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

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Lessons Learned?

Shindo bet the bank on polysilicon in 2008 - a gamble he eventually lost.

Photo: Mark Arbeit

So what does the Hoku tragedy have to tell us about the prospects for Shindo and IDEAS?

On the one hand, those who know him personally and have worked closely with him say it shows his intelligence and resourcefulness as an entrepreneur. They certainly don’t view him as a failure.

“Hoku means star in Hawaiian,” says Steve Iwamura. “Dustin had to look at his stars to navigate the company toward the horizon. I think he does that better than anybody I’ve seen in my lifetime. Some people think leadership is a function of age. I’ve never counted how much older I am than him, but I’ve got several years on him. But that guy is a CEO in every sense of the word.”

From another perspective, Hoku wasn’t a failure, but a success, because a lot of people made a lot of money on the IPO. “Hoku has two stories, as far as investors go,” Shindo says, “You have pre-IPO investors and post-IPO investors. My pre-IPO investors did very, very well. Some of them weren’t in very long, but as long as they sold their stock, they had very handsome returns for their support. And I value their support; we couldn’t have had Hoku without it. So, I had people thank me for the effort I put in to create the company. That meant a lot to me.

Hawaii Angel investor Rob Robinson, who says the early investors made a lot of money on Hoku if they sold soon after the IPO.

Photo: David Croxford

“The post-IPO investors – well, we were a public company. People could buy and sell whenever they wanted to. So, there were people who loved me and people who were frustrated. We got calls all the time: either somebody saying, ‘Thank you so much,’ because the stock went up, or, ‘What did you guys do?’ because the stock went down. I think that’s the case with most public companies. But the pre-IPO investors were pretty happy. Even today, when I see those investors, they remember – maybe, in part, because the other high-tech investments in Hawaii didn’t go as well.”

Rob Robinson says the Hawaii Angels investors were a good example. “Most of us were invested at about 75 cents a share. If you sold on the day the SEC lockup ended, as some of us did, you could sell for just under $15 a share. That was a pretty significant profit. That’s what you call a home run. Actually, the baseball metaphor is appropriate. In baseball, most of the time, when you go to bat, you strike out or ground out. Nothing good happens. But one or two times out of 10 at-bats, you get that double or triple or home run. And you need that to keep your average up. It’s the same with angel investing. Hawaii Angels has been around since nearly 2002. We’ve invested in about 50 companies, and we’ve never had another company produce the kind of return that Hoku has. We’ve had a couple that were pretty good, and a couple in the process that we think will be successful, but nothing as profitable as Hoku.”

Ironically, Hoku insiders didn’t do as well. “A lot of people made money,” Stahlkopf says. “Unfortunately, I wasn’t one of them. Being on the inside, with things jiggling around like they were, many of us were kept by SEC rules from selling. So, I think most of us lost a lot of the upside potential.”

No Big Payoff to Shindo

Even Shindo never really got to cash in on Hoku’s early success. Although his paper wealth approached $70 million when the stock was at its peak, insider-trading laws prevented him from selling more than a small percentage of his holdings at substantial profits.  

But it wasn’t just about the financial returns, Robinson says. Like many of those familiar with Hawaii’s startup community, he views Shindo as a particularly competent entrepreneur. “What was unusual was that Hoku did go as expected. The usual experience with tech investment is it’s a pretty wild ride, with lots of twists and turns, and a lot of times it doesn’t go right. But Dustin had a pretty clear vision of where he wanted to go, and he more or less stuck to that timeline. He really executed well. That’s what’s unusual in the business world. Nobody really expects that to happen. Of course, they certainly had some dramatic changes in their business model.”

