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The Honolulu Advertiser
Posted on: Sunday, March 14, 2010

Challenges for venture capital

By Alan Yonan Jr.
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Sopogy Inc. uses SopaNova mirrored collec­tors on the Big Island to inten­sify sunlight and generate power.

Sopogy photo

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Angel investors and venture capital providers are similar in that they invest in growth businesses in return for an ownership stake in the company and a degree of involvement and control. They do, however, differ in certain respects.

• Source of funds: Angel investors, acting alone or in organized groups, are usually wealthy individuals, often with a successful entrepreneurial record, who invest their own money. Venture capital funds are corporate entities that pool money from a range of institutional and individual investors.

• Deal size: The range of angel investor transactions is typically $25,000 to $100,000 for an individual, and up to $1 million, or more, when acting in a group. The range of venture capital transactions is large, from around $500,000 to $10 million, or above. Venture capital may provide second-round financing after angel investors.

• Stage of development: The focus of angel investors is typically earlier-stage businesses. Different venture capital firms focus on different stages of business development, but the unifying criteria is that they seek high growth companies capable of achieving exit strategies that meet the fund's return criteria within a specified time frame.

Source: LBO Advisers

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Hawaii news photo - The Honolulu Advertiser

Venture capitalist Christopher R. Hemmeter, left, talked with Justin MacNaughton, center, and Warren Doi of GreenCar Hawaii following their presentations at the Hawaii Venture Capital Summit this past week in Honolulu.

NORMAN SHAPIRO | The Honolulu Advertiser

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Hawaii news photo - The Honolulu Advertiser

In his two-minute pitch at the Hawaiçi Venture Capital Summit, Justin MacNaughton of GreenCar Hawaii told investors he wants to meet with them “to discuss a growth platform.”

NORMAN SHAPIRO | The Honolulu Advertiser

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Hawai'i's venture capital community is bracing for another tough year, weighed down by continued weakness in the economy and the disappearance of lucrative state tax credits for technology investment.

VC investors from Hawai'i and the Mainland who gathered in Honolulu for a conference last week cautioned that the environment for capital raising probably will remain challenging for some time.

Hawai'i's venture capitalists closed four deals in 2009 valued at $10.3 million, the lowest amount in five years, according to Dow Jones VentureSources. That compared with $89.7 million in 12 deals the year before.

Nationally, there were 2,489 venture capital deals in 2009 totaling $21.4 billion, down from $31 billion the year before.

"I think it continues to be tough time for venture capital not just in Hawai'i, but around the country," said Rob Robinson, founder and managing partner of Kolohala Ventures, Hawai'i's largest venture capital fund.

Robinson, who moderated a panel discussion at the annual Hawai'i Venture Capital Summit on Thursday at the Hilton Hawaiian Village, said the Legislature's decision last year to cut back a technology tax credit known as Act 221 dealt another blow to Hawai'i's reputation as an unfriendly place to do businesses.

"I think the legislature has created the impression that Hawai'i cannot be trusted as place for private investment," he said.

"In combination with the Superferry (closure), that's created an image that this is a terrible place to invest. I think we have to work really hard to overcome that impression."


The daylong VC summit, sponsored by the state-funded Hawaii Technology Development Corp. brought together, venture capitalists and angel investors from Hawai'i and the Mainland, entrepreneurs and representatives from local high-technology firms and other deal makers in the sector.

In a scene reminiscent of ABC-TV's "Shark Tank," entrepreneurs were given anywhere from two to 10 minutes to make their pitches in front of investors attending the conference.

Each pitch was critiqued by a panel of experts. In the final round, three selected companies were able to meet one-on-one with an investor behind closed doors.

In a two-minute pitch session, Justin MacNaughton, 38, laid out his company's plans to launch a car-share service that will allow visitors to rent cars by the hour via a kiosk in hotel lobbies. GreenCar Hawaii borrows its concept from Zipcar, the nation's leading membership-based car-sharing service, and adapts it to the visitor market.

MacNaughton and business partner Warren Doi, 40, are moving ahead with a pilot program for GreenCar Hawaii at the Grand Hyatt Kauai later this spring that will feature a fleet of four to six Ford Escape hybrid SUVs. GreenCar will charge an all inclusive rate of $15 an hour.

"GreenCar Hawaii is evolving a proven and successful business model by providing car-sharing to the tourism and travel industry, one of the nation's largest markets," MacNaughton said during his pitch.

"We make money by providing cars for use by the hour with an all-inclusive service fee that eliminates the typical cost of paying for vehicle when you don't need it, gas, insurance and paying for parking," he said.

"We're currently funded for the pilot program, but we're looking to have meetings with any of you out there to discuss a growth platform to take GreenCar Hawaii from an individual island market, through the state and beyond."

Panelist Christopher R. Hemmeter, managing director of Quest Hospitality Ventures, critiqued MacNaughton's presentation.

MacNaughton should have spent more time talking about some of the inconveniences in renting a car from a traditional vendor, Hemmeter said.

"What I didn't hear up front is what is broken down. It's always really interesting to me when I meet someone who can identify something about the way things are being done that's broken," Hemmeter said "That's got to get me first, and to say we can solve it in this way is the next important step."

Other presenters included David Watumull, chief executive officer of 'Aiea-based Cardax Pharmaceuticals; and Jeanette Hereniko, founder and president of AsiaPacific Films.com, an online film library that streams films.


Many of the morning panel discussions focused on the challenges Hawai'i faces in developing a robust venture capital community in an area so far from the established technology and financing centers.

But there also was widespread agreement about where the state has a competitive advantage: renewable energy.

Kolohala Ventures' Robinson said Hawai'i's progress in developing technologies to harness solar, wind, ocean and geothermal energy will help attract venture capital at a time when investors are becoming more choosy about where to put their money.

"I think renewable and sustainable technologies is a definite bright spot for Hawai'i," Robinson said. "I think that if we're going to establish a local center of excellence in any industry, that is one is that has the highest chance of success."

Darren Kimura, founder of the Honolulu-based solar power company Sopogy Inc., said the firm that he launched in 2002 has expanded its operations to seven western states, including a manufacturing facility in Los Angeles and a sales and marketing office in San Jose. Its research and development operation, however, remains in Hawai'i.

"Because of the type of company we are, we have an unfair advantage here in Hawai'i that you don't find anywhere else in the world," Kimura said.

"In Hawai'i you have access to some of the best solar radiation year round with virtually no seasonality. If you can solve the challenges (of remoteness) the technology will work anywhere around the world. Because of that our R&D is in Hawai'i."

Sopogy uses mirrors to intensify sunlight and generate power as opposed to photovoltaic systems that use panels made from silicon cells that convert the sun's rays into electricity.


William Reichert, managing director of Garage Ventures, an early-stage VC firm based in Palo Alto, said Sopogy is an example of a Hawai'i-based company that would be successful in any setting.

"There are sort of two types of entrepreneurs from Hawai'i," Reichert said.

"One is the entrepreneur from Hawai'i who's clearly from Hawai'i. And the business model, the orientation, the focus is, 'We've got this thing we're doing in Hawai'i and its really cool and we think we can build a good business doing this.' And from our point of view it's quite possible you could build a good business doing that but your orientation is too narrow.

"The other type of entrepreneur from Hawai'i is a global entrepreneur day one. And it's a person whose frame of reference is not Hawai'i, they just happen to be from Hawai'i and they happen to have a team from Hawai'i but the frame of reference is global."