Behind Hawaii’s push to be a startup paradise

Behind Hawaii’s push to be a startup paradise

 

By Ken Yeung, VentureBeat
Posted May 13, 2017

 

Above: Points around the world from paradise.
Image Credit: Anthony Quintano/Flickr

We all know the San Francisco Bay Area is home to Silicon Valley, but a few cities and states around the country are trying to recreate the region’s success. In Nebraska, you have Silicon Prairie, then there’s Silicon Alley in New York City, Silicon Roundabout in London, and Silicon Beach in Venice, California. Many of these have popped up in just the past few years, and some states are beginning to realize the importance of supporting these new innovation hubs.

Among these is one of the most isolated states, geographically speaking: Hawaii. Working with the local community, the government has been pursuing efforts to establish a tech hub that is being dubbed Startup Paradise. During my last visit to Hawaii, I spoke with Governor David Ige and others about the initiative, which is meant to further diversify the Aloha State’s industries and retain its talent.

Diversifying the economy

Above: Waikiki beach photographed from a Genesis Aviation Helicopter tour. Much of Hawaii’s economy is reliant on tourism and hospitality.Image Credit: Edmund Garman/Flickr

“I’m an electrical engineer by profession, a University of Hawai’i [alumnus], and I graduated in that first boom of tech,” Governor Ige said. “When I graduated…I had 41 job offers, 40 of them were on the mainland, and they were from everyone. My first time out of state was a job interview with Intel, IBM, and Hewlett Packard in Silicon Valley. So fast forward, once I became a legislator, I was on a mission to create more job opportunities for tech people and engineers…out of five friends in my EE class, four of them went to the mainland and never came back.”

Finding a thriving tech ecosystem in Hawaii is really difficult — I tried. During my trip, I sought out people I knew to see if maybe there was a startup market that remained relatively off the radar. Though there are accelerators, such as Blue Startups and Elemental Excelerator, and innovation centers, it’s rare to see a local startup make it big in Hawaii. But efforts are now being made to change all of that.

When I graduated from the University of Hawaii (UH), working in tech didn’t seem like a viable option — the focus was on travel and hospitality at that time. And unlike Stanford, Caltech, MIT, and others, Hawaii’s universities are perhaps known for their strong international business and research programs. So how can the state offer its young tech workers and entrepreneurs a reason to remain in Hawaii and contribute to the local economy?

During his time in the legislature, Governor Ige wrote all of the state’s venture capital laws, including creating the Hawaii Strategic Development Corporation(HSDC), which is tasked with making investments to boost economic development. “When I started, we had zero venture investments in the state of Hawaii..people weren’t interested in making this kind of investment,” he said. “We’ve had great tech successes, when you look at UH and the kind of things that started and evolved here, what should have been and could have been, but there was really no environment. When you talk about the ethernet and the core, it really started at UH. AlohaNet and the Aloha Protocol was really the beginning of TCP/IP — it’s the basic underpinning of the internet. None of it comes back to Hawaii, but it definitely was started here.”

Above: Hawaii Governor David IgeImage Credit: State of Hawaii/Flickr

He continued, “Clearly for me, now as governor, it really is about how we can complete the environment. How can we create opportunities for people so that the electrical engineering graduate from UH today has 40 local job offers and 1 from the mainland? Because that’s really what we want. And if you look at our economy from the 30,000 feet level, the hospitality industry is number one. We started this transition in 1950 when we knew that sugars, plantation, and big agriculture growth was limited and we started to think about the next economic driver in our community.”

Above: The Verifone credit card swipe reader was founded in Hawaii.Image Credit: Mike Mozart/Flickr

While Hawaii is still largely focused on tourism, some believe diversification is the key to supporting the state’s economy, and the governor subscribes to that idea: “The challenge for us is that we’ve pretty much hit that ceiling to expand, and creating more jobs in the visitor industry really places too much of a burden on the natural resources that impact the community. So what’s the next great job creator for our community? It’s about innovation.” He alluded to how payment tech company Verifone got its start in Hawaii in the 1980s before eventually settling in San Jose, Calif. “If we had the right ecosystem and they stayed here, that definitely would be a great job creator,” he said.

Starting in Hawaii but ending on the mainland

Make no mistake, there are startups in Hawaii, but there are nowhere near as many as you’d find in cities known for being technology hubs. Startups based on the islands are not necessarily concentrated on consumer applications, but are more in tune with “non-sexy” technology fields, such as energy, biotech, and medicine, areas Hawaii is known for.

Above: Hawaii-based Blue Startups brought its portfolio companies to San Francisco in 2016 to demo for investors.Image Credit: Ryan Ozawa

But, as the governor said, talent is escaping the islands and as people leave, so do the startups. To counter this trend, Hawaii is working to aggregate enough venture capital to incentivize entrepreneurs to stay. Last year, Governor Ige proposed that there should be consistent state investment in private equity and risk capital. He wants to have the HSDC work alongside accelerators and venture funds to invest in projects.

