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Venture capitalists
taking a second
look at Hawaii

A state agency official says
$200 million is expected to be
invested in the isles next year

---

By Treena Shapiro
Star-Bulletin

Two years ago, few investors could be persuaded that there was high-tech money to be made in Hawaii. But the success of Digital Island Inc. and other local start-ups has changed that, growing the availability of venture capital funding in Hawaii a hundredfold over two years.

Some $200 million is expected to be invested in Hawaii next year, according to John Chock, president of the Hawaii Strategic Development Corporation, the state agency tasked with building up Hawaii's venture capital industry.

With more investors from Hawaii, Silicon Valley and Asia willing to consider financing Hawaii start-ups, Chock is hoping to lure back entrepreneurs and skilled workers who fled the islands in search of better technology resources.

University of Hawaii electrical engineering professor Alex Quilici can vouch for the difficulty of finding adequate financing in Hawaii just a few years back.

Quilici, 39, had planned to start a company in Hawaii, but when he couldn't find a venture capital fund to back his idea to make the Internet accessible by telephone, he took a leave of absence from UH in May 1999 and headed off to Silicon Valley.

Fourteen months later, Quilici had not only started Quack.com, but made millions when his voice portal company was acquired by America Online Inc.

Quack.com allows companies to make online stock, traffic, weather and entertainment information accessible to consumers over the phone.

"It's kind of a nice thing to happen on your one-year leave of absence. It's been a pretty productive year," he said.

While Quilici did not disclose the details of the acquisition, he did say, "This is substantially more than you could make in a lifetime of being a professor."

But Quilici, who still plans to return to his teaching job, would have preferred to achieve his success in Hawaii.

"I hope Hawaii in the future is able to put together a high tech environment that would allow successes like Quack to come out of Hawaii and not have to move to the Valley."

Venture capital isn't just about money, but also the infrastructure needed to support fledgling companies, such as attorneys experienced in start-up financing, patent, merger and acquisition law, marketing groups, accountants and banks.

Besides all that, entrepreneurs need to be able to recruit qualified employees. "In Silicon Valley, every door you open, there's engineers behind it. The whole culture is designed to support start-ups," he said. "It's impossible in Hawaii. None of that's there, at least not where we could find it."

Bill Richardson, general partner in HMS Hawaii Management Partners, said that when Quilici was looking for local financing, there were only two venture capital funds active in Hawaii.

"It just fell through the cracks," Richardson said. "We looked carefully at it, brought it to the attention of venture capital partners in California, but it was too difficult for us to move on it. That's unfortunate because that was a good idea."

Richardson said more active funds are needed in Hawaii. HMS Hawaii, with a staff of two, can absorb only three to five companies a year. The capacity of Hawaii as a whole is about 10, he said.

But good ideas will get funded, Richardson said. And while Hawaii's venture capital funds may not be able to offer much financing on their own, they can tap into partnerships with Silicon Valley funds as well.

If Quilici was shopping his idea around now, he'd probably get funded, Richardson said. "He's a bright, energetic, young UH professor. That's what we're all looking for. I wish there were more like him."

Digital Island founder Ron Higgins, proof that international success is attainable in Hawaii, is now working to help more entrepreneurs get their companies founded.

"There's a whole bunch of resources that weren't available," Higgins said, when he was trying to start Digital Island.

Higgins recommends himself as one resource, through HiBeam -- an "incubator" or "technology accelerator." Incubators -- HiBeam, the Hawaii Health Care Business Incubator and the Manoa Innovation Center -- put entrepreneurs and young companies in touch with venture capital and industry people in Hawaii, allowing them to make crucial contacts at an early stage and find initial financing.

Having achieved his own success, Higgins now serves as an "angel" investor or mentor for technology start-ups. He points to the recent success of HotU, a company started by Wally Roth.

Higgins helped Roth find $800,000 initial financing in March. By August, the company had been built up enough to go into the second round of financing and captured $6 million in venture capital funds from Hawaii and the mainland. Higgins chairs HotU's board, lending his experience and his understanding of technology and Internet space to the company.

While HotU is HiBeam's only project, Higgins said he's also looking at four or five other deals in Hawaii.

Competition for local funding is tight, but Higgins advises entrepreneurs to look in Hawaii before relocating to the mainland.

"Money chases good deals," he said. "I fight constantly this gloom-and-doom attitude about tech companies in Hawaii. . . You set your sights on it and you decide you're going to be successful, you can be."