Tuesday, February 3, 2009

The Story of ACT 221: Stimulating Hawaii’s high-tech industries

Hawaii’s innovative high-tech industries have built new energy systems and discovered inexpensive ways to create pure drinking water in remote areas. They’ve regenerated human tissue for cell therapy, produced electricity for the grid, and developed vaccines for emerging infectious diseases.

Part of a new global community providing 21st century solutions, they’re also luring renowned scientists to Hawaii, bringing accomplished young Island graduates back home to work and creating good jobs and tax-paying companies for the state.
Between 2002 and 2007, the high-tech industry pumped at least $1.4 billion into Hawaii’s economy in direct spending, creating a firm foundation to help the state move away from dependence on tourism and the U.S. military.

In a few short years the high-tech industry has grown from less than $1 billion of the state’s overall economy to an amount almost equal to the construction industry. Latest estimates peg tourism at $11 billion; construction at $3.5 billion; and high-tech close behind at $3 billion.

All of this is thanks, in part, to one of the nation’s most innovative stimulus programs for high-tech industry – a law commonly called Act 221 – that offers tax credits to investors willing to take an early risk on the state’s high-tech future.

Act 221 is aimed at encouraging high net worth individuals in Hawaii to invest in innovation in their own back yard, but it has also served to inspire outside investors to evaluate Hawaii companies as wise investments with good return and strategies in place to reduce risk.

Since the high-tech tax credit was first initiated in 1999 – then later expanded and amended – results have been impressive. The 177 qualified Hawaii high-tech companies that filed with the state under a new 2007 transparency law, received $1.2 billion in cash investments between 2002 and 2007. Over the same period, they spent $1.4 billion in the Hawaii economy. They’ve employed at least 4,500 people, with more than half of the 1,450 full-time jobs averaging pay above $60,000 annually. At the same time, the state has seen a welcome diversification into industries offering a “brain gain” with new opportunities encouraging more young people to consider innovative fields for themselves.

“The high-tech industry is very much a fresh dollars industry,” says Anton C. Krucky, who co-founded and is president and CEO of an innovative medical company called Tissue Genesis, which has grown in just a few years to become a $4 million-a-year enterprise with 29 employees.

“We brought some very bright people from the Islands home, and that has been very exciting,” he says. “I’m a big hit with parents,” he adds with a laugh.
Investors collected $295.6 million in tax credits from 1999 through 2006, but every one of those tax credit dollars attracted three more in outside investment for the state.

Those numbers don’t take into effect thousands of other subtle and less quantifiable benefits, including the trickle-down effect of a new industry as people spend money on additional goods and services, pay excise and income taxes, and inspire additional economic activity.

“When we were founded, Act 221 was an essential part of getting the business off the ground, and getting the financing we needed,” says Dustin Shindo, founder, president and CEO of Hoku Scientific, a renewable energy company. Hoku Scientific’s success has helped to fund other technology companies, assisted in drawing other research funding to Hawaii, and supported local businesses.

Without Act 221, says Shindo, Hoku wouldn’t have gotten going or been in Hawaii.

In a few short years the high-tech industry has grown from less than $1 billion of the state’s overall economy to an amount almost equal to the construction industry. One of the earliest success stories was Oceanit, begun back in the mid 1980s before the tax credit helped pull in venture capital. But even a company as diverse and substantial as Oceanit has doubled in size to 150 employees in the last seven years, says Ian Kitajima, director of marketing.

Kitajima is one of those lured back to Hawaii from an international career with high-tech companies. Trained at UH, he left the state for what he once thought were better opportunities on the Mainland, in Europe and in Asia. What brought him back was the realization of just how good high-tech had become here – and a recognition that Hawaii’s welcoming people are the best in the world.

“In all those years of running away – and seeing the world – I realized how special Hawaii is,” he says. “When I was in Finland (one of the world leaders in high-tech development due largely to government support), I would meet some of the best guys there and I would think ‘I know guys back in Hawaii that are as good….’ In going away I got to see the world’s best and realize our people are as good. Or better. And because I saw what Finland is doing, I said ‘We’ve got to get to that.’”

According to Kitajima, Hawaii legislative support of high-tech through Act 221 is already setting the state on a positive course.

“Act 221 has proven it’s an incredible vehicle to start companies, bring folks back from the Mainland, inject capital into Hawaii and bring in outside investment,” says Kitajima.

“When you’re trying to build a company, capital is a lifeline,” agrees Krucky, CEO of Tissue Genesis. “Act 221 has enabled companies to have the energy, willingness and hopefulness to get going.”

Krucky launched his company on the Mainland, then brought it to Hawaii. Because of his Native Hawaiian ancestry, coming back to live in the Islands – after spending much of his life away because of his father’s military career – was a dream. That’s also part of what resonates for him when the company hires new employees.

He remembers poignantly what some of those people have told him: ‘I couldn’t believe there was this kind of work going on in the islands’…‘I’m so happy I found you’…’One of my dreams was to come home and this is part of that dream…’”

The company has thrived and grown, partly because of a good business plan and contented employees and partly because of the high-tech tax credits and incentives provided by Act 221. The credits also provided the leverage to bring top scientists into the Tissue Genesis fold.