Nevertheless, the company did go under. And, given the dramatic swing in prices for polysilicon, it’s fair to ask: Was the whole Hoku saga based on a bubble? That’s certainly what some analysts have said, most of them with the benefit of hindsight. But, as early as 2007, Citron Research’s stocklemon blog pointed out the difficulty a small company like Hoku faces competing in a commodity market:

“The problem with commodity manufacturing is simple. What is now a high-margin business will soon turn into a low-margin one as undercapacity gives way to overcapacity. The company is not producing natural resources; rather they are turning raw materials into a manufacturing component. Hoku doesn’t seem to have acknowledged that access to capital and lowest-cost-of-production rules this game.”

Not surprisingly, Hoku insiders have a different view. “It wasn’t a commodity market when we started,” says Karl Stahlkopf. “It was a value-price market. And there were a lot of people who agreed with us – the early companies in China that invested in the long-term future of polysilicon. Maybe we could have seen the market swing coming, but I doubt it. I find that looking into the future is hard to do. Every sign we were getting from the smart people in the market was that there was a need for this. And we got multiple validations along the way as we signed several long-term contracts with international players.”

Even so, it’s hard not to wonder why Shindo and the Hoku team didn’t anticipate a ramp-up in supply as competitors raced to get a piece of those outrageous poly prices.

The bubble issue is relevant because there are signs that today’s healthcare IT space is also overheated. When asked to describe the potential size of the market for IDEAS, Shindo cites a recent IPO: “I’ll give you a sense of how hot or exciting this market is,” he says. “If you look up a company called CastLight Health – it just went public last month – its annual revenue was only $13 million, but its market cap at IPO was $1.5 billion, which never happens. Now, it’s climbed over $2 billion. It’s a healthcare data analytics company. We’re a smaller version of it. That gives you a sense of how big and meaningful this market could be.”

Of course, those figures look pretty alluring to a startup in the healthcare sector. But industry observers are (suddenly) skeptical. In May, Aaron Pressman of The Exchange described Castlight as the “Most overpriced IPO of the century.” He wrote: “Castlight’s insane level of valuation – 107 times revenue (not profits, as they had huge losses last year) – of the original IPO pricing hasn’t been seen for a tech deal since the year 2000, the twilight of the 20th century. Of the prior 13 deals priced at 100 times revenue or more and sales of at least $10 million, the average three-year return was negative 92 percent.”

That bodes ill for IDEAS, if the business model depends on these kinds of valuations. Probably more important, though, is what all this attention means for competition in the healthcare IT sector. Just as the big players were drawn to sky-high poly prices, giant healthcare tech companies are swarming to the same space IDEAS is trying to stake out. Inevitably, there will be a shake out.

In a Wall Street Journal interview, veteran healthcare investor Anne DeGheest explains how the bubble will burst for many small analytics companies: “A lot of these companies say they are going to pull data from a variety of sources, run algorithms on the data and then present the data to the customer. At the Series B level, we would ask, ‘Why is this data actionable? Who is meant to take action on the data? How do you measure the impact of this data?’ ”

These are questions that get to the core of what it will take for IDEAS to succeed.

There is one big difference between IDEAS and other startups, though. Because of how it was formed, Shindo has been able to grow the company without investors, and IDEAS has been break-even from the start. Having that steady, growing suite of customers is insulation from heady swings in the marketplace. It’s also a competitive advantage.

“There are certainly other companies that are doing healthcare data,” Shindo says. “The next question is: What makes us different? We have three things going for us, I guess. One is, via what Mike Sayama and HMSA have already done, we’ve been doing this much longer than those other companies. That means our understanding of the technology issues is better.

“The second thing we have going for us is people – not just within our team, but in the community. The relationships we have in East Hawaii, in large part due to Mike and his team, allow us to have that trust, that foundation that brings people together. Anytime you’re sharing data, you definitely have to have that trust.

“The third component is we’re developing custom algorithms here that help further our system. That’s a differentiating factor as well. It’s a competitive advantage because it takes data to come up with algorithms. If you’re starting from scratch, then you don’t have data, so you don’t have algorithms. And, over time, as these companies get bigger and bigger, it will become harder and harder to break into this market. It becomes the chicken and the egg thing. If you don’t have the algorithms, you can’t get data; if you don’t have data, you can’t get algorithms.”

