HI. TECH
Proper financial support can take high-tech startups to next level
By John Duchemin
Advertiser Staff Writer
After years of labor, Hawai'i technology industry advocates have finally created an environment in which entrepreneurs can create companies, polish the concepts and hold a reasonable expectation of attracting startup money.
At last count, 14 Hawai'i high-tech companies received about $26 million in investments at the end of 2002, and reports are still trickling in of other investments.
The past quarter was therefore one of the most successful fund-raising periods for the state's small high-tech industry. These 14 companies now have startup money to spend on salaries, research, office expansion and sales — all good things, and all affirmations of the technology industry's power to diversify the economy away from tourism.
But it would be wrong to say this moderate accumulation of investments is evidence that high-technology has finally "arrived" as a major economic force for Hawai'i. Twenty-six million dollars is chump change compared with investments in the state's $9-billion-a-year tourism industry — it would pay for less than half of the mold repairs at Hilton's Kalia Tower, for instance.
More importantly, Hawai'i still lacks the venture capital necessary to take many of these newly financed companies to the next level. Almost all the money for these investments came from wealthy individuals and small-scale local venture firms. Few of them attracted more than $1 million.
In most cases, that's enough money to give the companies a few months of breathing space. After that, they still face a vacuum.
This is a dangerous situation, because many of the startups are research companies: They're working on a great idea, but need constant infusions of money to develop a marketable product. Their goal is to use venture investment dollars, preferably in ever-larger amounts, to gradually leverage themselves into world-class companies, capable of being acquired or taken public with a handsome payoff for investors.
In 2002, the Hawai'i investment community proved capable of starting this process — but hasn't yet shown it can pay for companies anywhere close to the final rounds.
Venture capitalist Barry Weinman, a part-time Hawai'i resident, articulates the risks of the situation.
"I have concerns about how these companies will be able to raise significant future rounds here in Hawai'i," Weinman says. "If we don't achieve this capital formation ... then I think Hawai'i companies will either be capital starved or will have to relocate to the Mainland."
To raise money in the current environment, Weinman and his colleagues will have to exert all their skill. Venture investments worldwide, while above historical levels, are still far below the amounts spent during the boom that ended in 2000. And the threat of war and a double-dip recession could make investors even less likely to risk money in speculative companies.
So are things looking good for the technology industry here? In some ways, yes. At the very least, Hawai'i has a growing batch of minor companies that could become major, with proper financial support.
But until that support materializes, the state's investment community has only done half its job. And if these companies all die off, investors may as well have stuck their money in mold repair.
Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.