The credits themselves are less important to many Hawaii investors than the fact that they help to continually assure interest in Hawaii among outside investors, says Rob Robinson, founder and managing partner of Kolohala Ventures, which raises money both in and outside of Hawaii to invest in local high-tech businesses.

“For most individual investors in Hawaii, they’ve already got a lot of tax credits, and many no longer use tax credits,” says Robinson, who is also a Professor of Management at the Shidler College of Business at the University of Hawaii-Manoa.

“What concerns them is, ‘Will these companies be able to get additional capital when they need to grow?’ Without Act 221 there’s almost no way for these companies to raise additional money in Hawaii. They’ll either go out of business or be forced to leave the state. That would be the worst of all worlds. The companies we’ve already invested in and the tax credits we’ve already given would be for naught and we wouldn’t get any new companies. The consequences are pretty dire.”

Robinson said it’s important for the state to recognize that new economic sectors can’t be built in just a few years, and continuing support is a crucial element.

“It’s important to understand that it takes 20 to 25 years to build a new sector of the economy. It took 25 years to build high-tech in San Diego, for example. We’ve had Act 221 for seven years and we should absolutely renew it for another 10. Capital is a very delicate thing and you don’t want to create capital flight.”

Not every enterprise that benefits from the economic stimulus of Act 221 has succeeded. But many have – and are now drawing investment and interest far beyond what was initially spurred by the tax credit.

“You can’t just count jobs,” continues Krucky. “You have to count money swirl and economy creation, especially in life sciences. There are grants and contracts. These technology companies – they’re not companies that want to do business just in Hawaii, but to do it nationally and internationally, with their base in Hawaii. They have to do that to bring fresh dollars into Hawaii, and these companies are doing that.”

Shindo’s Hoku Scientific, for instance, is building a $390-million 67-acre polysilicon plant in Pocatello, Idaho, for producing the raw material used in manufacturing most solar panels, though the company’s corporate headquarters and operations remain in Hawaii.

“People think ‘If Hoku did that in Idaho, it’s not good for Hawaii.’ Not the case,” says Shindo. “The corporate office is here and the growth of the business outside the Islands has helped Hoku to develop its solar integration business in Hawaii,” he said, referring to the design, installation and servicing of photovoltaic systems.

In the highly competitive high-tech arena, Hawaii’s innovative economic stimulus program has given the state an advantage in facing challenges from other states trying to lure investment capital to innovative industries of their own.

“Outside investors wouldn’t invest in Hawaii deals if there wasn’t local skin in the game,” says Bill Spencer, co-founder and CEO of Hawaii Oceanic Technology and president of the Hawaii Venture Capital Association.

“When you’re an early stage company trying to get off the ground, the likelihood of getting money from traditional Mainland sources is very low. So one of the motivations behind Act 221 was we’ve got to do something to get our local high net worth investors to look at investment opportunities right here in our own back yard.”

As the country and the state face difficult economic times, Act 221 is being seen as an even more critical economic stimulus. Without a continuing infusion of venture capital, young companies could struggle to keep providing the jobs and growth that have already become an important piece of Hawaii’s economic pie.

In a January 2008 report assessing market opportunities in Hawaii for venture capital, the Hawaii Institute for Public Affairs noted that Hawaii is “broadly undercapitalized,” consistently ranking among the bottom 10 states in venture capital and small business loans, even though it ranks as the 15th best state for “young growing firms” and “surviving start-ups.”

David G. Watumull, president and CEO of Cardax Pharmaceuticals, which has also grown dramatically with support from Act 221, notes that high-tech now produces as much income as one of the major pieces of the tourist industry – ‘accommodations’ –dominated by the state’s vast array of hotels.

“The whole tech sector has been fueled by Act 221,” says Watumull. “And it’s significantly faster growing than anything for the visitor industry.”

For those companies, entrepreneurs and chief executives on the front lines of building new 21st century business models for the state, continuation of the tax credits is a crucial tool.

“When I joined Hawaii Biotech we had 10 employees and a $1 million budget,” says Watumull. “Now three companies have come out of that – with 70 to 75 employees and annual budgets that total around $30 million. The company probably would have gone out of business without Act 221. None of the three companies would have been around.”

As both the State administration and the State Legislature begin a new year of ideas to both sustain and stimulate the economy, potential changes are being considered to make Act 221 less generous to investors.

However, any potential changes could have a devastating effect both on the growth of high-tech companies in Hawaii and the overall economy itself, say business leaders.

“If Act 221 goes away, there’s not a big reason to stay in the state,” says John Bower, CEO of uBoost, which is helping hundreds of thousands of children across the country improve school performance with a wide variety of incentives and rewards.

“You’re going to see a mass exodus of all the more established companies,” said Bower. “They won’t have the strength or the leverage to say ‘I can’t go.’

“Why would any Act 221 company stay in Hawaii?” he asks. “What would the reason be? Why fight the battles, the resource issues? Why fight all the people who want to give you financing – but only if you move?”

