Angel Investors and Venture Capitalists Breathe Life into Hawaii's High-Tech Industry.
You don’t have to dig far to find deep pockets in Hawaii. Wealth is everywhere: local family estates, pension funds, local venture capital firms and high-net-worth individuals, known as “angel investors.” The challenge is to convince these rich folks to invest their moolah in local start-up companies, in fledgling firms that, given the chance, have the power to transform Hawaii’s venture capital community into the next Silicon Valley.
Unlike the high-tech driven Valley, the Islands are comprised of biotechnology and Internet developers, software and aquaculture farms. “Hawaii has a number of things that are unique, and venture capitalists like to see that,” says Bill Spencer, president of the Hawaii Venture Capital Association.
The economic diversity works like a magnet, say industry leaders. “We want to develop a different industry that can bring very efficient, clean, non-polluting companies to our market for future employment,” says Ron Higgins, a local angel investor and entrepreneur who is the founder of local company Digital Island Inc., a worldwide data center that specializes in the storage and transmission of Web site content. The company went public in July 1999 and on Aug. 31 of this year, was acquired for $340 million by Cable & Wireless PLC. “From day one, we were an international, global company as opposed to just regional,” he says.
As of last August, HSDC had invested more than $13 million in seven local funds. That value is expected to grow, now that HSDC has given its investment portfolio to local private company MN Capital Partners LLC. Under the agreement (finalized last May), MN Capital has been asked to raise $20 million in three years, plus another $20 million in six years. “They’ll help us manage our investment and bring in new, private sector investments, plus they’re better able to go to the investors than the state would be,” Chock says. “Hundreds of millions of dollars (in Hawaii) are going into venture funds in the mainland.” HSDC is confident its new portfolio manager will reverse that.John Chock, president of the state agency Hawaii Strategic Development Corp., is one of Hawaii’s venture capital proponents. He, too, believes funds should come from local investors. “It’s a matter of shifting the investor mentality from real estate, which is a flat, intellectual property, and recognizing that value can be gained by investing in early-stage technology companies,” he says. Although laws ban the 11-year-old HSDC from certain financial activities (housing construction), the state has an indirect investment policy that allows HSDC to tap into venture capital limited partnerships. HSDC does so by combining its own state funds with money from the federal government and from private investors.
The timing for Hawaii couldn’t be better. In Silicon Valley, the power has shifted back to venture capitalists. Competition to fund companies has become less fierce. A Deloitte & Touche survey this year found that Silicon Valley venture capitalists were more confident about investing in the third quarter than they were in the first two quarters.
The upbeat attitude was evident despite dismal findings: approximately 78 percent of the respondents expected 10 to 33 percent of venture-supported companies to close shop by the end of this year; about 77 percent expected a continuation of down rounds, with valuation drops of between 25 to 50 percent between venture rounds; and 41 percent had planned to spend their time and dollars on new, longer-term investments rather than on sick portfolio companies.
Hawaii is playing catch-up in a venture capital game it never played. “Venture capitalists are dumping their bad Internet investments and betting on the remaining portion of the investment fund,” says angel investor Higgins. “This is not necessary in Hawaii. The investments were not made in the frenzy of Silicon Valley.”
Local venture capitalists and related professionals are far from frenzied.
“A lot of people are contributing their time, energy and money to put on a non-profit company; they’re really adding another level of sophistication to the marketplace,” he says.
Pushing this philosophy is a group of venture capitalists and business leaders in a new non-profit organization called Hawaii Business and Entrepreneur Acceleration Mentors (HiBEAM). Since HiBEAM was established one year ago, its members have found funds for three promising upstarts: AssistGuide Inc., a disability and elderly services provider; HotU Inc., which is a career-placement service for college students; and Hawaii Biotechnology Group Inc. (see page 25).
AssistGuide in September 2000 received approximately $1 million in angel funds to expand its Hawaii-only operations to Houston, St. Louis, Las Vegas and Dallas. That was followed last August by a second angel round ($900,000). “We’ll use the money to expand to additional markets and hire new people in service and technology,” says Kevin Sypniewsky, president. Today, AssistGuide boasts new features, including live chat sessions with specialists in health, disability and senior citizen-centered topics. The company this year formed partnerships with Hawaii Health Systems Corp. and Regency Pacific Inc. to better assist clients. “Sypniewski is in an industry that hasn’t adapted to technology very quickly, and he had a plan,” says Leigh-Ann Miyasato, executive director for HiBEAM.
HotU Inc., a 2-year-old company founded by a local twentysomething entrepreneur Walter Roth, was built with seed capital from angel investors like Higgins, who is the company’s chairman. HotU’s philosophy is unique. It links students and job recruiters via the Internet and other high-tech methods. One of HotU’s star products is an on-line class-scheduling program, launched last year at the University of Wisconsin.
The future looks good for this company, primarily targeted at college students. On Aug. 22, HotU announced its merger with Sunnyvale, Calif.-based Scholastic Recruits, a campus recruiting company that was created in 1996. The merger allows both companies to combine existing programs, including hotUconfirm, an event management tool for career centers. “In the short time that hotU and Scholastic Recruits have worked together, we’ve already made a mark in the university recruiting domain,” says Laurie Foster, president of hotU. Already four universities have signed up with hotU’s services: University of San Francisco, Colorado University-Denver, University of Alabama La Salle Universities. HotU to date has received funds of up to $6 million.