Dustin Shindo: The story behind what happened at Hoku and his new venture in healthcare IT

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Photo: David Croxford

If you invested in Hoku, your view of Shindo is probably colored by when you got in and when you got out – if you did before it went bankrupt. Those who got in early remain big fans and some are supporting his new venture in healthcare IT. As always, Shindo has big IDEAS.

Shindo at IDEAS Health headquarters in Moiliili.

Thirteen years after he and his partner, Kaleo Taft, founded their fuel cell startup in a Waikiki apartment. Nine years after he put the company on NASDAQ in a $21 million IPO. Seven years after he and his colleagues gave up on fuel cells and broke ground on a $400-million polysilicon plant in Idaho. Four years after he stepped down as CEO and a Chinese conglomerate acquired controlling interest in Hoku. And a year after what was left of the company finally declared bankruptcy.

People still think of him as the wunderkind from Hoku, but Shindo’s now 41 and he hasn’t been sitting still in the four years since leaving the company. Today, he presides over a pair of healthcare startups from offices in a Moiliili strip mall. Don’t be fooled by the modest setting. He may be older, but he’s still the smart, ambitious entrepreneur who once sold over $2 billion worth of polysilicon before the manufacturing plant was built. And he still expects to change the world. The question is: Are the lessons Dustin Shindo learned at Hoku the right ones?

First, the present: “We have two businesses running out of here,” Shindo says. “One is Pono Corp. and the other is IDEAS Health. IDEAS stands for Information and Data Exchange and Analytic Solutions. Both of these companies are very healthcare-centric. They’re two legal entities, but we really run them as one business.”

Shindo with family in New York City as Hoku closes the trading day at NASDAQ on April 30, 2007.

Photo: David Croxford, Courtesy of Dustin Shindo.

Pono Corp. is a drug development company that Shindo founded with his old Hoku partner Kaleo Taft, though Taft has since moved to Dallas and become president of METIS Scientific, which makes DeConGel, another Hawaii-born product. “We have two drugs,” Shindo says. “The main one is a cancer drug for multiple myeloma, which we originally bought from the University of Hawaii and have continued to develop. Multiple myeloma is a blood cancer. It’s pretty rare, but it’s one of those you don’t want to get. There’s no cure. It’s a blood plasma cancer and, once you get it, it’s just a matter of time.”

Treatments for rare diseases like multiple myeloma have become profitable for drug companies. “The primary treatments for multiple myeloma are proteasome inhibitors, which is what we have. Right now, there are only two in the marketplace. The main one is called Velcade, which was developed by a company called Millennium Pharmaceuticals, in the U.S., which, in turn, was acquired in 2008 by Takeda Oncology, in Japan. Velcade now does about $1.5 billion a year. It’s an expensive drug to take, which, in part, is because there aren’t very many alternatives for this cancer.”


At DR Fortress, where IDEAS has its servers.

Photo: David Croxford

Despite the potentially lucrative future for Pono’s cancer treatment, most of Shindo’s efforts are focused on IDEAS. Its goal is to build a digital platform that can provide sophisticated analytics for healthcare. According to Shindo, the company has an interesting pedigree. “Several years ago,” he says, “HMSA started investing in an analytic platform. Using funding from something called a Beacon Grant, it started going through data from East Hawaii on the Big Island. Beacon was a very competitive program; this was one of only 17 communities in the country to get the Beacon Grant. I’m from Hilo, so I followed that project for the last couple of years. Last year, the Beacon funding ended, and HMSA decided it wasn’t going to be the developer of this system; it’s not really their business. Instead, HMSA wanted us to develop this analytic platform, so we ended up buying it, and HMSA signed up as our first customer. So, HMSA is our largest customer, although, since then, we’ve signed up a couple of others.”

Shindo appeared in Hawaii Business in December 2001 holding a fuel cell.

Photo: Ronan Zilberman

One of the biggest trends in healthcare is the conversion from paper to electronic medical records. While crucial to a more efficient healthcare system, IDEAS is interested in something much broader. “Just to be very clear,” Shindo says, “this isn’t the same thing as the Hawaii Healthcare Information Exchange, which is a secure system to share individual patient health records. This isn’t at the individual level. This is more about asking questions like, ‘What does the community spend on diabetes? What treatments are most effective? Which treatments cost the most money?’ Maybe, at a more detailed level, it could be, ‘Which physicians are most successful at treating diabetes?’”

The analytics part of IDEAS is designed to answer those questions, but it won’t work without the data exchange part. The key is to create a system that takes in data from as many sources as possible – insurance companies, hospitals, physicians, etc. – cleans it up and packages it so those same entities can analyze it. Increasingly, healthcare experts see this kind of data analytics as crucial to identifying problems and controlling costs.