Hawaii’s business sector has always faced an uphill battle to attract outside capital. Geographic isolation, a small workforce and limited land availability have served to dampen many bright ideas. But in the age of the Internet – and with a 25-year commitment by state government to building infrastructure – those obstacles began fading.

The Manoa Innovation Center, Pacific International Center for High Technology Research, Hawaii Technology Development Corporation, Mililani Tech Park, and the John A. Burns School of Medicine, all have helped support the state’s growing ability to diversify and spread beyond dependence on tourism and military spending. Act 221 was an enlightened next step in nurturing the seedlings of 21st century industries; biotech, solar energy, cutting-edge medical research, new fuels and dozens of innovative ideas that have often sprung from University of Hawaii research projects.

Industry executives worry about the impact of a retreat at this time.

“Putting something out there and then taking it back makes the business community leery about any government-led initiative,” says Bower. “Hawaii has always been in the bottom 10 percent of the states friendly to business. Things like that perpetuate the idea this is not a great state to do business in.”

Act 221 has turned around that perception. By offering a 100 percent tax credit, to be taken over several years, to investors who support bright young entrepreneurs, Hawaii has begun to gain a reputation as business-friendly.

“Without Act 221 we never would have been able to raise money to hire the software developers,” says Bower of uBoost. “There would have been no funding for this idea. And now we’re teamed up with Harvard. And Arne Duncan, the new (U.S.) Secretary of Education, uses it in Chicago.

“It’s something that wouldn’t be here without that funding. Nobody on the Mainland was willing to fund a Hawaii company. If you’re a Hawaii company with a good idea, they’ll fund you – if you move. But that’s the battle. We want to keep the jobs here. And have high-paying jobs for our kids. So we have to figure out how to seed and develop an industry and be willing to invest in it over the long term.”

Developing future industries is only one of the ways Act 221 has benefited the state. The social benefit is equally compelling. Act 221 creates hope – and job opportunities – for high school students who might otherwise feel forced to leave the state or work in less meaningful positions in the tourism industry. Simply put, Act 221 brings Hawaii people back home to work, raise families, purchase homes and contribute to the economy.

“What options have really existed in Hawaii for kids who go to college, get a degree, and want to return to Hawaii and live in the community where they were raised?” asks Robinson of Kolohala Ventures. “What we’ve seen is a huge exodus of the best and brightest going to the Mainland and living in economic exile because there aren’t the kinds of jobs in Hawaii using the skills they’ve acquired and offering a decent salary.

“But we live in an era now when a lot of wealth is being created by high technology. The average starting salary in Act 221 companies is $55,000 a year. Most of those jobs require people to have a degree. Without this kind of diversification there is no future for our kids. Or for our community. Tourism is a mature industry. It’s not going to create a lot of new jobs. And we know what kinds of jobs it creates – mostly low-paying, low skill jobs.”

In an island state where extended families provide much of the strength and cohesion for local communities, bringing bright young people back home for highly skilled jobs makes for contented employees and a congenial workforce. At Oceanit, for instance, some employees hit the waves for an hour of surfing before they settle in for a day’s work, while others even keep their surfboards in their office. Studies continually show that happy employees are productive workers.

Spencer, of Hawaii Oceanic Technology and the Hawaii Venture Capital Association, has tracked the growth of Hawaii’s high-tech industry and warns against allowing the tax credits to expire in 2010. Instead, says Spencer, the credits should be extended indefinitely to give the companies an even more solid foundation and investors confidence in the business environment.

“At least 80 percent and probably more are in these early stages of development where they haven’t hit their stride and aren’t ready for large Mainland funding,” he says. “If you kill the program now, you’re probably cutting off 4/5 of the companies that have started, cutting them off from getting more funding, completing their research and development, and positioning themselves to grow.” Just 38 out of 333 qualified high-tech businesses were profitable as of 2007, says Spencer. That means the rest are still in the research and development mode.

In fact, extending these credits could serve as a far greater stimulus to the state economy than other proposed plans, say business leaders. Watumull, for instance, believes Act 221 has far greater potential for stimulating the economy than Gov. Linda Lingle’s proposed construction stimulus package that calls for borrowing and spending about $1.86 billion. Once a construction job is completed, he points out, the job goes away.

“It’s not as good… It costs almost $100 million a year to finance,” said Watumull. “You will have some early economic activity, but you will pay for it for 30 years, far in excess of the economic activity generated.” By contrast, said Watumull, Act 221 provides “three times the economic activity vs. the cost.”

The state has tried direct investment of taxpayer dollars to stimulate the economy in the past, without great success. Back in the mid 1970s, as Big Island sugar plantations closed, the Kohala Task Force recommended pumping money directly into new industry. Those efforts were generally considered a failure. By contrast, Act 221 stimulates high net worth individuals to invest their own money in new ventures. That technique is proving successful based on the Dept. of Taxation data.

“What they’re really doing,” says Spencer, “is achieving the goal of bringing in outside investors.

What’s critical now, say local entrepreneurs, is to keep Hawaii ‘skin in the game.’ To move forward with state leaders believing in Hawaii products/services, Hawaii people, Hawaii potential.