Chenoa Farnsworth Managing Director, Blue Startups; Managing Director, Hawaii Angels; Director, Hawaii Venture Capital Association; Founder, HI-Impact

Chenoa Farnsworth Managing Director, Blue Startups; Managing Director, Hawaii Angels; Director, Hawaii Venture Capital Association; Founder, HI-Impact

“Yes, it’s a big challenge,” he acknowledged. “I do think it’s about creating an ecosystem…I think it’s about creating an environment. I really do believe it’s a state of mind. People leave because they believe they have a better shot at being successful by going. I think it’s really about getting the startups here and it really takes just one that really commits to staying here. We have a couple of serial entrepreneurs that are committed to Hawaii. To me, that’s just as important as getting the equity. I mean, you want those business owners and entrepreneurs to be invested in Hawaii and really want to have their headquarters here.”

Some of the people I spoke with described a less-than-ideal venture capital environment and said that local investors tended to be gun-shy about putting money in unless they can get a mainland firm like Kleiner Perkins Caufield & Byers, Sequoia Capital, or Andreessen Horowitz to participate.

“It’s on us to show the world that we can create that quality, competitive company here. We have to create enough companies [in Hawaii] that a VC will see a pattern or trend,” said Chenoa Farnsworth, the managing director of Blue Startups, one of the more active startup accelerators in the state.

Governor Ige remains optimistic: “I do think that it’s a matter of mindset and if we can nurture enough of these startups and get them to the brink — and it’s really about getting one group of entrepreneurs who said that ‘we’re going to plant our flag in Hawaii’. And when they’re successful, other successes will follow.”

It’s about execution

Diversifying a state’s economy and moving forward with innovative technologies is definitely easier said than done, as the state has had at least one major stumble in recent history. In 2016, a Maui-based technology fund for early-stage startups, called Mbloom, was shuttered amid allegations that one of the investors engaged in securities fraud and that the fund’s initial investments were rife with conflicts of interest. The other major investment party to this was the state, and HSDC moved swiftly to terminate the venture, especially since it was supported by taxpayer money.

Hawaii did offer startups tax breaks for doing business in the state some years back, through a law called Act 221. But it was not renewed due to concerns about whether it was really effective. Governor Ige voted in favor of Act 221 when he was a legislator and has previously stated that he believes it was a good law that needed a few tweaks:

“Act 221 could be executed better. When we passed the law, we provided tremendous flexibility to the executive. We had a very broad definition, and we enabled the executive to implement. I believe that part of the challenges and the controversy truly was a result of poor decision-making on execution,” he explained.

Above: Governor David IgeImage Credit: Anthony Quintano/Civil Beat

While in his first term as the state’s chief executive, the governor has also proposed establishing a $30 million innovation fund, setting aside money from corporate tax revenues over six years to support startups. First announced in his 2016 State of the State address, Governor Ige revealed that he had submitted legislation that would take $5 million each year for five consecutive years. The money would go into a strategic fund that would be co-invested with a private provider.

“What we’re trying to do is commit a steady flow of income that would allow [the fund investors] to begin to program and set up relationships so they can create a sustained kind of investment pool,” he explained. “It would be $30 million over the next six years that they can count on. I’m pretty confident that in six years, we’ll be able to prove success, that we’ll be able to convince the other legislators to…make bigger investments.”

Above: Hawaii’s Governor David Ige gives his State of the State address in 2016.Image Credit: Screenshot

During this year’s State of the State address, Governor Ige touted the impact of innovation, announcing that 145 startups have gone through six accelerator programs, receiving $10 million in venture capital and generating more than $250 million in total capital. “That’s why the budget includes additional funds for the Hi Growth program,” he said in prepared remarks.

While the state executive and community organizations are behind this diversification effort, how does the general public feel about their taxes being used to boost tech companies? Governor Ige is bullish, telling VentureBeat, “I think that many of us who are residents see the same challenges. Our economy is doing great. Our unemployment is among the lowest in the country. The hospitality industry generates a lot of jobs, but they are living wage jobs. If you look at the median home price at $700,000, a lot of those jobs generated by the visitor industry would [make it] tough to be able to live here.”

As for the business community, he said: “I think they get it. I have three children and they’re all in school. What decisions do we make today to give them the best opportunity to call Hawaii home, to be able to have them graduate and find a challenging and enticing job opportunity in Hawaii that pays them a living wage and allows them to purchase a home so they can choose to call Hawaii home? I think for me, and many of those in our community, it really is about how we can create these opportunities.”

Above: Hawaii Governor Ige at the 2017 STEM conference.Image Credit: State of Hawaii/Flickr

What Governor Ige, Farnsworth, and others in Hawaii are attempting isn’t new — others in the state have tried to establish a startup community of sorts. In 2012, the governor’s predecessor, Neil Abercrombie, signed into law HB2319, which would appropriate $2 million for a venture accelerator funding program. It was under Abercrombie that the aforementioned Hi Growth program, a state-sanctioned program to engage with the private sector, was created.

In 2013, then-Governor Abercrombie proposed providing $20 million in funding to focus on “the critical building blocks of research commercialization, entrepreneur mentoring, and the mobilization of startup investment capital.”

But while efforts have been made before now, the question is what it will take to make a real dent on the startup ecosystem.

