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The Honolulu Advertiser
Posted on: Sunday, July 28, 2002

Improved business climate spurs high-tech growth

By John Duchemin
Advertiser Staff Writer

Dozens of start-up technology companies have sprung up in Hawai'i in recent months, thanks to an improved business climate that belies an otherwise moribund state economy.

Supported by an improved network of services, and by increased interest from potential investors, government and private institutions, this new batch of post-recession entrepreneurs say they are increasingly developing new business plans and making deals. Some say the new activity points to a newfound maturity in Hawai'i's small but growing technology sector.

"The environment in Hawai'i is the best it's ever been," said Kevin Sypniewski, founder of Kailua-based AssistGuide, which has created an Internet service for long-term care providers. "There's been a very organized, concentrated effort to improve, and it's working."

Since last fall, a rapidly coalescing high-tech community, supported by influential investors from Silicon Valley, has put millions of dollars into at least eight Hawai'i start-ups. At the same time, more Hawai'i technology companies are winning grant money from government sources. Public and private business incubators, which themselves have multiplied in number, are full of newcomers.

The list of new tenants at the state-run Manoa Innovation Center shows the depth and diversity of the latest start-ups, such as:

• Hoku Scientific, whose 28-year-old founder Dustin Shindo has secured about $1 million in private financing and hired several top-flight scientists to develop fuel cell components.

• Blue Lava Wireless, a company whose Dutch founder, Henk B. Rogers, beat out nationwide competition to secure the right to develop Tetris and other games for Sprint's third-generation wireless phones.

• ITS Solutions Inc., a computer systems engineering company that has landed government contracts and hired about 15 people.

• Vitex Inc., an on-demand, toll- free news service catering to business executives.

• Quality High Tech Research, a company developing ways to recycle grease into energy.

Better equipped start-ups

Observers say the newcomers are, in general, better equipped than their predecessors to survive, grow, and help turn "high-tech Hawai'i" from a long-discussed dream into a real engine for economic growth and high-quality jobs. This is true despite global uncertainty, economic turmoil, plunging stock markets and the spotty history of the local technology sector, said John C. Dean, chairman of Silicon Valley Bank.

"If you think about it, there couldn't be a worse time to start a company, but people here are still managing to raise funds," said Dean, who since becoming a part-time O'ahu resident in the late 1990s has invested in several Hawai'i-based companies. "There's more experience, a good, bright talent pool and stronger management teams. The whole scene is ratcheting upwards."

Despite years of political discourse on the need to develop a meaningful high-tech presence in Hawai'i, the industry is still tiny, consisting of a few clusters of companies in fields such as biotechnology, military research, software development and diversified agriculture, which together make up a few percentage points of the tourism-dominated economy. Many observers say the sector will remain small unless more is done to market Hawai'i's high-tech assets and attract talented workers and venture capital.

The industry also is coming off a year of setbacks: Several highly publicized companies laid off hundreds of workers in 2001. Web translator WorldPoint and nonprofit DVD developer Ohana Foundation closed last year after the companies failed to find markets for their products. Telecom test equipment maker Adtech saw its market dry up, laid off about 30 employees and canceled plans to build a new headquarters on the Kaka'ako waterfront. And Square USA, after spending millions to develop a computer-animated movie studio in downtown Honolulu, collapsed after the flop of its debut movie, "Final Fantasy: The Spirits Within."

But as these companies struggled and the state suffered through the aftermath of Sept. 11, several key changes occurred that observers say have created a better environment for the current crop of island start-ups.

"It's like a field of daisies died, but more are growing up in their places, and we're probably going to cultivate them better than before," said Ian Kitajima, marketing manager for Honolulu research firm Oceanit.

Improved support system

With more Hawai'i business leaders convinced that high-tech companies can prosper here, more avenues have opened for local entrepreneurs to seek advice and money in hatching their ideas.

Business-plan competitions are a good example. In 2000, there were none. This year, there were four: two held by UH, one by the Hawaii Healthcare Business Incubator, and a contest held by Pacific Business Forums. Each not only offered cash prizes but helped budding CEOs practice their pitches, refine their ideas and make valuable contacts with business veterans. Each contest attracted several dozen entrants.

Also new are:

• Two private incubators, the HMSA-sponsored Hawaii Healthcare Business Incubator, and the Hawai'i Opportunities Group, which give office space and professional hand-holding to new businesses.

• A semi-formal network of investors. Led by former Harvard University professor Rob Robinson, now with the University of Hawai'i business school, the group has attracted wealthy residents and is regularly reviewing start-ups for investing opportunities.

• HiBeam, or Hawaii Business and Entrepreneur Acceleration Mentors, a nonprofit group of lawyers, venture capitalists and other professionals that helped secure millions of dollars in financing for each of its first four "client companies."

• A federally sponsored mentoring program for "pre-seed" companies that have received government research financing. The program will start this fall, said Janice Kato, program organizer and official with the state High Technology Development Corp.

• Pacific Business Forums, a for-profit Honolulu networking group run by former New York and Maui resident Lisa Labonte, who has brought in Mainland venture capitalists to advise Hawai'i entrepreneurs.

Entrepreneurs say these groups have helped create a more nurturing environment for new ideas.

"I feel very comfortable that we'll be able to make it with the amount of support here," said Jill Hamasaki, co-founder of start-up Zoji Golf, which wants to make kids' golf clubs with replaceable shafts. After winning the UH business plan contest, Zoji Golf has been coached by HiBeam, counseled by several local lawyers and veteran entrepreneurs, and has raised $300,000.

Government help

A state tax credit and an increased flow of federal money have helped inject capital into local technology companies.