“The reason I’m so passionate about the notion of a diversified economy,” says Spencer, “is that unlike tourism, where we’re dependent on the world coming to us, tech companies have the whole world as their marketplace. It’s a way to leverage our local talent, our local intellectual property. It’s a way to bring revenues into the state from outside of Hawaii rather than depending on people coming here and spending their money.

“But you’re not going to have entrepreneurs setting up shop in Hawaii unless there’s a source of capital. And you’re not going to have capital unless you have companies to invest in. You can have the best incubator in the world, but if there isn’t money to invest in it, there’s no glue to hold it all together.”

Monday, February 2, 2009

Legislative Spotlight on Act 221 - Week One

Legislative Spotlight on Act 221 - Week One
February 1st, 2009 by Jay Fidell

Things have been pretty active around Act 221 over the past week or so, from a presentation in the capitol by 221 supporters prior to the opening, the early morning rally on opening day, at which hundreds of T-shirted pro-tech pro-221 supporters showed up, and the “pro-con” joint senate-house meeting last Wednesday. It’s been exciting to see all that energy.

The 221 supporters who have appeared are not Jay Pierpont Morgan, they’re enthusiastic young people with T-shirts that say extend221.org. They’re largely local, vital, articulate and promising. They’re from the software, biotech, energy and the performing arts sectors, and from the Hawaii Angels and investment community. It was great to see them out there together, actually. You don’t see them together very often - they’re usually too busy working. But now they’ve become a phenomenon.

Linda Lingle has been busy too. Her new strategy is to compare 221 to the low income housing tax credit, which is widely recognized as a failure, and to make 221 more like that. Although she wasn’t at the pro-con to make that argument, her chief policy advisor Linda Smith was there with her tax director Kurt Kawafuchi. The only person there to support them was Lowell Kalapa of the Hawaii Tax Foundation, who has been making knee-jerk attacks against 221 and other credits for years.

The 221 supporters say the 221-low-income-tax-credit comparison is a bad one, that the administration’s analysis is apples and oranges and inaccurate, and that the administration just wants to damage 221 to the point where it becomes ineffective too. And that argument seems to have legs. Lingle has been attacking 221 since right after the 2002 election. What makes this ironic is that she supported 221 unconditionally right before the election. See her promises in the tech debate on October 24, 2002, where she and Mazie Hirono both said that 221 should not be changed, at thinktechhawaii.com/video.aspx?video=techdebate.wmv.

221 supporters think Lingle completely abandoned them on this issue by attacking 221 for every year of her administration, in good times and bad over all these 6 years since then. They’re not impressed with her claim that 221 should now be repealed or rewritten this year because of the recession when in fact she’s been trying to undo it every year since she was elected, regardless of the economy or the budget. They say she’s just using the economy as a convenience to make the same attack she has been making all along, and that it is blatantly disingenuous.

The administration has said it wants to cut back on 221 for renewable energy research. This is remarkable given that the administration has been doing a regular talkfest about the benefits of renewable energy in its “clean energy” initiative, Linda Lingle’s latest attempt at legacy. One wonders how the administration expects Hawaii energy startups to get started without the capital they so critically need. The 221 supporters point out that the administration’s position on 221 is completely and inexplicably inconsistent with its simultaneous energy initiative.

The opening gambits of the session have been revealed. HVCA and HSTC have demonstrated that there is a huge number of people in and out of the tech community who want to see 221 left alone and for that matter extended for at east 5 years. More will probably come out on this in the weeks to come. The administration has revealed its strategy and at least for the moment committed itself to trying to cut the act back to be more like the low income housing tax credits. Actually, the people on the administration’s side do not seem very enthusiastic about their position – perhaps they recognize the inconsistencies. Note also that a number of Republican legislators openly disagree with Lingle on the 221 issue.

The 221 supporters, however, are very enthusiastic. They are also ticked off with the people in the administration who continue to bash 221 and who have turned their backs on local tech entrepreneurs, especially now in a deep recession when diversification is even more crucial. They do not understand the administration’s continuing enmity for tech and consider it motivated by dark political forces or just irrational, or both. They’ve given up on the administration, but clearly haven’t given up on 221.

Most of the legislators at the pro-con event seemed sympathetic with the outpouring of support for 221. The only one visibly unsympathetic was Isaac Choy of Manoa, who by his grimaces repeatedly demonstrated his distaste for their cause, as he has in the past. It seems remarkable that an accountant whose office is so near the Manoa Innovation Center and whose clients are or could be 221 entrepreneur and investors could be so rigidly negative on this issue. Some legislators had hard questions, e.g., Angus McKelvey (picture at left), Carol Fukunaga, Roz Baker and Sam Slom, to the point where the administration was deflecting, not answering, their questions.

Most of the legislators seemed to understand that 221 is more a stimulus than a tax package, that despite the Lingle attacks 221 does work to bring critical capital to local business, that it has been successful in developing Hawaii’s tech and performing arts sectors, and that the administration’s claims that 221’s costs exceeds its benefits are bogus and based on twisted figures. In fact, 221 has infused $1.4 billion into our economy at a cost of less than 1/3 of that. It’s also clear that if Lingle has her way with Act 221, investment in those sectors will dry up.

