State venture capital may fall short of demand

Hawaii could see venture capital investments jump in the next three years, but still fall short of increasing demand, a study released yesterday indicates.

Demand for venture capital is likely to hit a cumulative $146.9 million by 2011, driven by maturing companies in need of larger amounts of funding, the report by Hawaii Institute for Public Affairs, a nonpartisan public policy institute, said.

Achieving that would mean a "substantial" increase from $20 million raised last year to nearly $50 million this year. Fund managers who regularly invest in the state expect to raise $128 million in the next two years, the report states.

Fund managers are focusing on technology and renewable energy fields -- areas with an established infrastructure where Hawaii could emerge as an industry leader, said Nonie Toledo, who handled the project for HIPA.

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Venture capital investments in Hawaii are expected to increase in the next three years but could still fall short of rising demand, according to a study released yesterday.

Demand for venture capital is likely to hit a cumulative $146.9 million by 2011, driven by maturing companies in need of larger amounts of funding, the report by Hawaii Institute for Public Affairs, a nonpartisan public policy institute, said. That would mean a "substantial" jump from $20 million raised last year to nearly $50 million this year.

Ten fund managers who regularly invest in the state plan to raise $128 million in the next two years, the report states. The survey, which polled 63 companies and 27 venture capital firms who invest in Hawaii, said that data suggests fundraising goals still fall "somewhat short" of the forecast for demand.

"There is still somewhat of a gap in terms of what companies are asking for and what fund managers are estimating that they will be supplying the market," said Nonie Toledo, who runs consulting firm Nonie Toledo & Associates LLC, which handled the project for HIPA. "Both fund managers and companies feel that there are significant opportunities over the next three years."

Fund managers see those opportunities primarily in fields such as life sciences, renewable energy and information technology, with a strong infrastructure already established in research facilities such as the Natural Energy Laboratory of Hawaii Authority and the University of Hawaii John A. Burns School of Medicine.

"They are very, very bullish on the Hawaii market for having good opportunities for investing, especially in the clean tech industry," she said. "Hawaii could grab a name for itself in terms of that industry."

Jeff Au, who helps manage $85 million in committed venture capital as the managing director of PacifiCap, said local startups have been helped by Act 221/215, state laws providing tax credits to encourage investment and research in Hawaii.

"What we are seeing here under the long term is that Act 221 has been really helpful over the last five or six years to provide the early-stage financing," he said. "What do these well-qualified companies do to get to the next stage? They find a way to survive, but really their growth is constrained because they don't have that optimum amount of capital."

David Watumull, president and CEO of Cardax Pharmaceuticals, which participated in the study, said the tax credits made his company's spinoff from Hawaii Biotech Inc. possible two years ago.

"This is one of the few places in the world that our company could have actually gotten funding," he said.

Hawaii currently ranks in the bottom ten states nationwide in venture capital and Small Business Administration loans per $1,000 of gross state product, the study said. That is in part because two-thirds of all venture capital in the country is based in California and Massachusetts, said John Chock, president of the Hawaii Strategic Development Corp.

"The rest of the country, including Hawaii, are considered fly-over states where it's really tough for the struggling startups," he said. "One percent of the companies that submit business plans to venture capital firms get the funding."