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The Honolulu Advertiser
Posted on: Thursday, April 29, 2004

Act 221 startup HotU Inc. collapses

By Sean Hao
Advertiser Staff Writer

HotU Inc., one of the first companies to benefit from the state's Act 221 technology investment tax credit program, has failed as a business.

Last week the U.S. Bankruptcy Court in Honolulu granted the company's request to convert its Chapter 11 bankruptcy reorganization case to Chapter 7 liquidation.

HotU, which provided career fair management software to universities, filed for bankruptcy protection in August with $513,556 in assets and $389,761 in debts. Like many companies founded during the technology bubble, HotU's main problem was a lack of money, said Bill Richardson, a general partner of HMS Hawai'i, a venture-capital firm that has invested in several local startups including HotU.

"The killer was the business model was flawed in terms of timing," he said. "After the bubble burst, the funding became unavailable. It was highly dependent on continued funding."

Now that HotU is being liquidated, investors could face repaying up to 10 percent of the tax credits that were claimed during the last two years. Act 221 allows for the state to recover some of the tax credits if a business fails within five years of granting credits.

Though Act 221 helped the company attract needed investment capital, it also ultimately led to friction between HotU investors such as Barry Weinman, managing director of Allegis Capital, and Jeff Au, managing director for PacifiCap. That has since spilled over into the debate on changing Act 221, with Weinman and others seeking to tighten the act and Au looking to preserve the credits as they are.

State lawmakers currently are considering extending the program, which expires next year, for another five years.

Founded by Walter Roth, a Punahou School graduate, HotU grew from three employees to 34 between 2000 and 2002. With help from a $10.8 million investment from venture capitalists led by Ron Higgins, a Punahou alumnus who founded the local high-tech startup success Digital Island, HotU moved from the state-run Manoa Innovation Center incubator to the downtown high-rise Harbor Court.

Roth left the company as a director and chief executive officer early in 2002 shortly before the resignation of Laurie Foster, another Punahou graduate who had been HotU president.

Two HotU affiliates — HotU Development Co. LLC and HotU Technology Co. LLC — were not part of the bankruptcy.

As HotU's senior lender, PacifiCap likely will decide what happens with the company's assets, Au said.

"We're trying to determine what the next steps are," he said.

HotU's failure is not a reflection on the effectiveness of Act 221, Au added.

"Anyone will tell you 221 or no 221, you have a lot of these companies; in fact, the majority of these companies fail," he said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.