The stakes are high. There are various bills pending, ranging from the extension of the act to its repeal. They will come up for hearing before these house and senate committees over the next few weeks, and then the house and senate money committees, and the same arguments will be made. Some will survive those hearings and cross over. It’s anyone’s guess as to what happens in the horse trading that takes place in the conference committees at the end of the session. The one thing clear is that the tech, performing arts and investment community are watching very closely this year, and the process will be examined as never before.

Of course, there are people like Isaac Choy, who write 221 off as a “black hole” and do not address long-term issues affecting the economy of the state. They are negative without offering positive solutions to save us from backwater. But the friction over act 221 has lit a flame this year, as never before, among the tech industry, the young entrepreneurs and the local investors. We can only hope the legislators we elected will treat that flame as one to be nurtured as a symbol and mandate for diversification.

Over the years, 221 has been the subject of more negative headlines in the Advertiser than it deserves. The Advertiser’s headline story yesterday implied that there’s something nefarious about 221 companies that don’t file annual reports, even though not all 221 companies are required to do so. It also implied nefarious things about 221 companies that don’t have websites or use post office boxes. These implications are unjustified. All startups have challenges and not every startup succeeds. Because you have a comfort letter doesn’t mean you get an investment or tax credit. Misleading stories like this, repeated every few days year after year, build negative public opinion by way of confusion. They have a corrosive effect on public opinion and public policy. We can do better.

But everyone seems to agree, including the papers, that 221 is a complex high-stakes game, and that if we fail to incentivize and provide stimulus for our tech industry, the results will be disastrous. I’m watching, and I’ll write more about this going forward. But you should also watch.

For more on 221 developments in the legislature, see the ThinkTech video of Jeff Au at http://www.thinktechhawaii.com/video.aspx?video=jeffau.wmv.

Saturday, January 31, 2009

Lingle's Legacy a Lasting Shame

Linda Lingle is killing Hawaii’s only economic stimulus effort that is actually working, Act 221. What’s troubling is that her actions in that regard are completely unjustifiable.

This coming session she is using the budget deficit as justification for this, but we all know this is not sincere. She has introduced two proposals that will essentially destroy the act and leave little choice for existing tech companies but to close down or leave the state. The fact is that she and her policy staff have been trying to kill Act 221 since she took office. She has breached her campaign promise to support the Act since day one. Does she think we have not noticed?

By using administrative tricks, and without any legal authority, she is doing everything she can to stop Act 221 in its tracks. That seems to be her style and her way of conducting business, but it certainly doesn’t make what she’s doing lawful or acceptable.

By imposing a “moratorium” on 221 and ignoring the evidence compiled by her own Tax Department, she has made it virtually impossible for renewable energy companies to obtain comfort rulings. These rulings give investors’ confidence that the tax credits their investments will earn will be accepted by the Department of Taxation.

For many other qualified high tech businesses that are seeking investment, she has instructed the Department of Taxation to arbitrarily limit the amount of funding they can raise, even when such a limit is not contemplated or allowed by the law.

The few comfort letter rulings that are now being issued are dictating how much investment dollars will be eligible for the tax credits. That this not authorized by the law and some would say is a violation of the law, which by its terms expressly allows an investor to invest up to two million dollars per company.

Most of the deal-flow these days involves renewable energy companies. But Lingle has required that the Department of Taxation stop issuing any comfort letters for such companies because she feels the amount of funding being sought is too high. The irony is that while she is choking these companies off from critical capital, she is regularly touting her renewable energy initiative and telling us how much she is doing for the renewable energy sector, as if she could have it both ways. She can’t.

If seems incredible that the governor would do this when point four of her own five point “economic action plan” is to “attract outside investment, especially in energy” (see http://hawaii.gov/gov/economy). Where does she think this outside investment will come from, when investors in other parts of the country are all investing in their own local energy deals? This is not policy, but head in the sand.

Investors from outside of Hawaii typically do not invest in a deal unless there is some local skin in the game. One of the most compelling aspects of 221 has been its ability to attract investment from outside of Hawaii by matching local tax advantaged investors with non-tax advantaged investors who are willing to swap the credits they earn for additional equity in the company.

The Department of Taxation has reported that from 1999-2006 the total investment tax credits claimed by local investors was $295.6 million dollars, compared to $1.2 billion raised by qualified high tech businesses and $1.4 billion invested back into the Hawaii economy during those years. This means that for every dollar invested by local investors, at least three dollars of non-tax advantaged investment have come into the state from outside investors or from those who do not need the tax credits.

This three to one ratio is great leverage, and a great stimulus for technology businesses in our state. While tourism and related sectors have been losing momentum, jobs and local spending power, the tech and renewable energy sector are the only ones that have grown and created new high paying jobs. How can she ignore these facts?