Steve Iwamura, a business consultant in Japan who helped arrange meetings between Shindo and executives at Japanese corporations such as Sanyo. Despite Hoku’s demise, Iwamura remains a big fan of Shindo.

Photo: Courtesy of Steve Iwamura.

“Of course, you have to follow all the healthcare (privacy) rules,” Shindo says, “but you want to trade data from multiple places for the purposes of analytics. That’s definitely cutting edge as far as healthcare data goes. If you only have your own data to run analytics on, which is what we have today, it’s already beneficial; but running analytics on data from multiple sources would certainly take it to the next level.”

Mike Sayama, the executive director of IDEAS’ Learning Health Home division, is in charge of coordinating the healthcare community in East Hawaii. Before coming to IDEAS, Sayama was an executive VP at HMSA and was in charge of the Beacon project, so he understands the complexity of the process. He contrasts what IDEAS does with Kaiser’s EPIC system, perhaps the industry’s leader in analytics. But Kaiser is a self-contained healthcare system; all its hospitals, clinics, physicians and patients comprise a single entity, which makes it easy to share data. IDEAS, on the other hand, is building a community system. “The question is,” Sayama says, “Can a community model of delivering healthcare remain viable compared to the Kaiser model? For it to remain viable, my belief is we need the information platform that we’re trying to develop.”

This is the complex and high-stakes scenario that Shindo and his team will have to negotiate. That’s what makes the Hoku story – one of the most complicated and high-stakes business stories in the state’s history – a meaningful comparison.

Hoku Rises

Shindo appeared often in Hawaii Business during Hoku’s ascent. Here’s a picture from the August 2005 issue.

Photo: Olivier Koning

The most fascinating part of the Hoku story is how many times the company changed course. When Shindo and Taft founded Hoku in 2001, it was a fuel cell company whose technology was based on a proprietary fuel cell membrane. With a big investment from Hawaiian Electric’s venture arm, the company grew quickly. Because Japan had a large fuel cell market at the time, early Hoku customers included Sanyo Electric and Nissan Motors, both of which ended up as investors in the company. A $3.5 million deal with Sanyo, in particular, set the stage for Hoku’s success. Subsequent deals with Nissan totaled more than $8 million.

Steve Iwamura, a business consultant in Japan who helped set up the meetings between Shindo and Japanese executives such as Sanyo R&D head Fusau Terada, thinks these Japanese activities highlight Shindo as a deal-maker. He lists the challenges: the language difference, the relative size and strength of these giant conglomerates compared to Hoku, and Hoku’s lack of money. Shindo not only closed these deals, he was able to secure cash up front and have most of the rest of the money parked in escrow at Bank of Hawaii.

“Even with that first deal with Sanyo,” Iwamura says, “that was like Hannibal coming over the Alps with elephants. I still find it hard to believe we did that.”

Karl Stahlkopf, who served on the board of Hoku from beginning to end.

Photo: Courtesy of Karl Stahlkopf

In the early 2000s, many renewable energy experts believed the “hydrogen economy” was only 10 years away. Dirty, inefficient internal combustion engines in cars, for example, would be replaced by fuel cells, which work by taking hydrogen and passing it through a sophisticated membrane – Hoku’s main innovation – producing electricity and pure water. But, even though fuel cells were clean, but they weren’t cost effective, especially compared to the new electric and hybrid car engines entering the market. Even after Hoku’s IPO in 2005, the hydrogen economy still seemed to be 10 years away.

“By 2006,” Shindo says, “a lot of the fuel cell companies were struggling and the market wasn’t coming to fruition as we had hoped, so we started looking for ways to diversify.”

One diversification was commercial solar development: designing and installing large solar farms. “We did a lot of great projects,” Shindo says. “The second largest solar farm on this island – still, today – was built by Hoku out at the Pearl City peninsula. The largest solar farm in the state was built by Hoku on Kauai. All the solar at the outer island airports was built by Hoku.” According to Shindo, solar helped Hoku turn a profit – a rarity for a tech startup. But solar was just a way to provide cash while Hoku moved to something more ambitious: producing polysilicon, a key ingredient in making solar cells.

Karl Stahlkopf, who served on the board of Hoku “from the time it was born until it died,” describes how the company got into polysilicon. “It was pretty clear that there was a cliff up ahead for the hydrogen car. … So, the team of scientists and some of us from the board got together and said, ‘What are we going to do now?’ ” The conversation turned to polysilicon, a hot commodity in the booming solar industry. At one point, the spot-market price for polysilicon was more than $300 per kilogram; but, by Hoku’s calculations, it would only cost about $25 per kilogram for a new plant to produce it. That’s an attractive margin. Maybe more important: industrial polysilicon production is essentially chemistry, which was Hoku’s scientific strength. Also, there was some customer overlap between the fuel cell industry and polysilicon. Sanyo, for example, made both fuel cells and solar panels.

