“To get Honolulu on par with vibrant startup communities, we need more companies emerging from Hawai‘i’s centers of excellence and more engagement from the corporate leaders.” —Tim Dick, Startup Capital Ventures
Hawai‘i’s venture community has set its sights on leveraging the state’s unique cultural environment and transnational ties to attract and retain both entrepreneurs with ideas and investors who champion innovation— but can they go the distance? At the foundation of this push is a massive support network that is doing an excellent job of nurturing homegrown talent and fostering the growth of vanguard companies.
The state is buoying the startup movement by dedicating creative resources to building a thriving entrepreneurial ecosystem in the islands. Recruiting players through the Hawai‘i Strategic Development Corporation (HSDC) and further developing the equity investment program HI Growth Initiative are two of those avenues for growth. Stakeholders in Hawai‘i’s innovation center like the Hawai‘i Venture Capital Association (HVCA), XLR8UH, Blue Startups, Energy Excelerator, Startup Capital Ventures, Pacific Asian Center for Entrepreneurship and StartupHawai‘i have joined forces to create Startup Paradise, a new branding effort to promote the local venture capital industry. The Hawai‘i Growth Connect and Network program—a grant-based outreach effort linking investors and entrepreneurs—and the Launch Akamai Venture Accelerator (LAVA) Program are two HSDC-sponsored initiatives currently offering blanket support to entrepreneurs with big ideas.
Though opportunities for collaboration provide a distinct advantage for Hawai‘i’s venture players, the potential for a startup boom really rests on a different factor— the state’s ability to successfully nourish each stage of the capital funding cycle.
An average of 80 percent of venture capital money is dedicated to developing a strong infrastructure during a company’s adolescent phase, but simply finding an entrepreneur with a catchy concept is not enough. Exceptional managers who have vast experience in the industry as well as the tentative growth stages are needed to float a great idea through the cycle successfully.
To understand where Hawai‘i sits on the larger venture capital map, it’s important to first survey the national landscape. The venture fundraising market is currently in a boom with a total of $59 billion of venture capital invested in 2015—the highest amount since 2000—which is good news for entrepreneurs. And while the angel market is the strongest it has been in 15 years, the exit market is in a funk because venture capital returns consistently exceed public market returns. On the plus side, deal sizes are robust at an average of $4 million for early-stage deals, and $20-$30 million for late-stage deals. The risk adjustment happening that prefers those later stage deals is ideal for investors since they don’t see much competition, but it’s not great for startups themselves.
The infamous Silicon Valley is becoming the Wall Street of the venture capital market, boasting almost 60 percent of total venture capital dollars in the country.
Enterprise and B2B software are producing better returns and requiring a more sophisticated entrepreneur. Round-to-round price growth is falling but healthy, averaging 56 percent since the beginning of 2004— further proof that the bubble is flattening and the industry is returning to normal.
Today angel investors are investing in a wider geography and banking on more specialized, diversified project types. More angel groups are partnering with venture capitalists to strengthen and fortify their investments and ensure the companies they fund are well served. Though new angel investors are typically breaking into the startup realm with one or two investments, experts advise choosing 20 or more investments to ensure a diversified portfolio—and suggest they reserve half of all investment capital for follow-on funding. As such, companies are gradually getting more creative about how to increase the appeal of follow-on investments, understanding that successful exits will attract more capital.
Here in Hawai‘i, there seems to be no lack of raw startup deals, but a shortage of higher quality deals that can sustain momentum through to the exit phase.
For local startups looking to attract angel investors, “traction trumps everything,” says local angel investor and Hawai‘i Angels board member Steve Markowitz. “Traction as an indication of growth is the number one metric to watch,” he says. “The more that you can demonstrate to angel investors that your company is growing up and to the right, whatever metrics you define as those that drive your company, that’s going to help you gain interest from angels and venture capitalists.”
Startup Capital Ventures is a local fund that invests in early-stage enterprises and B2B startups. The fund is currently tracking 150 deals, with eight of those companies near venture-ready. General Partner Tim Dick estimates that Hawai‘i should be able to average as many as 10 fundable deals per year, considering our resources. “To get Honolulu on par with vibrant startup communities like Boulder, Colorado, or Austin, Texas, we need more companies emerging from Hawai‘i’s centers of excellence—sophisticated startups that solve problems—and more engagement from the corporate leaders,” he says. One of Dick’s missions in the year ahead is to entice more of Hawai‘i’s corporate executives to join the venture capital scene: “Engagement from corporates with deep vertical experience, that’s where great startups tend to come out of. Experts with a decade or more experience have the resources and wisdom to help commercialize the learnings they have.”
