Is it OK for a venture capital fund to take Hawaii taxpayer money and then turn around and invest that money into startups for which their partners are CEOs?
Without any background, that is the question many are asking after Pacific Business News this week reported that mbloom, the Maui-based venture capital fund founded and run by Arben Kryeziu and Nick Bicanic and that raised $10 million–$5 million of which is State of Hawaii taxpayer money–made their first investments in two startups, Flikdate and Ozolio. Each company received $350,000 from mbloom’s fund.
Aside from the conflict-of-interest perception, did Bicanic, Kryeziu, and mbloom’s board–and more importantly, the steward of the public’s money, HSDC–think that this wouldn’t attract attention? Whether or not these startups pass scrutiny, or even what that process entails, it’s the “optics” of such a deal that makes one wonder if there’s any oversight at all.
To get that background and understand more before I wrote anything, I talked with Bicanic on Friday and he mentioned that they did realize that it might seem a bit fishy at first glance, but that they have processes in place to avoid any conflicts of interest.
“Clearly, this is an issue of our fund investing in a ‘related party,’ and we did consider the possibility of it seeming odd at the surface,” Bicanic said. “But we have multiple checks and balances in place to help avoid any conflicts of interest.”
Checks and balances that PBN failed to mention, but which are there, assures Bicanic.
“It’s all above board,” he continued. “If we’re involved with a potential investment, then we can’t make decisions related to that investment. We recuse ourselves from the process and the mbloom board makes the final decision. Furthermore, Arben and I can’t draw any funds from what’s been deployed.”
But, without any mention of that in the PBN article, the average person might not realize that “checks and balances” are in place. Even so, what was the mbloom board thinking when they approved these deals as the very first announced by a publicly-backed investment fund?
, consisting of Josh Cook (“a corporate and securities partner at Gunderson & Dettmer” who represents a “number of leading venture capital firms”), Don Dodge (a “special advisor to the [Google Ventures] fund and…a venture investor” himself) and Keath Teare (a person who has “started or co-started many successful companies”), all people with significant venture capital experience, are really the right people to release a statement that better explains their reasoning behind this initial set of investments. (Update: Bicanic let me know that there’s a difference between the advisory board, which I originally listed here, and the “LP investment committee,” who are actually the ones that decided to approve these deals. I asked twice, but Bicanic would not give me the names of the people on that LP investment committee. He only said that, “The LP committee is composed of representatives of all investment partners (i.e. the people who actually invested money into the fund).” So, one can assume that both HSDC and Rosemont Capital have representatives on that investment committee and, therefore, approved the investments in question.)
But, Bicanic, mbloom’s general partner, assured me that these investments, regardless of perception, were appropriate.
“We accept that there’s the potential for conflict so we put a process in place to help avoid and prevent it,” Bicanic continued. “But, we do realize that this doesn’t change the perception.”
Then why do it?
It’s a Small Tech World Afterall
This “perception” has become quite the local issue with Hawaii’s startup community, prompting this post from Ryan Ozawa and this Facebook post from Eric Nakagawa, which has garnered close to 40 comments as of Friday night.
Usually, when justifying the lack of significant venture capital activity happening in Hawaii, the answer is always something like, “There aren’t many investable startups here.” It’s plausible that mbloom’s board found both Flikdate and Ozolio as worthy investments that they knew well and that met their criteria. Hawaii’s tech scene is small, there really aren’t many viable startups, and everyone knows everyone, so the chances of overlap and the perception of conflict are pretty high, especially when the news hits devoid of any background information.
But, again, what were they thinking?
Adding to the intrigue and interconnectedness of this mess, Ozolio is listed as a client of Bump Networks, a website developer. Bump’s founder? Arben Kryeziu. So, again, not knowing anything else, one might wonder, “If mbloom takes taxpayer money and gives that money to their founders’ startups, can those startups use those funds to pay a vendor that’s also run by an mbloom’s director?”
What is Mbloom’s Investment Criteria?
You can read on mbloom’s website their investment mantra, pasted below, as well as their “investable business check-list,” which lists such questions as “Does your management team cover all the bases related to your business?” and “Will you be able to return at least 10x on the investor’s money within a reasonable time frame?”
How We Invest
Mbloom searches for investable business ideas from dedicated, passionate founders with defensible product or service concepts that solve real problems in a large underlying market (more than $1 bn in market size). Mbloom seeks to invest in early stage, disruptive technology products that have a strong technology core, a compelling product idea, and a high probability of potential return on investment 20:1 or higher.
Do Flikdate and Ozolio both fit those criteria? Flikdate, whose website currently seems to be down, launched their iOS app in mid-2012 (with a whopping 7 reviews in the Apple App Store), doesn’t appear to be lighting the world on fire after 2 years in business. Ozolio also launched in 2012 (according to their Twitter account, which only has 16 followers, and their state tax license application date), and seems to be gaining traction as they list several customers and state a price of $95/mo for their webcam streaming service.
Bicanic did mention that they have several other investments in the pipeline, and that they would have liked to announced the others initially, but that the timing worked out such that Flikdate and Ozolio were first.
Would that have made a difference in perception?
What do you think? Leave your comments below…