State agency gearing up to invest over $50 million in Hawaii companies

There’s a good chance Oahu consumers have seen digital advertising screens at free electric vehicle charging stations mainly at shopping centers around the island.

In a way, Hawaii residents own a teeny bit of the company that developed this charging network, Volta Inc., which is valued at close to $800 million and has developed about 2,200 charging stations nationally, including 51 on Oahu and two on Maui, since its founding in Honolulu 12 years ago.

This public ownership stems from a state investment in Volta as a fledgling company in the wake of the Great Recession of 2007 to 2009.

Now a state agency is gearing up to channel over $50 million to hundreds more local small businesses, including startups, under a federal program designed to fuel job creation, economic recovery and maybe even some profit years from now if investment dollars flow into the next Volta.

Under the program, a Hawaii government agency stands to receive $56.2 million in federal money to invest in local small businesses over seven years with a required minimum equal investment from the private sector.

State officials expect this infusion will help companies grow and, in turn, attract over $600 million in future private capital that helps the state economy diversify and recover from the downturn that still exists amid the coronavirus pandemic.

“There are a lot of businesses right now that are struggling,” said Len Higashi, acting executive director of the Hawaii Technology Development Corp., a state agency overseeing execution of the federal program, called the State Small Business Credit Incentive, or SSBCI.

“There is a lot of need.”

Splitting seed money

SSBCI has several options for states to direct investment into small businesses through private partners.

Higashi’s agency plans to funnel about a third of the $56 million it is applying for into local venture capital funds that will pick companies, often startups, in which to invest with at least an equal amount of matching private capital.

Another third would be available to private lenders to supplement no more than half of a loan to individual small businesses that can’t qualify to borrow the whole loan amount.

The last third would be reserved as cash collateral that helps businesses qualify for commercial loans in cases where the businesses don’t have enough collateral, such as property or equipment, required by a lender to secure a loan on their own.

Additionally, some of the investing will be directed to benefit companies needing very small amounts of money, as well as companies whose owners are economically or socially disadvantaged.

In all cases a private len­der or venture capital firm must have at least the same amount of money at risk as the state does through its SSBCI contribution.

“It’s a way to ensure that the private sector has something at risk and (each investment) is managed properly,” Higashi said.

Under this arrangement the state isn’t directly investing in companies. Rather, it’s a passive co- investor. For loan investments, the state stands to get paid back with interest. And in the case of a venture capital investment, the state gets a share of equity ownership in the company receiving the capital.

SSBCI was authorized by Congress in March as part of the American Rescue Plan Act and provides $10 billion to invest nationwide.

Hawaii was one of 30 states to receive a minimum allocation of $56.2 million. California can receive the biggest sum, $895 million.

Unlike some federal coronavirus relief programs such as the Paycheck Protection Program, SSBCI isn’t new. It was created in 2010 in response to the Great Recession on a smaller scale.

SSBCI 1.0

Hawaii received and invested $13.2 million in SSBCI’s first go-round, though most of that money didn’t get invested locally until the mid-2010s or later because detailed rules and state resources to run the program took a long time to develop.

At the time, the state’s Hawaii Strategic Development Corp. operated SSBCI and limited use to venture capital investments. The initiative helped establish and attract venture capital companies to Hawaii, where historically there had been relatively little in the way of startup businesses in the technology sector popular with venture firms.

Chenoa Farnsworth, managing director of local venture capital firm Blue Startups, said SSBCI was one reason the firm and its BlueVentures investment funds were started in 2012.

“It was very instrumental,” she said.

Other Hawaii-based venture funds that participated in the inaugural SSBCI program were Reef Fund, Startup Capital Ventures, GTA Development Fund, Upside, Energy Excelerator and Mana Loa Ventures.

Farnsworth said Blue Startups investing paired with SSBCI money did exceptionally well with 65% of funded businesses surviving. Survival rates generally can often be 15% to 25%.

Local companies funded by Blue Startups and SSBCI include water bottle filling station developer FloWater, travel guide app Shaka Guide, tea purveyor Tealet and See Rescue, which developed streamers used for signaling emergencies on land or sea.

Another one was Volta, which in August got listed on the New York Stock Exchange in a transaction that raised about $400 million for the company.

Higashi said it’s not yet possible to calculate the value of the state’s stake in Volta because of public stock trading regulations covering early investors in the company. But he is certain there will be a return whenever the state’s investment in Volta is liquidated if the company, which is still in a growth stage absent profit, keeps doing well.

“No doubt, there will be financial gain from that,” he said.

Some of Hawaii’s SSBCI investments also were lost in company failures.

As for the broader goal of bolstering the local economy, Higashi said Hawaii’s use of SSBCI’s $13.2 million during the prior decade was spread over more than 120 investments that got paired with over $100 million in initial joint private capital contributions.

The companies that received inaugural SSBCI funding went on to attract over $300 million in future private investment and created or retained at least 678 jobs, according to Higashi.

A good share of these results were due to Volta. Also, not all the resulting benefit stayed in Hawaii, given that it’s not uncommon for tech companies founded in Hawaii to relocate to the mainland if they succeed on a big scale. Volta, which today has around 300 employees, relocated its headquarters to San Francisco in 2014.

Higashi said the state achieved a more than 10-to-1 investment benefit from SSBCI the first time, and that the same is expected from rerunning the program with four times as much money: $56.2 million expected to be leveraged by over $600 million in follow- on private investment.

SSBCI 2.0

To maximize use of available federal funds, which would be delivered in three increments of nearly $19 million provided that each preceding increment is being used, Higashi’s agency is seeking $1 million in state funding from the Legislature to help administer the program.

A bill authorizing this contribution, Senate Bill 2808, is pending. The money would help pay for resources, including an auditor or compliance manager, to oversee the program. SSBCI allows 5% of federal funding to be used for administration. That equates to $2.8 million for Hawaii, but this would be parceled out in three pieces, and Higashi said the state supplement is needed to make full use of the program.

It’s unclear when the state might receive its first tranche of SSBCI money. Higashi said his agency did a lot of work in 2021 preparing to run the program and is applying with the U.S. Treasury Department by an initial deadline of Friday even though the deadline was recently extended to May 11.

If an approval comes soon, Hawaii’s SSBCI program could be operating before June.