Posted on: Tuesday, May 13, 2003
HI. TECH
Local technology industry will lose critical catalyst if fund is eliminated
By John Duchemin
Advertiser Staff Writer
The pending shutdown of the state's venture-funding arm will strip Hawai'i technology industry advocates of one of their most reliable allies.
The state Legislature, intent on balancing the budget in a time of major shortfalls, has voted to erase the Hawaii Strategic Development Corp.'s $1.3 million revolving fund, which otherwise would have been available to invest in Hawai'i's most promising high-technology companies.
The move, if approved by Gov. Linda Lingle, would virtually eliminate HSDC, which since the mid-1990s has provided more than $13 million in taxpayer money to venture firms for investment in start-up Hawai'i technology companies.
That's not a lot of money, especially when compared with the trillions of dollars that many other states' public and private venture firms have invested in their technology industries in the past decade.
In Hawai'i, however, where most technology companies are capital-starved to the point of folding, HSDC has at times seemed like a poor man's Daddy Warbucks. Without HSDC, the state probably wouldn't have developed even the stunted venture capital resources that presently exist.
Consider the nonexistent Hawai'i technology scene of the mid-1990s. In a time when the Mainland high-tech industry was attracting billions of dollars each month in venture funding, Hawai'i had virtually nothing.
Economic development gurus had long endorsed the idea of creating a high-tech scene in Hawai'i to add some spark to the economy, then floundering in a tourism lull. But without local sources of financing, entrepreneurs were complaining they had no way to get off the ground. Mainland capitalists were leery of coming in without a strong local partner, but Hawai'i bankers and other private investors proved unwilling or unable to pitch in.
A visible venture capital scene didn't coalesce until the government created and financed HSDC, which placed millions of dollars with several would-be venture firms. These firms, given the legitimacy of a government backer, were able to raise several modest millions of dollars from the private sector.
Was this money wasted? In quantitative terms, it's still too early to tell. Venture funds expect to finance a lot of losers, but hope that one or two winners will emerge from the heap and produce exceptional returns. HSDC's investment portfolio funded plenty of small companies that have struggled and sputtered, but none have yet turned out to be unqualified successes.
The biggest hit was Digital Island, a Hawai'i-founded communications company that soared on the stock market after going public in 1999. Digital Island fell victim to the telecommunications crash before HSDC-funded firm HMS Hawaii liquidated its gains, and the state lost an opportunity to make tens of millions of dollars.
Given this mixed performance, HSDC's John Chock, who has directed the organization since its founding, apparently found it tough to justify his job to skeptical legislators looking for shortcuts to a healthy budget.
But Chock rightly argues that HSDC's task is nowhere near complete. Hawai'i high-tech companies have still proved unable to generate enough interest from local or outside venture investors to consider themselves a self-sufficient industry.
"At some point, there won't be a need for HSDC and we can go away," Chock said yesterday. "We're not there yet. There's still a need for a catalyst."
In killing off HSDC, then, is the Legislature declaring high-tech Hawai'i a dead dream? Perhaps not — if someone else emerges to play the role of catalyst. If that fails to happen, the state's technology industry could return to the unfinanced wasteland from which HSDC helped lift it.
