Seed Capital From Angel Investors: Chenoa Farnsworth, Executive Director, Hawaii Angels (Part 3)

By guest authors Irina Patterson and Candice Arnold

Irina: Do you have any sector preferences?

Chenoa: Not really. We have done a lot of investing in technology, high tech. There’s a state definition here because we had a tax credit program in place for many years that defined high-tech business. So, because of the tax credit, there was a preference for high tech businesses. Going forward, I would say, that’s less true, but it remains true to a certain extent that those businesses tend to scale better and return higher.

Irina: Could you tell more about the tax credit program?

Chenoa: The tax credit is a state law similar to many other programs in the country where angel investors are provided with a tax credit up to a certain percentage of the money that they invested. In Hawaii, we had a very generous program where you were provided with 100% tax credit over a five-year period for your investment.

Irina: For investment in certain companies?

Chenoa: Yes, into a qualified high-tech business. They have to meet certain qualifications.

Irina: In technology, what do you invest in?

Chenoa: We try to look for companies where Hawaii might have a certain advantage. So, clean tech companies, certain bio tech companies, where there may be a very good reason for the company to be here.

We tend to shy away from companies that require a lot of on-the-ground sales because that’s very difficult to do from here. We have done software companies, but those are difficult because sales are all on the mainland and that requires, at the very least, for the companies to have sales teams elsewhere, outside of the state.

Irina: Do you invest in enterprise software?

Chenoa: We have but, again, that’s not a sector where we see any specific advantage for Hawaii.

Irina: What types of companies are advantageous for Hawaii?

Chenoa: Like I said, some of the clean tech companies, solar companies, wind companies, bio fuels companies, energy efficiency companies, algae companies, across the board, and some water companies.

Irina: What kind of companies do you invest in on the mainland? How do you select those?

Chenoa: Typically, that has been based on a personal connection. For example, one of our members maybe invested in the company or may be on the board of a company or [is] maybe even a founder of a company on the mainland. That’s usually how we [receive] deals from the mainland, through a personal connection.

Irina: Do you take board seats when you invest in a company?

Chenoa: Sometimes we do. Certain members enjoy that part of the investment process, and they’ll volunteer to represent the shareholders’ interests if they’re on the board, but not always.

Irina: Do you syndicate with other angel groups or venture funds?

Chenoa: We haven’t done much with other angel groups. We have definitely done a lot in conjunction with other venture capital groups here in Hawaii to syndicate deals.

Irina: Do you have a lot of venture capital groups in Hawaii?

Chenoa: Not a lot, but we’ve had some, and most of those were also fueled by the tax credit program. So, most of those currently don’t have money to place because it’s all dried up now. The current situation is not great for getting follow-on investments from within the state.

Irina: What is your usual investment type?

Chenoa: Again, it depends on the situation. It depends on the round. We’d prefer to invest in a series A preferred shares priced round, but we do invest in convertible notes where there’s no lead investor and the company’s really set. They’ll be getting institutional capital in relatively quickly, so we’ll invest in that convertible note.

Irina: In general, how long do you usually stay invested before you exit?

Chenoa: So far, it’s been eight years and counting.

Irina: How many exits have you had?

Chenoa: I think we’ve had four exits to date, out of 54. So that’s not very many.

Irina: Were they profitable?

Chenoa: Yes. We had one IPO that was very profitable. That was a 9x return for our investors. That was our biggest success to date. Then we’ve had a few others that have issued distributions so they were partial returns. And then we’ve had one company go out of business.

Irina: What was the IPO company?

Chenoa: The IPO company was a company called Hoku Scientific. They were initially a fuel cell company but have also now developed extensive solar technology.

This segment is part 3 in the series : Seed Capital From Angel Investors: Chenoa Farnsworth, Executive Director, Hawaii Angels
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