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The Honolulu Advertiser
Posted on: Tuesday, January 14, 2003

HI. TECH
Run of end-of-year investments bodes well for Hawai'i tech industry

By John Duchemin
Advertiser Staff Writer

Hawai'i technology on public radio

Hear The Advertiser's John Duchemin and the latest Hawai'i technology-related news every Wednesday on Think Tech Hawai'i, 5 to 6 p.m. on Hawai'i Public Radio KIPO FM 89.3, with hosts Jay Fidell and Gordon Bruce.

TOMORROW: "A Look into the World of HiTech Quest — Will It Help Tech in Hawai'i?" will be the topic on Think Tech Hawai'i, featuring HiTech Quest students. HiTech Quest, founded in 1996, was created to identify young people in Hawai'i with information technology ideas and skills and to help them showcase their abilities. An annual HiTech Quest technology fair is open to all Hawai'i K-12 students.

December has become Money Month for the Hawai'i technology community, with startup companies attempting to reap tax-leveraged investments from wealthy Mainland and local investors.

Last month, at least six Hawai'i technology companies received at least $5.3 million worth of investments, following December 2001's harvest of $8 million from four companies.

In many communities, this seemingly meager amount would not be reason to celebrate. But in Hawai'i, these deals show that after several years of uneven progress, the Hawai'i technology scene is finally gaining some lasting credibility and traction.

Consider the facts:

• The receipt of money last month by at least six Hawai'i companies means investors think there are at least six Hawai'i companies actually deserving of funding.

Hawai'i entrepreneurs have long played a monotonous chicken-and-egg game with potential investors, arguing they can't succeed without investments — while investors have wanted some proof that their money wouldn't be wasted. But now, local investors, lawyers and other observers say, the quality and quantity of deals has improved to the point that being a "Hawai'i entrepreneur" is no longer a fatal handicap.

• Some Hawai'i companies are able to raise money more than once. Five of the deals are follow-on financing from earlier "A-round" or "angel" investments. Medical imaging device maker Hoana, for instance, raised $1.6 million in late 2002 after raising an initial $1.7 million a year earlier. Fuel cell component maker Hoku Scientific, research firm Hawaii Biotech, aquaculture company Kona Bay Marine Resources and Internet service provider AssistGuide also secured re-investments.

This is good news. It's hard to raise money these days. Investors look closely at deals, and if a company loses its luster, it won't get funding — a death-kiss for startup firms with few or no customers, but with pressing needs for cash infusions to survive until they find their markets.

By raising new money, these five Hawai'i firms have passed a key credibility hurdle. And they will also be able to pay the bills, hire more employees and buy new equipment.

• Act 221 is proving to be a positive factor in generating deal-flow. The state tax credit for investments in high-tech companies was key for several deals that involved local investors partnering with Mainland investors.

Local investors "bought" the Mainland investors' tax credits in exchange for a chunk of equity. Both sides got what they wanted at discount prices — and the entrepreneurs receiving the investment got more money as a result. At least four of the deals involved such swapping, and all six companies will benefit from other Act 221 credits including a 20 percent refund for research and development costs.

This is precisely the evidence that Act 221 backers have sought to show the tax benefit, which has been steeped in controversy, is an effective tool for economic development.

• Local investors are getting involved. Hawai'i tech companies have long complained that their capital needs have been ignored by tourism, banking and real-estate magnates. But wealthy Old Economy kama'aina, including former Bank of Hawai'i chairman Lawrence Johnson, Schuler Homes founder Jim Schuler, Hawaii National Bank boss Warren Luke, and banking and insurance veteran Frank Tokioka all put money into startups in 2001 and 2002.

Johnson, for instance, invested this year in Hoku Scientific, Hoana Technologies and wireless Internet component maker Landmark Technologies.

Add up the facts, and Hawai'i has apparently developed a workable infrastructure for talented entrepreneurs to attract "seed" funding for their startup businesses. Never have this many local companies been in the early stages of the funding pipeline.

These companies are hardly swimming in cash. Most received a few hundred thousand dollars, enough to tide themselves over for a few months. Nonetheless, Hawai'i suddenly has a working portfolio of funded companies to pitch to big-time Silicon Valley, New York and Asian venture capitalists, any one of whom could provide many millions of dollars for future investments.

That's a big what-if. But after the deals of December, it no longer seems impossible.

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