Looking to drive entrepreneurship in an economy dominated by tourism and the military, the Abercrombie administration is willing to spend $20 million over two years to help local startup companies take ideas to market.
The Hawaii Growth Initiative would be a state investment program that would help commercialize research being conducted in the islands, mentor budding entrepreneurs and mobilize startup investment capital. The administration contends the state money would attract additional private-sector investment and hatch new companies that would create higher-paying jobs and diversify the state’s economy.
Gov. Neil Abercrombie has wanted to nurture an innovation economy as part of his "New Day" agenda, but this is the first year since the governor was elected that the state has some money available for that purpose.
The state’s track record on economic diversification has been meager, however. Financial incentives have benefited a few private interests — most notably investors in film production and solar power — but have not transformed the economy.
State lawmakers will likely not agree to the administration’s request — $10 million each in fiscal years 2014 and 2015 — without some safeguards to protect taxpayers’ money.
"These kinds of programs work," said Karl Fooks, president of the Hawaii Strategic Development Corp., a little-known state agency that would oversee the investment program through its revolving fund. "They do create real economic activity and real jobs."
Fooks said the idea is not for the state to handpick a few startups for investment, but to build an "innovation ecosystem" in which entrepreneurs can experiment over time.
"You can’t invest in one company and make any money and create an ecosystem," he said. "So the way venture capital works is you invest in a portfolio of companies, right? Because you don’t know which one of them are going to be successful.
"This is not a game of picking winners. If you try to pick a winner, you’re going to lose every time because you just don’t know which company will win. What you want to do is create the opportunity for these companies to succeed."
The Hawaii Strategic Development Corp. was established in 1990 to work with the private sector on technology-related economic diversification. The agency has used state and federal money to help sustain venture capital partnerships that make direct investments in companies, creating a climate, Fooks says, that helped launch companies such as Digital Island, a high-speed communications firm, and Hoku Scientific, a solar energy products firm.
Last year lawmakers approved $2 million for the Launch Akamai Venture Accelerator program, which will support three teams of experts who will provide mentorship and professional development to entrepreneurs.
The corporation would use money from the Hawaii Growth Initiative to continue and expand the venture accelerator program and to establish a proof-of-concept center where entrepreneurs could test whether their innovations and ideas have commercial potential.
The corporation would also use some of the money to expand its seed fund investment program, which helps startup companies that have proven ideas grow into sustainable businesses.
Fooks sees potential not only from traditional research hubs such as the University of Hawaii, but also in health care and in emerging food, digital media, information technology and clean technology sectors.
Entrepreneurs insist a new state investment program can be effective.
"If you asked me two years ago if there is a real startup scene here in Hawaii, I would be like, ‘Maybe one day,’" said Anthony Stanford of The Box Jelly, a co-working space in Kakaako that offers a modern twist on the executive center, emphasizing collaboration. "There’s certainly that level of spark now. Will it catch on fire, and will we become the next Silicon Valley? We can dream, but certainly I like to think we’re going in the right direction."
Denyse Ray, owner of the Ease Collection, an apparel manufacturer in Kakaako, says the state money can help create the type of good-paying jobs that might keep young people in Hawaii.
"How do they stay home if there is no place for them to utilize the talents that they learn in school?" Ray asked.
Unlike tax credits or loans, the Hawaii Growth Initiative would place taxpayer money directly into private hands with no assurance of any economic return to the state. Even if the state’s investment one day helps to produce viable companies, there is nothing to ensure that the companies will hire locally or stay in Hawaii.
Some lawmakers are gun-shy.
High-technology tax credits in Act 221 cost the state $1 billion during the past decade, but the state was unable to adequately measure whether the tax credits were effective. Solar tax credits cost the state an estimated $174 million last year, up from $35 million in 2010, an increase that has persuaded the Abercrombie administration and lawmakers to restrict the incentive.
Rep. Gene Ward (R, Kalama Valley-Queen’s Gate-Hawaii Kai) praised the Hawaii Growth Initiative as "one of the few bills that mentions the ‘e’ word: ‘entrepreneurship.’" But Ward does not want a repeat of the experience with the high-technology or solar tax credits, where concrete performance data have been elusive.
"Is this going to be able to show what it can do and have evidence that it’s done it?" he asked.
The Hawaii Strategic Development Corp. would have to file annual reports to the Legislature on what the money from the investment program has achieved.
The state House Finance Committee and the Senate Ways and Means Committee on Friday advanced bills on the Hawaii Growth Initiative — House Bill 858 and Senate Bill 718 — but deleted specific dollar amounts pending a larger discussion over the state’s two-year budget.
Rep. Sylvia Luke (D, Punchbowl-Pauoa-Nuuanu), chairwoman of the House Finance Committee, called the initiative a "laudable goal."
Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, said lawmakers would have to evaluate the administration’s request for $20 million over two years with other budget priorities.
"I’ve been a strong proponent of making risk capital available for entrepreneurs, so this is really just an extension," Ige said. "I do think that we’ve established a pretty strong base of seed and initial capital, and really what the industry needs is that bridge and expansion capital that we can’t get.
"So I think we all understand the importance," Ige said. "It’s just trying to balance the budget."