In search of a startup paradise

“I’ve lived [innovation] and kind of understand how it works. I see the ups and downs in it,” Governor Ige said. “I understand how when it’s other people making investment, it’s about the money. So how do we create private equity and risk capital in Hawaii that believes in Hawaii?”

“It’s so funny how at one point in time, green companies were an outlier. People thought: ‘Who cares if your policies are green or if your company takes care of itself?’ Today, you can’t be a successful company if you’re not green,” he continued. “What we’re looking to create are companies that are truly doing the right things in the right way in every step of the way. These are the kind of companies that we want to build.”

To attract talent, startups, and investors, Governor Ige is backing the Startup Paradise initiative that was put forth by the local community and HSDC. As the name suggests, Hawaii believes that its real appeal lies in its being…well, Hawaii. The program also focuses on technological innovation, job growth, and economic strategies aimed at helping the state rival the tech hubs in other markets.

Above: Manoa Innovation Center in Honolulu. Hawaii is home to some of the companies participating in Startup Paradise.Image Credit: Hawaii High Tech Development Corporation

As of 2016, it was reported that 60 percent of the 145 startups participating in the program were based in Hawaii, and 78 percent of those are still operational. Nearly 40 percent of those participating in Startup Paradise are involved in software services, while 32 percent are in energy technology. The remaining startups deal with media (11 percent), hardware (6 percent), agriculture (6 percent), and life science or health care (5 percent).

“Most people think that they can start [in Hawaii], but if I really want to make it, I got to go [to Silicon Valley]. It’s really about creating the support structure so that [entrepreneurs] have the capacity to choose to stay here,” Governor Ige explained. “Once we can get the one or two breakthroughs, then I think it’ll be like a dam bursting. People, given the choice, will want to live in Hawaii. If their business can be successful, they’ll choose here.”

He doesn’t think Silicon Valley should have a monopoly on startups. “Nothing can be harder than Silicon Valley. Hawaii is a piece of cake compared to Silicon Valley, but Silicon Valley thrives. Why is that? It’s about the people. It’s about the human resource in the innovation economy that’s the most important resource.”

“I believe our environment gives us a competitive advantage because that human resource wants to be in Hawaii,” Governor Ige said, echoing statements that have been previously reported. “It’s about really changing the paradigm for our young entrepreneurs to show that, yes indeed, it can happen in Hawaii. And we’re going to create that ecosystem that supports them and that we’re going to be working really hard to make sure that they have a pathway if they want to start a company in Hawaii, that we’re going to provide them support they need to get the second, third, or fourth round [of funding] and that big expansion,” he said.

Above: Hawaii Governor David Ige meets with students at the University of Hawaii College of Engineering banquet.Image Credit: State of Hawaii/Flickr

Major stakeholders concede that this is a long-term endeavor and that the current ecosystem is young, but they also see that it is growing and has potential. “Communities and cultures are not built overnight, and startup communities are no exception,” explained Dawn Lippert, a director at Elemental Excelerator, in a 2014 interview.

Rather than going head-to-head with every other technology hub around the world, Hawaii is opting to focus on a select group of clusters, areas where the state holds a competitive advantage. The state has pledged to support 100 percent renewable energy, ethnic and cultural diversity, biomedical and pharmaceutical research, Hawaii’s cancer center, and hospitality and tourism.

Is Governor Ige worried about any negative impact of innovation, such as gentrification and people being priced out of their home, things that have plagued cities such as San Francisco? He acknowledges the risk, but said: “It’s about changing the trajectory of Hawaii: What is it that we want? We want to support the innovators and creators that are committed to what’s special about Hawaii. It’s really about the integration of the host culture…celebrating diversity. I believe that Hawaii is the best place to raise kids and a family, bar none. So how do we keep it going?”

Above: Hawaii Governor David Ige signs order instructing departments to submit documents using an electronic routing form template.Image Credit: State of Hawaii

As part of that vision, the governor is in favor of disruptive technologies, even those that have run afoul of regulators, such as Uber and Airbnb:

“Uber is successful and the traditional business guys want to shut them down because their platform, their technology, and business model is so different from the existing. But the flip side is that their business models respond exactly to the concerns that the traditional business lived with and built…”

“So yes, it is disruptive,” he said, “and yes, we don’t want to clamp down and regulate them in the traditional sense. So how do we create an environment that is flexible? From a government side, that’s a challenge for us. I’ve challenged my cabinet to reinvent government to be flexible and innovate itself. How do we make sure that we don’t apply the same old regulatory tendencies onto these new areas? I’m not exactly certain, but I’ve encouraged the cabinet to think outside the box and encourage employees to not be close-minded and to think differently. I’m committed.”

As governor, Ige has also vetoed a bill that required online lodging services such as Airbnb to collect state and local taxes.

“It’s really about creating a vibrant innovation economy so that we can have the investment capital and we can find and grow the innovators here in our community that understand what it means to be in Hawaii, why it’s special, and why we have to take care of the environment, be respectful, and to celebrate the host culture, and celebrate our differences…Once we’ve gotten that first success, the rest of that will happen,” he said.