Editor’s Note: Hawaii’s technology community is blossoming, fueled by new ideas, new entrepreneurs and new money. Today we welcome tech columnist, Evan Nagle, to our stable of regular contributors. Evan offers a look from inside the growing scene — he’s a software developer and the founder of Mentalpez, a tech and design boutique operating out of Honolulu.

In December 2013, Maui-based mbloom, an early-stage venture capital firm, secured $10 million in funding.

The Hawaii Strategic Development Corporation, or HSDC, committed $5 million to the fund, and Rosemont Seneca Technology Partners matched that commitment.

The firm that secured that money is managed by Arben Kryeziu, who lives in Maui, and Nick Bicanic, in Venice, California.

The HSDC investment is part of the Hi-Growth Initiative, a new investment program focused on “building an innovative ecosystem that supports entrepreneurial high growth.” The initiative offers both state and federal funds that are supposed to be matched by private funds, and used as investment capital.

Past recipients have included Blue Startups, UPSIDE Fund, and Startup Capital Ventures.

Stock Photo: High-Tech Classroom

Startups that compete for limited local funding in Hawaii don’t like it when companies appear to enjoy special advantages.

Fotalia

On Thursday, mbloom announced its first two investments. It will invest in Flikdate, a mobile phone-driven dating service, and Ozolio, a live webcam service. Each company received $500,000 in funding, with mbloom investing $350,000 in each and the rest coming from undisclosed third parties.

This is where things get interesting. Well, according to Hawaii business filings, Ozolio is owned by Kryeziu, and Flikdate is co-owned by Kryeziu and Bicanic.

So mbloom’s first two investments — partially paid for with public HSDC funds — are in companies owned by mbloom’s founding partners.

To complicate matters, according to Kryeziu, the investments did not include federal funds, only state funds, due to federal prohibitions on related-party transactions.

In effect, investors using federal funds via HSDC cannot invest directly in themselves — a limitation not applicable to HSDC’s state funds.

It’s not unusual for a fund to invest in one of its partners’ companies, but the state funding brings transparency issues, as well as others about perceived public value.

Also of concern is the fact that mbloom’s entire portfolio, which is the first two companies that are receiving funding, and at least 7 percent of mbloom’s total initial portfolio, consists of Flikdate and Ozolio.

Hawaii Tech’s Fragile Ecosystem

Early-stage venture funding for tech startups in Hawaii is limited, and entrepreneurs here do not appreciate insider dealings.

Many local startups live and die before obtaining funding. Often, promising startups must turn to the mainland where funding opportunities are much more plentiful.

Some in the local startup community say they would like to understand what the HSDC knew about mbloom’s investment strategy before backing the fund and whether or not it was disclosed beforehand.

“There are procedures to deal with these conflicts,” said Karl Fooks, president of HSDC.

Both companies were reviewed by HSDC prior to mbloom investment. “We were aware of these companies prior to the formation of mbloom,” he said.

These deals are often complex, and the details are rarely publicly disclosed.

According to Kryeziu, part of the initial $5 million investment by Rosemont Seneca Technology Partners was specifically earmarked for investment in Flikdate and Ozolio — a condition that HSDC was aware of, and a requirement for procuring Rosemont’s funding in the first place.

“We know how to build companies, so we know how to build startup communities,” Kryeziu explained in an interview. “Flikdate and Ozolio were seed companies we were pitching to investors. That’s how we got Rosemont.”

Both Flikdate and Ozolio have newly hired management teams, a precaution taken by mbloom to ensure a clear delineation between the startups and their investors and advisors.

“None of the money is going to the founders,” Kryeziu said.

That may be true, but it is arguable that the potential mentoring, collaboration, and funding opportunities that mbloom could offer other Hawaii entrepreneurs have been usurped, at least for now, by its founders’ own pet projects.

Talent Is Not Infinite

Spencer Toyama, founder of local tech startup Sudokrew, suggests that the investment may be indicative of an anemic local talent pool.

“First, Hawaii has a pretty shallow startup pool, so keeping dealflow moving is a challenge in itself,” Toyoma said. “If there aren’t strong companies that are worthy of investment, then it might be necessary for mbloom to invest in their own products.”

Even so, questions remain.

Should HSDC be responsible for reviewing investments and ensuring that HSDC money is, in fact, catalyzing entrepreneurial growth?

Should the details of that review process be public knowledge?

What kind of review process currently exists? And how do we ensure that public funds go to the most promising startups?

The ecosystem here is fragile, and guidance and leadership are needed for Hawaii’s tech community to continue to grow.

In this case, Fooks explained, “The review process is private and specific to mbloom.”

HSDC, Blue Startups, and mbloom

The goals of the Hi-Growth Initiative are wide-ranging, with focuses on entrepreneurial development, research commercialization and startup investment capital.

The fundamental objective of the program is not solely mentorship. The seed funding offered by mbloom could serve as a great extension of Blue Startups accelerator offerings.

Blue Startups, the Hawaii-based accelerator that was started by The Tetris Company founder Henk Rogers, has used HSDC funds to invest in 23 different startups. They include promising businesses like Tealet, a company that sells tea online, and Gibi, which created a dog-collar with GPS built so that owners can track their pets from their cell phones or computers.

mbloom is slated to soon invest in Vantage Sports, a startup from the third cohort of Blue Startups. Vantage Sports doesn’t have any direct connection to either Kryeziu or Biconic.

“The due diligence is done,” Kryeziu said. “We’re investing this week.”

Kryeziu seemed adamant in his desire to support companies incubated by Blue Startups, and to improve the Hawaii tech scene overall. “Some startups are more ready than others,” he said. “We’re reviewing on an ongoing basis.”

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