Agriculture, energy, travel and tourism and healthcare IT are areas that hold a lot of promise in the islands, if only the venture community can come together to focus on energizing these markets. Hawai‘i’s strategic location in the middle of the Pacific Ocean makes it an ideal spot to create great companies around cybersecurity technology, and the climate is well-suited for hosting massive live events, as the local success of the Ironman and Xterra have shown.
The next big things coming out of the 808 state include transformation technologies, like the ed-tech platform Comprendio that is changing the way education is taught with innovative knowledge transfer.
MorphOptic is a local company applying telescope technology to the solar industry, and a startup called B-stripe is developing a privacy-enhanced search engine called SearchLock. Switchfly, a sophisticated travel tech company that provides real-time bookings, is another Hawai‘i-bred startup with global potential.
Omar Sultan, co-founder of Sultan Ventures and Director of Investments at Hawai‘i’s Upside Fund, feels that the best strategy for improving Hawai‘i’s venture landscape lies in training local talent to understand what investors want to see— traction, valuations, metrics—essentially teaching entrepreneurs how to become investor-ready. Through the venture accelerator XLR8UH, one of the first university-based accelerators in the country, he helps early-stage entrepreneurs kickstart successful launches. Funded entirely by the UH system, XLR8UH is trailblazing a path that other public universities in the nation are now looking to for guidance.
Since there are more federal grants available for the commercialization of research, as opposed to just basic science research, it’s a hotbed of potential. “Innovation hubs occur around strong universities—think Google or Facebook,” says Sultan. “We’re fortunate to have UH here in our backyard, and it’s now in the top third in the nation in terms of federal research and development dollars flowing into it.”
Looking forward to the next five years, Hawai‘i’s startup scene should see a noticeable rise in entrepreneurship thanks to the comprehensive support network and growing resources. The connection between having a great idea and the ability to implement it has never been stronger, and the fact that technology costs have dipped over the last decade doesn’t hurt either.
Hawai‘i as a place with limited resources is attractive, leaving plenty of room for innovation to fill the cracks. We’ll see more startups growing around “re-efficiency”, or themes of limited resources like dualuse technologies for civilian and military application and aquaponics systems to maximize limited land. High-tech ideas that solve problems unique to the islands are also fertile ground for the start of great companies—think renewable energy, transportation technology and residential and commercial energy conservation.
“Innovation hubs occur around strong universities—think Google or Facebook. We’re fortunate to have UH here in our backyard, and it’s now in the top third in the nation in terms of federal research and development dollars flowing into it.” —Omar Sultan, Sultan Ventures
The near future will also see the startup community addressing the elephant in the room: The fact that startups born in Hawai‘i tend to eventually depart in search of deeper pockets. To improve retention, a solid capital base that can support these companies from inception through every stage of development is key. Efforts to make Hawai‘i more livable (i.e., affordable housing and competitive education) will serve to retain and attract real talent on both the entrepreneur and investing side. Educating local policymakers can also help create a more inviting and sustainable startup climate. This past year’s collective efforts around the legislative session marked the most aggressive and organized lobbying efforts to date. Though the incentivizing bills did not pass, creative engagement left a lasting impression on policymakers, including tapping the Chamber of Commerce and hosting a Startup Paradise Walk Around the Capitol. The addition of favorable tax credits for investors can also serve to take institutions off the sidelines and get them to invest capital locally.
Local experts say the startup boom is imminent, thanks in large part to the fact that stakeholder interests are aligned like never before. Startup organizations can continue to leverage Hawai‘i’s primary strength—the close-knit community that serves to builds trust between investors and entrepreneurs—to draw talent and funding.
“There’s a real sense of ohana here that I’ve never seen this in any other market,” says Dick. “We’ve typically known the entrepreneurs before they became venture ready, so you end up with a lot of comfort.
That’s simply not true with big companies like in Silicon Valley where meet and greet to deal close is probably less than two months.” All things considered, the nexus of shaping and sustaining the startup industry in Hawai‘i rests on a symbiotic combination of traction, collaboration, diversification and education— crucial forces needed to give a great idea wings and translate it into a thriving enterprise that produces high returns. Recruiting passionate entrepreneurs who attract funding, and finding skillful management to carry a startup through to a successful exit, will drive Hawai‘i forward on the path to becoming a world-class startup hub.
See Pacific Edge Magazine article here.