News

Study Assesses State of Venture Capital in Hawaii

Hawaii has the entrepreneurs, wealth and expertise to grow a viable tech industry, but lacks the venture capital to put it all together, according to a comprehensive new study sponsored by Enterprise Honolulu and Harvard Business School.

By:
Terrence Sing
Pacific Business News

The study was done over a two-month period by Harvard Business School MBA candidate Daniel Cook, who conducted more than 100 interviews with fund managers, entrepreneurs, institutional investors and government officials in Hawaii and the mainland. He has done similar capital-formation studies in Mexico, Argentina, Brazil, Chile and Uruguay and in Connecticut and New York.

Good ideas, but more capital needed

Cook found promising entrepreneurs and companies in Hawaii, but not the capital needed to back them.

"There is a growing demand for this that will determine the success of those entrepreneurs and the impact that their growth will have on Hawaii, both economically and financially," he said. "But there’s no supply in the marketplace due to a very nascent venture capital community."

He estimates that community to be five years old at most.

What’s missing is a commitment to put together a capital fund, he said.

"If this capital is not pooled together, the lost economic impact in terms of growth, diversification, validation of the entrepreneurial processes and momentum will be severe," he said.

Wanted: $233 million

Cook estimates Hawaii needs $95 million in local venture capital and another $138 million coinvested from outside sources over the next five years based on a historical analysis of Series-A and Series-B funding of local firms.

"The idea there is really to put a stake in the ground and to come up with a figure that would help guide the formation of a fund," he said.

One big fund that would fund a series of smaller venture capital funds probably would be best, he said.

"You don’t want to have all your exposure in one area," Cook said. "You would want to diversify that geographically and by stages of development."

Such a fund would take a public/private alliance, he said.

Hawaii needs to coordinate, network and educate potential angel investors, Cook added.

He found a large base of high-net-worth individuals here, including more than 100 venture capitalists with full or part-time Hawaii residence.

Hawaii’s wealth considerable

The top six wealth holders in the state are worth an estimated $14 billion as a group, and 24,000 wealth holders have an average base of $966,000 and a combined net worth of $23 billion, he said.

Citing U.S. Department of Treasury data, Cook found most of the $23 billion (55 percent) invested in real estate, 16 percent invested in corporate estate stock, and 7 percent invested each in cash and money market accounts and bonds.

People in Hawaii typically have invested in real estate and are not accustomed to investing in the tech sector, said Ann Chung, executive director of the Hawaii Technology Trade Association, a private organization that supports Hawaii’s tech industry.

"What we need to do is provide some education, discussion and some modeling so that people can become familiar with it," she said.

Cook cites the UH Angels, Hawaii’s only formal angel investor network, as a good example of what is needed. Its 30 members have invested close to $3 million in eight deals over the past year, ranging from $75,000 for a single investment to $1.2 million for several investors.

Still, Hawaii venture capital is severely constrained and limited to Series-A funding of an average of $2 million, he said.

Getting beyond ‘starter’ funds

Act 221, Hawaii’s high-technology tax-credit law, has brought in the seed funding for tech startups, but not beyond Series-A, Chung said.

"We need to come up with a good model investors can look to as having worked in another state," she said. "And that’s what we are doing. People in Hawaii just need a good education about venture capital."

Organizations such as the UH Angels and the Hawaii Venture Capital Association are doing just that, she said.

"Given the limited capitalization of Hawaiian venture capital funds, Series-B participation is rare," Cook said, adding that companies that have moved to the mainland have secured the most venture funding.

But the lack of venture capital here also allows for better deals.

"Because venture capitalists don’t have to compete, nobody’s bidding," Cook said. "In California and on the mainland you have an oversupply of capital."

Hawaii also needs strong local venture capital in order to attract mainland and outside investors.

"Mainland investors are necessary to make this happen," Cook said.

In the past, Hawaii hasn’t had the capital available to attract outside investors at higher levels, he said.

"Everything is at an inflection point," Cook said. "Hawaii has the next generation of success stories of entrepreneurs. But what has to happen is the groups that can finance this growth have to come together and put together this fund of funds."

Sorry, we couldn't find any posts. Please try a different search.

Leave a Comment

You must be logged in to post a comment.