The governor says she wants to attract outside investment in energy, but then in the same breath, she says she wants to kill the only program with a successful track record of doing just that? Her Tax Department tells us that Act 221’s effectiveness has been clearly proven, but then she wants to stop the gathering economic momentum of the Act by capping investment and refusing to issue comfort letter rulings, all without legal authority or due process. This kind of anti-policy is ill-formed, self-defeating and unbelievably arrogant.

Many renewable energy and other qualified high tech businesses on the ground in Hawaii demonstrate the economic viability of our innovation economy (her phrase), while our traditional tourism economy is going down the drain. Lingle keeps looking outside of Hawaii for renewable energy investors and companies, even while she tells us that it is the “resiliency and innovation of our (own) people that will pull us through the current economic situation”. That is simply irrational, a great sound bite, but a completely inconsistent position.

The bottom line is that Act 221 is a proven, effective economic stimulus policy that should be strengthened and extended, and certainly not killed, in the open or in the back room. Doesn’t she know this? She and her economic advisors have their heads in a dark place that apparently blinds them to their own data and disables their ability to do critical thinking and honest policy.

To date, Lingle’s time in office has not resulted in any successful economic stimulus initiative. If she is interested in leaving even a modest legacy on her departure, she really needs to wake up and desist from this senseless policy of killing the only goose that is laying the golden eggs. If she continues on her present and destructive course, she will leave a legacy of only shame and embarrassment, one that will follow and haunt her in any run for subsequent office.

Response to Anti 221 Article

Randy Roth’s Gathering Place commentary (Jan. 13, 2009) about Act 221 (http://bit.ly/iBni) ignores several facts. He contributes to a shortsighted perception of perhaps the most productive economic stimulus plan yet to diversify Hawaii’s economy with technology and renewable energy companies. Consider the following:

1. Act 221 is the only proven economic stimulus creating high paying jobs for our children who want to stay in Hawaii, come home and be with family or raise a family here. What alternative do critics of Act 221 offer? 177 qualified high tech businesses reported to the Department of Taxation creating 2,245 jobs in 2007, of which 1,450 were full-time positions. The average salary for a full-time position was $76,790.

2. For every dollar of local investment $3 dollars of additional investment comes into the state from outside of Hawai‘i. Act 221 does not cost the state money: It brings money into Hawai‘i.

3. Between 2001 and 2007, Act 221 stimulated $1.2 billion of investment in Hawai‘i companies, which then spent $1.4 billion in Hawai‘i. This money goes right back into the economy. It’s largely spent on salaries that also contribute income taxes and general excise tax.

4. Act 221 capitalizes on 25 years of State investment in the tech sector, starting with Governor Ariyoshi’s administration in the mid-eighties. Let’s reap the investment we’ve made over those years: Mililani Tech Park, Manoa Innovation Center, Pacific International Center for High Tech Research, John A. Burns School of Medicine, Hawaii Technology Development Corporation, Maui Research and Technology Park and others.

5. Hawaii’s tech sector is growing rather than shrinking. It’s now more than a quarter the size of tourism, and almost as big as our construction sector. And, the tech sector is not subject to the whims of tourists or real estate developers. Keep in mind that the tech industry is $3 billion, tourism is $11 billion, and construction is $3.5 billion.

Tax audits of Act 221 deals are few because assertions of abuse are largely unfounded. Other negatives cited were corrected with Act 215 in 2004 such as credit shifts greater than two for one.


Not all Act 221 investments will succeed. Some companies may have to move to the mainland for strategic business reasons. If we do not extend Act 221 we will most certainly lose many of the companies started here with Act 221 investments. Ultimately, odds are good that Act 221 companies will mature, create more high paying jobs and return much more in tax revenues and local expenditures than investors have ever taken in credits. That’s why qualified investors put their money into qualified high tech and renewable energy businesses in Hawai‘i. They expect that their returns will exceed the amounts they invest. Hawai‘i should look at it exactly the same way.

Getting your FAQS straight about Act 221

1. What was the original intent of Act 221?

The legislature’s intent with Act 221 was to motivate Hawaii high net worth investors to turn their attention to investments in our growing tech sector with an eye toward diversifying the economy. It was also expected that Act 221 would attract outside investment that has been lacking in the state: offer new opportunities to keep Hawaii’s bright young people here and lure those who have left back home. Because of Act 221, Hawaii’s young people have begun to see opportunities right in their own back yards – opportunities to become engineers, scientists, analysts, to work on clean, “green” energy systems, to make a better world for everyone. In short, it has done everything – and more – the legislature hoped it would.

2. Why should I support Act 221?

Act 221, which offers tax credits to those who invest in qualified high-tech industries in Hawaii, has already helped diversify the state’s economy from a dangerous dependence on two core industries (tourism and military), enabling high-tech ventures to grow rapidly to become a $3 billion portion of the state economy. That compares favorably to $3.5 billion for the construction industry.