The state's Act 221, a package of tax breaks for technology businesses, has attracted new local and national money to Hawai'i start-ups, observers say. Among the recipients are Hoana Technologies, a company developing a biosensor mat for medical use, and Hawaii Biotech, an 'Aiea research company developing a cure for dengue fever; each received several million dollars in venture investments. Investors say the tax credits aren't the main reason they invest, but they clearly are an extra incentive.

The flow of tax-leveraged investment has been less than some anticipated — a sign that state and industry officials haven't properly publicized the tax credits, said Tareq Hoque, president of the Hawaii Technology Trade Association.

But awareness of the credits appears to have grown in recent months, said AssistGuide's Sypniewski: "We did a presentation for a big VC firm in the Midwest, and they knew all about the Hawai'i tax credit," he said.

Other major help is expected to come from the federal government, which already is supporting several of the largest local technology companies with scientific grants and military contracts. Many observers predict that millions of additional Department of Defense dollars will flow to Hawai'i as the government steps up post- Sept. 11 counterterrorism research. The money would stimulate the Hawai'i "dual use" industry — companies that make commercial products based on military research. Several members of a dual-use industry delegation to Washington, D.C., in July were encouraged by the Defense Department's interest in Hawai'i, said several people who went on the three-day mission.

"There really is more money out there — this area is definitely our short-term opportunity," said Jeanne Schulz, marketing manager for the Estate of James Campbell, which wants to attract high-tech businesses to its land in Kapolei.

UH brings new focus

Observers say UH's new administration, an influx of fresh teaching talent and several influential outsiders have triggered a new entrepreneurial spirit at UH, which many see as a crucial idea factory for Hawai'i technology companies.

The College of Business Administration has taken an active role. The business school supported both of this year's UH-sponsored business contests — the in-house contest, and the Asia Moot Corp competition that brought students from universities around the Pacific Rim.

The school also hired professors Michael Moore, a specialist in entrepreneurship from Miami University in Ohio, and Robinson, the former Harvard professor, who teaches negotiating tactics. Together, they form the nucleus of an entrepreneur-focused curriculum.

Equally important, observers say, is an increased emphasis on churning out commercial ideas from the UH science schools. One sign of this emphasis is the attitude change at the Office of Technology Transfer and Economic Development, or OTTED, which controls intellectual property developed at the campus.

Under new technology licensing manager Richard Cox, an early hire of UH President Evan Dobelle, observers say the office — once seen as a defensive roadblock that kept patented technology locked on the UH campus — is now helping to move that technology into commercial enterprises. In his first 10 months at OTTED, Cox has helped streamline the university's patent procedures, strengthen its intellectual property ownership rights and increase licensing revenues from patents by 90 percent.

Others are trying to attract corporate joint-venture money. This fall, the university will start a program to give $75,000 matching grants to companies that engage in commercial research projects with UH. The goal is to move more UH research into the private sector, said Keith Mattson, director of UH industry outreach organization University Connections.

UH has committed $150,000 for the project's first year, Mattson said.

Pushing a similar idea is electrical engineering professor Magdy Iskander, recently hired from the University of Utah to direct UH's Hawaii Center for Advanced Communications, where faculty and students are creating new wireless technologies. Iskander has started a clinical program in which teams of students will work on projects conceived by private companies, who would finance the research with $25,000 grants.

The project, which starts this fall, has attracted $100,000 from four sponsors with local ties — defense contractor Raytheon, research firm Orincon, Web service integrator NetEnterprise, and Spirent Communications. Iskander's goal is 10 sponsors, which would bring in enough money to upgrade the center's labs and pay for graduate fellowships.

The program should lead to more commercial ideas coming out of UH, Iskander said. "With projects coming in from industry, we'll have an incredible infusion of ideas," he said. "When industry comes up with the ideas, they force us to think in deliverables."

Other opportunities decline

Some attribute this year's surge in entrepreneurial start-ups to the struggles of the tourism sector. With hotels and retailers cutting thousands of jobs, many see technology as a relatively rosy alternative to Hawai'i's dominant industry.

"Lots of people are very bright and intelligent, but can't find jobs because they're just not out there," said Michael Possedi, a consultant for the Hawaii Healthcare Business Incubator. "So they will go out and make their own opportunities, because no one else is making any for them."

Also, Hawai'i farmers and agriculture companies, facing the long-term decline of sugar and pineapple, have embraced diversified agriculture as a way to stay in business. For some, this simply means growing high-value niche crops such as Maui onions or Kona coffee. But others, in turning to science, have become an integral part of the local tech industry, attracting venture money and government help.

Mushroom farmer Bryan Hiromoto is one. After 18 years growing mushrooms in Haiku, Maui, he realized his crops seemed especially resistant to nematodes, the root-eating flatworms that make life miserable for farmers worldwide. After several years of research, Hiromoto developed two environmentally friendly products: a mushroom-based nematode killer and a plant growth stimulator.

The project has snowballed. Hiromoto, 47, has started a company, ABR Inc., to perfect his products. He has attracted seed financing from Honolulu investors Randy Havre and Albert Pleus. He secured the help of Maui Pineapple Co. and Hawaiian Commercial & Sugar Co., which not only gave him lab space but are providing pineapple and sugar byproducts with which to grow mushroom culture in plastic vats and test tubes.

Hiromoto this summer won a $750,000 federal grant to further develop his products, which are being tested by researchers at nine universities across the United States. Multinational farm products company ConAgra, eager to find pesticides that meet rigorous new environmental standards, is taking a serious look at ABR products, and further venture financing is in the works, investor Havre said.

Hiromoto said Hawai'i has provided an excellent environment for him to do his work.

"A lot of people tell me I should have been on the Mainland to do this kind of work, buried in one of the big agricultural chemical companies," he said. "But I like it here. Here you have the raw materials and a friendly year-round climate, which is very important."

Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.