Hawaii’s tech industry is dead, but here are five ways to keep the momentum going

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     Photo and illustration: istock

Watching the death of Act 221 was like watching the Superferry ordeal unravel all over again,” says attorney Jay Fidell, president of ThinkTech Hawaii. “Why this state continues to oppose progress and kill measures that so many people and businesses will benefit from just boggles my mind!”

But not everyone in the local tech community is sad to see 221 go. Serial entrepreneur Tim Dick says Hawaii will continue to innovate just fine without subsidies. As an example, Dick points to a company he now heads, Adama Materials, a local maker of nanotechnology-based materials, which raised $4.75 million in Series A equity financing in September despite the death of 221.

So many people have strong opinions about 221 – whether it worked, failed, was too expensive or wasn’t given enough time to succeed – that the controversy has generated a much-needed discussion about what Hawaii must do to create a viable tech sector. Here’s a look at five ideas and the likeliest path toward a high-tech future in a post-221 world.
 

1. It Starts with leadership

Act 221 attracted capital for early-stage investment, but the challenge today lies in helping the hundreds of local tech companies get to the next level.

“If you ask me what’s the most important thing for high-tech investment, capital formation and economic diversification that has been missing over the past decade, it’s good leadership with vision and commitment,” says Jeffrey Au, managing director of PacifiCap Group, a venture-capital firm with about $100 million under management. “No matter what your strategy or program, you need proper leadership for it to be successful and effective.”

While most business groups supported other gubernatorial candidates, the Hawaii Venture Capital Association backed Neil Abercrombie and his calls for incentives and programs to help grow the tech industry.

“The main thing is that leadership needs to do what they say they’re going to do,” Au says. Former Gov. Linda Lingle “supported 221 in the beginning and then did a 180-degree turn. I am much more optimistic based on the new administration.”
 

2. Invest locally

Hawaii continues to lead the nation in millionaires per capita, according to annual research by the marketing firm Phoenix Marketing International. Phoenix says these are not millionaires with second homes in Hawaii, but those who say Hawaii is their primary residence. Why, then, asks Bill Spencer, president of the Hawaii Venture Capital Association, aren’t more of those rich people investing their wealth in Hawaii?

“As of 2007, the top 20 landowners in Hawaii had over $20 billion worth of value in their land,” Spencer says. “If they invested 5 percent of that into local venture capital, that would be $400 million. Kamehameha Schools has $8 billion – they’re one of the biggest trusts in the country. If they put 1 percent of that into local ventures that would be $80 million.”


“Just look at the money in Silicon Valley; it stays there and keeps churning,” says Spencer, a member of the Hawaii Angels, a group of about 80 individuals who have invested more than $30 million in local startups.

But, Spencer says, many of Hawaii’s wealthiest people put their money into Mainland venture firms rather than the handful of active local funds. “It’s important to remember that there’s an added value to investing at home: It means a diversified economy and higher-paying jobs.”

Fidell says when big Hawaii investors don’t put money back into the community from which they made their wealth, “It’s a one-way street that’s ultimately unsustainable.”

Of its $8 billion endowment, Kamehameha Schools spends about $300 million a year on education in Hawaii and about $2.5 billion is invested in local real estate, says Kirk Belsby, KS’s VP for endowment.

“We have set aside approximately $40 million out of our venture capital and private equity portfolio for investment in Hawaii. About $12 million has already been committed to venture funds that are predominantly or significantly invested in Hawaii,” Belsby says. “We continue to look at other opportunities to do more of that.”

Big players such as Kamehameha Schools and the Hawaii Employees Retirement System, which invests about $10.5 billion, have to diversify their holdings and they can’t just invest in Hawaii or Hawaii companies.

“It’s too difficult for big institutional investors to go around investing directly in companies,” says Karl Fooks, president of the Hawaii Strategic Development Corp., a state fund of funds that invests in other VC firms. “They want to invest in a smart fund manager who then picks the right companies for their business focus.”

According to Dick, Kamehameha Schools is an investor in Startup Capital, which is one of the companies financing Adama Materials, and other Hawaii businesses. Similarly, the ERS is investing up to $25 million in VC funds that may include exposure to local portfolio companies through its Hawaii Targeted Investment Program (HiTIP).

“Our expectation is that approximately one-third of the total capital will have local exposure through venture-capital funds, some based in Hawaii and others based on the Mainland,” says Wesley Machida, ERS administrator.

He says ERS diversifies its holdings to reduce the impact of volatility in the market. “It would be challenging from a risk-return perspective to place 100 percent of all of the HiTIP funds in local companies through venture-capital funds and still yield competitive returns.” 
 

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