3. Isn’t Act 221 costing the state money?

Act 221 is bringing fresh dollars into the state by attracting outside investors who are willing to join local investors in technology companies capitalizing on Hawaii’s strategic advantages in renewable energy, ocean science, biotech, optics and other areas. Before they are willing to co-invest, big investors generally judge the viability of investments by whether or not the state’s own high net worth individuals are investing. That’s now happening thanks to Act 221. Through 2006, investors who put money into qualified high-tech Hawaii companies earned approximately $300 million in credits while pumping more than $1.2 billion into the economy. For example, according to a recent State Department of Taxation report, between 2002 and 2007 high-tech companies spent $1.4 billion in Hawaii. While there is a “cost” in a portion of tax credits granted, that cost is more than balanced by attracting $3 from outside of Hawaii for every dollar invested by local investors.

4. I heard it’s just helping the rich. Is that true?

What you heard is that 95 percent of those who benefited from the Act 221 tax credit were wealthy individuals. This is exactly the purpose of Act 221 – to encourage wealthy individuals to invest in companies in their own back yard. They are the ones who have the money to invest, and they’re the ones whom the act is aimed it. By supporting new investment into innovative companies – and not just Hawaii real estate – the tax credit is strengthening and diversifying the state’s economy, creating new job opportunities that lure bright young Hawaii graduates back home to the Islands, and supporting the kinds of industries needed to tackle 21st century global problems. Also, federal law requires that companies offer private investment opportunities only to qualified high net worth individuals.

5. Would direct taxpayer investment in the economy be a better stimulus?

Direct taxpayer investment in new industry has been tried in the past without great success. For instance, as plantations closed on the Big Island three decades ago, a task force recommended pumping taxpayer dollars into new industry. Unfortunately, the outcomes have not been particularly successful and nothing has emerged to take the place of sugar. By contrast, in a few short years Act 221 has already helped bump the high-tech industry from a $1 billion share of the economy to a $3 billion share. Many of these are fresh new dollars coming into Hawaii from outside the state.

6. High-tech industry just isn’t getting off the ground in Hawaii no matter how much support is being given. Right?

Wrong. Thanks to Act 221 high-tech industry has blossomed in Hawaii. There are now 177 companies considered qualified high-tech businesses. In 2007, they’ve employed more than 4,500 people, with more than half of the full-time jobs created (1,450) paying on average $79,000 annually. The size of high-tech has tripled over the last six or seven years, going from a $1 billion portion of the economy to more than $3 billion. Entrepreneurs who have started some of the most profitable and expansive companies consider Act 221 the best action government has ever taken to strengthen the economy.

7. If Act 221 is so good, why aren’t more places doing something similar?

They are. In Finland, for instance, one of the smallest but most successful countries moving forward in high-tech industry, there is full government support for innovative business. Just one example: the government organizes “Venture Days” for the high-tech industry and venture capitalists from all over the world fly in to participate – and get the chance to invest in top Finnish companies.

8. Act 221 is going to cost the state a billion dollars by 2010, isn’t it? Shouldn’t we dump it now?

Act 221 is not taking taxpayer money. By contrast, Gov. Linda Lingle is supporting a $1.5 billion construction stimulus program that will cost the state $100 million annually to finance over the next 30 years. That compares to Act 221, which costs the state just $300 million over six years in tax credits claimed. By dumping or radically watering down Act 221 now, many of the industries that it has helped launch could disappear. That could mean a loss of jobs and spending power, and a bigger recessionary spiral in Hawaii. The state would also lose the income tax revenue generated by company employees and the GET revenues generated by the business expenditures of these companies, which over time could amount to many more dollars than the credits granted.

9. I heard that it’s impossible to find out what companies are benefitting from Act 221. Shouldn’t there be more transparency?

The legislature has already made changes to Act 221 to offer greater transparency. In 2007 they passed a law – Act 206 – to measure the effectiveness of the high technology business investment tax credits. Act 206 requires businesses that accept investments for which the credits can be claimed, to complete and file a survey with the state. As a result the state keeps a list of those companies and annually assesses the effectiveness of Act 221. This tight oversight gives the entire community a close view of how well an important stimulus plan is working, year by year. This list is available on page 85 of the Hawaii Department of Taxation report prepared for the legislature and is on its website.

10. Shouldn’t Hawaii focus on its core industries like tourism and the military and stop trying to support every pipedream that comes along?

Supporting high-tech doesn’t mean abandoning the core industries of tourism and the military. The state is capable of supporting a wide range of industry and seeing business diversify. Hawaii has always been vulnerable to economic downturns because the state is so dependent on tourism. Without diversification Hawaii is subject to the whims of the rest of the world rather than being in charge of its own destiny. Building the state’s own clean 21st century industries makes the state a player on the world stage – and one of those places that others turn to for solutions. Tech sector companies are clean and their products and services can readily be sold around the world to markets hungry for advanced technology.

11. I heard the little guy is paying for Act 221 while the rich are benefiting. Is that true?

No. The little guy is getting immediate and direct benefit from Act 221 because it’s creating jobs, employing 4,500 or more people, and bringing new money into the economy to be spent in a myriad of ways that support the entire state. Act 221 allows the wealthy to benefit from tax credits – but that’s the whole point – in order to lure them into spending their money on new industry.

