Be Patient – Give Economic Diversification Incentives Time to Work

article top

Our fast food, high speed, quick decision society has lost its grip on how long it takes to make positive change. Journalists and other arm chair quarterbacks who observe and criticize Hawaii’s economic development incentives such as Act 221, simply do not understand what is involved in building a world class company and how long it takes to get from seed stage to $50 million dollars in revenues.

In an editorial response to DBEDT Director Ted Liu’s proposed capital formation strategy, ”’Pacific Business News”’ said that “it seems ridiculous to try to expand incentives just to get the heat off of Act 221 (sic) that is controversial.” ”’The Honolulu Advertiser’s”’ Sean Hao, in a January 8th article about stagnation in patent growth, implied that the Act 221 R&D tax credit has yet to stimulate more patents.


The fact is it could take as many as two years just to get a patent approved, even under the best circumstance, much less do the prior research and development. Act 221 is an incentive designed to promote seed stage investing and intellectual property creation. Companies often take five to ten years and multiple rounds of professional venture capital before they can create meaningful job growth, dominate a market and seek further funding such as that which comes from an IPO.

Dan Cook in his landmark study of the venture capital needs of Hawaii companies funded by Enterprise Honolulu, “A Turning Point in Capital Formation: Assessing Hawaii’s Strategic Options,” August 2003, estimated that existing startup and emerging companies in Hawaii will require $223 million from Hawaii and external sources over the next five years. In order for these companies to stay in Hawaii, diversify the economy and improve the quality and quantity of jobs, at least half of these funds should come from Hawaii sources. Act 221 was not conceived to provide this kind of funding. This money must come from professional venture capital firms, on the ground in Hawaii in order for the companies seeded by Act 221 to stand a chance at success. The goal of the contemplated capital formation strategy is to encourage the creation of more venture capital for Hawaii businesses that have the potential to diversify and stabilize the Hawaii economy. This is indeed a necessary next step that must be taken to assure a continuum of funding for Hawaii companies, and is essential to keeping these companies here instead of losing them to the mainland where venture capital is more plentiful.

I encourage Hawaii business journalists and critics of economic development incentives to step back a bit and get more realistic about how long it will take to diversify our economy and grow exports spawned from Hawaii’s unique strategic business sectors. Measurable results are forthcoming, but even those take time to collect and analyze. The Department of Taxation is just now getting around to analyzing Act 221 data from 2001, the year the law was enacted. Even in the zoom times of the dot com era it took local success story Digital Island almost three years from its first round of venture funding to its IPO and two more years before it was acquired, giving initial investors a remarkable 16:1 return on investment. Act 221 is barely 30 months old, yet many continue to expect instant measurable results. We are not making hamburgers here, we are building new industries. It is simply time to be patient and proceed to do whatever it takes to secure Hawaii’s economic future by letting Act 221 run its course and supporting future capital formation initiatives that supply critically needed venture capital.

”’Bill Spencer is president of Hawaii Venture Capital Association, which was founded in 1988. He can be reached by email at:”’ ”’The opinion expressed here is that of the author and does not necessarily represent the opinion of the Hawaii Venture Capital Association.”’

”’ reports the real news, and prints all editorials submitted, even if they do not represent the viewpoint of the editors, as long as they are written clearly. Send editorials to”’