Shindo also emphasizes the difference in culture between IDEAS and its potential competitors. “My philosophy, in every business I’ve created, has always been to grow it to be the best business it can be. As far as how do we grow it, I have a philosophy called ‘Silicon Valley meets family business.’ I grew up in a family business in Hilo. We had the Pepsi Cola franchise and distribution network for the Big Island and, as a kid, I worked six days a week. My dad used to make me stock shelves as soon as I could hold one six-pack in each hand. So I bring a lot of those principles into how I run a company. It was the same thing with Hoku. People always looked at Hoku as a company that raised a lot of money, but we actually raised very little money before the IPO. We were actually profitable before the IPO. I’m growing this business the same way, with a lot of the same principles any corner mom and pop store would have: You have to work hard. You have to make your customers happy. You have to control your costs. And you have to build a good team. All those things are consistent here.”

Broadly speaking, IDEAS enjoys the advantage of an owner who’s trying to build something that will last, not make a quick killing in the market – a concession, perhaps, to critics who said Hoku went public too quickly.

Investing in People

For better or worse, IDEAS also gets the benefit of a leader who’s run the gauntlet. Stahlkopf thinks that’s crucial. “The thing that you learn, if you’re around venture capital for very long, is they really invest in the management team as much as they do the technology. The world is littered with ideas that were better than their competition, but didn’t make it to market because their management team wasn’t as strong.” He cites the example of Sony’s Betamax technology, which, he says, lost out to the inferior VHS technology largely because of Sony’s poor management.

“That’s why you see venture capital folks, when they evaluate a company, they vet the management team as closely, or more closely than they do the technology. So many deals go before their faces, but most of these guys are financial guys, they’re not technical guys and, as an early investor, it’s really tough to tell if a technology is going to make it or not. So, you really have to look at the credentials, the work ethic and the personality of the management team so you end up with the VHS as opposed to the Betamax.

“The reason I bring this up is because Hoku was not a case of management making a mistake. Not the kind of mistake that let an inferior product take over the marketplace. It was a case of externalities – the downturn in several markets at the same time. I continue to be a big supporter of Dustin. I think he’s shown it with what he’s done since then. He’s clearly a bright, energetic, hard-working entrepreneur, who’s kind of dusted himself off from Hoku and has done some extremely interesting things since then. He’s still well thought of in the financial community. He’s still well thought of in the Hawaii technology community. So, the business failed; but, in my opinion, management didn’t fail.”

“Mostly a Success”

Shindo himself doesn’t see Hoku as a failure either. “It was mostly a success,” he says. “I say that for many reasons. First of all, we started that business in an apartment in Waikiki. How many businesses start that way and get to being a NASDAQ-listed company? We were the only profitable fuel cell company ever publicly traded, that I know of. And, when the fuel cell market didn’t happen, we reinvented ourselves as a solar company. We were constantly overcoming challenges. When we had trouble with financing – in large part, because of the decline in the polysilicon market and the global financial crisis – we found a buyer, an investor, in China. So, insofar as my involvement goes, it was a big success. It’s certainly something I’m very, very proud of. The reason I say that so adamantly is: that was my baby. I built that for 10 years. And when the company was closed, even though I was four years removed from the company, it was still sad. It’s something that, obviously, I would never have wished to happen.

“Another way it was a really big success is, I think, it changed the beliefs, if not the perceptions, of entrepreneurs in Hawaii of what could be done here. A lot of times, it’s really easy for people here to say, ‘It’s Hawaii; we can’t do certain things.’ And I don’t think they should. I think, with the right people and the right situation, we can do almost anything here. Certainly, for at least a couple of years after the IPO, there were things that people thought they could do in Hawaii that, previously, they would have moved to the mainland to do, or just not done at all. In that way, I think the ripple effect of Hoku was much bigger than people realized.”



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