12. The Governor doesn’t seem to like Act 221 and there’s been other criticism. Shouldn’t that make us leery about it?

Before her election Lingle supported Act 221. It has surprised many in the business community that she seems to be pulling some of that support now, even though she talks about how important it is to support business and attract investment into the state. In fact that is so important to her leadership that she has made it one of the points of her economic recovery plan. While she is obviously worried about the economy – as we all are – she has not given Act 221 proper recognition for the crucial role it has already played in stimulating the Hawaii economy. Many believe the state would be in far worse economic shape if it weren’t for the flourishing business ventures supported by Act 221. Criticism can always help us look more clearly at an issue, but the state’s own report on Act 221 shows the success this innovative law has already achieved, and just how much of an economic impact it has already made. Quite simply, for every dollar given in tax credits, three to four more are coming into the state. That’s a dramatically good return on investment.

13. What kinds of industries has Act 221 encouraged in Hawaii?

Hawaii has focused on industries that take advantage of the state’s unique geography – the ocean, the sunshine, the unique flora and fauna that have developed in isolation. Local industries have also developed around the need for clean fuels to reduce global dependence on the world’s diminishing supplies of oil. As a result Hawaii entrepreneurs have looked at solar and wind, fuel cells and ocean thermal systems. But they’ve also delved into health care – and ways to impact the wellbeing of current and future generations. Some examples: Cardax Pharmaceuticals is developing new and better treatments for stroke by focusing on the source of inflammation Tissue Genesis is extracting adult stem cells from tiny amounts of a patient’s own fat to treat disease and injury Hawaii Biotech is developing new vaccines to combat emerging infectious diseases like West Nile virus and dengue fever Oceanit is doing everything from developing super fast cameras capable of detecting fired bullets to creating remote sensing capabilities to developing the ‘Star Trek’ sickbay bed. Companies like these are improving life for all of us every single day.

14. How do the tax credits offered by Act 221 attract outside investment?

Business investors aren’t interested in risk. They want to put their money into something sound, something that incorporates strategies that reduce risk, something that has already been a proven investment. So when local high net worth individuals see opportunity in local companies and invest accordingly, Mainland and foreign investors begin to pay more attention. That means that making investment in innovation attractive to local investors, serves as a catalyst to attract money from beyond Hawaii. A recent assessment by the Hawaii Institute for Public Affairs (HIPA) notes that while young Hawaii high-tech firms are ranked high for entrepreneurial activity and health, the state is consistently ranked in the bottom 10 for capitalization. That fact alone offers outside investors the opportunity for better returns on their money. The same HIPA report indicates an increasing demand for second and third funding rounds.

15. Is there any precedent for Act 221?

Ever since the early 1980s the state has been attempting to find ways to stimulate economic diversification and new industry in Hawaii. Beginning with the leadership of Gov. George Ariyoshi, the state began to build the infrastructure necessary to truly launch a high-tech industry. Manoa Innovation Center, Mililani Tech Park, Hawaii Technology Development Corporation, Maui Research and Technology Park, Pacific International Center for High Tech Research, the John A. Burns School of Medicine – these were the kinds of enterprises needed as first steps. Act 221 was the automatic next step, a continuation of these positive and powerful stimulus programs. It was designed to provide one more important element to stimulate economic diversification – venture capital. In trying to build a whole new sector of the economy, a process that took 25 years in San Diego, for instance, making sure capital is available to flow into young businesses ensures their growth, expansion and strength in the marketplace.

Tuesday, January 23, 2007

Welcome

Welcome and thank you for visiting the Hawaii Venture Capital Association blog. HVCA, established in 1988, is focused on bringing together entrepreneurs, investors and service providers in an effort to expand Hawaii's innovation economy. Topics of import to the innovation economy will be discussed and debated here.

Hawaii has a growing innovation sector born out of a need to diversify Hawaii's tourism centric economy. Though it is certainly a tropical paradise for residents and tourists alike, there is a burning desire for Hawaii to play a role in the global marketplace. Once a travel hub in the center of the Pacific ocean, Hawaii is now becoming a hub for entrepreneurs who have the ability to capatize on the state's strategic industries. The cultural diversity of Hawaii coupled with top-notch institutes of higher learning and eager entrepreneurs makes for a winning combination when addressing global markets.

Hawaii has unique strategic advantages in the life sciences, performing arts, astronomy, ocean science, alternative energy and more. Supporting the entrepreneurs that can turn these opportunities into world class companies is the mission of HVCA. Working with the Hawaii state legislature, our association and others have strived to build a venture capital infrastructure to provide the funding needed to get promising companies off the ground.

In 2001, we supported the creation of landmark legislation that resulted in a powerful incentive for investors to fund qualified businesses doing research, development and operations within business areas of strategic importance. Known as Act 221/215, this law has brought capital to Hawaii entrepreneurs where before there was little or none.

Today, new iniatives are being introduced in the legislature to nourish the innovation sector including education initiatives and additional venture capital. The purpose of this blog is to engage in a lively discussion about the issues associated with growing and diversifying Hawaii's economy with a vibrant innovation sector. Please join us.