“So,” Stahlkopf says, “the company made the strategic decision to shut down the work we were doing on hydrogen and put all our time, energy and money into developing a long-term plan to do two things. One was commercial solar development in Hawaii, basically selling solar energy in the commercial industrial space. The other was making polysilicon.”

In March 2007, with great fanfare (and criticism from people who wanted to keep jobs in Hawaii), Hoku began construction on a $400 million polysilicon plant in Idaho. Shindo approached funding the construction with characteristic ingenuity. The company still had millions of dollars in the bank from the IPO, plus steady revenues from its solar business in Hawaii. Shindo ultimately secured more than $2 billion in contracts – essentially commitments to buy Hoku’s future production – with solar companies in Japan, China and Germany. These deals generally included some cash up front, with the rest becoming available in increments as Hoku reached various milestones. For example, Sanyo, which, like other early investors, made a handsome profit on the Hoku IPO, signed a $370-million deal that included $2 million in cash and $108 million in escrow, again, at Bank of Hawaii. These efforts raised nearly $330 million in cash toward the construction and development costs for the polysilicon plant.

“All we needed to do was get $70 million in project funding out on the financial market,” says Steve Iwamura. “That’s not a lot of money in a $400- million project.”

Then Lehman Brothers collapsed.

In 2008, not yet realizing the severity of the financial crisis, Shindo  began knocking on doors for financing. “We had a great deal to offer,” he says. “We had the plant structured. We had an engineering company to build it. We had customers. We had some money in the bank. We had contracts. This is what project finance companies lend on. And they all said no. At the time, we had Merrill Lynch as a bank that we were counting on. It was tough because we thought, ‘We’ve done all we can do.’ Then, of course, we found out why they were saying no: They didn’t have the money to lend.”

Like Merrill Lynch and many other companies, Hoku became a victim of the great recession and its deals unraveled. The big solar companies, under duress themselves, demanded that Hoku renegotiate their contracts (most of which were not guaranteed). Payments came in late. Construction delays sent the price of the plant spiraling, ultimately exceeding $700 million. Hoku fell further and further behind with its own creditors. Worst of all, the market for polysilicon tanked.

“There are a couple of reasons for this,” Shindo says. “One, it is a commodity, so it’s driven by supply  and demand. And, when demand was high, supply just shot up. Existing manufacturers added capacity, and the Chinese built a ton of new capacity, so supply increased like crazy. In part, that was predicated on the belief that demand was going to continue to grow. So, the second half of the story was that demand didn’t continue to grow, because the global crisis not only cut off the debt spigot, it cut back or curtailed the government incentives for solar. As government incentives, particularly in Europe, dried up, demand for solar dried up. Thus, demand for polysilicon didn’t grow nearly as fast as everyone predicted. So, it was supply and demand that drove prices down, just as it was supply and demand that had driven them up. It was the flip-side of the same coin.”

But Shindo still had one last trick up his sleeve. In 2009, he arranged a deal to sell controlling interest in the company to the Chinese energy conglomerate Tianwei, which agreed to convert $50 million in polysilicon prepayments into stock, and to provide an additional $50 million in loans to help finish the construction of the plant. That effectively ended Shindo’s relationship with Hoku.

“In Japan, we have a saying,” Iwamura says. “ ‘When a bird lands on a lake, the lake is supposed to be calm. And when the bird leaves, the lake should be calm, too.’ When Dustin left Hoku, he left calm waters behind him. What happened after he left he had no control over.”

“I woke up the next day feeling good,” Shindo says. “The poly price was still in the $35 to $50 range, so everyone thought, ‘Well, it’s not $200 anymore, but it’s still good enough that we can start the plant and move forward.’ Here’s the interesting thing, though: After we sold it to the Chinese, the spot price for polysilicon fell to $15. This is why there’s really no one to blame for Hoku’s failure. The spot price fell below the price to make polysilicon for any new plant, which was roughly $25. In the end, a lot of those new Chinese plants just closed up. Today, the spot price sits around $20, so it’s probably going to bea long time before polysilicon is profitable again.”

Last December, the $700-million Idaho plant was auctioned off for little more than $8 million.

Karl Stahlkopf compares the end of Hoku’s saga to a Shakespearean tragedy. “One of the things that distinguishes Hoku from other startups that I’ve worked with,” he says, “is that the original path it started on was very different from where it ended up. And it was able to execute an absolutely brilliant U-turn, which very few people have successfully done. It went out with one market and technology, which the whole company was founded on, then went in a completely different direction. But, because of the intelligence, the diligence, the thoughtfulness and the hard work of Dustin and his staff, they were able to make that U-turn and make it successfully. But, again, the Shakespearean tragedy takes over and Juliet dies.”


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