The Change
Hawaii has been identified as the 3rd worst state in the U.S. for starting a business, according to recent analyses, ranking 46th in the average growth of small businesses. This persistent underperformance, highlighted as of January 2026, signifies an entrenched challenge for new ventures seeking to establish and scale operations within the islands. It reflects systemic issues that deter business formation and growth, rather than a recent policy shift, but underscores a growing risk for those operating within or considering the Hawaii market.
Who's Affected
Investors
Investors, including venture capitalists, angel investors, and portfolio managers, face a landscape where Hawaii-based startups present a higher risk profile. The 46th ranking in average small business growth suggests that ventures initiated in Hawaii are less likely to achieve significant scale or rapid expansion compared to those in more favorable states. This necessitates a re-evaluation of risk premiums, potentially demanding higher equity stakes or longer expected return timelines for investments made in Hawaii. Real estate investors may also see reduced demand for commercial and innovation hub spaces if the startup ecosystem struggles to attract and retain new businesses.
Entrepreneurs & Startups
For entrepreneurs and startup founders, Hawaii's business climate presents significant scaling barriers. The low average growth rate implies difficulties in accessing capital, attracting skilled talent, and navigating regulatory hurdles that can impede rapid expansion. This forces founders to expend more resources on foundational elements—like securing funding and talent—which can divert focus from product development and market penetration. The perception of Hawaii as a business-unfriendly state can also make it harder to attract non-local talent or secure investment outside of a few niche sectors.
Small Business Operators
Existing small business operators in Hawaii, especially those with plans for expansion or relocation, should anticipate a more challenging environment. Difficulty in starting new businesses often correlates with a less dynamic local economy, potentially leading to slower growth in customer demand and a more competitive labor market for retaining existing staff. Access to funding for expansion might become more constrained, as lenders and investors may view Hawaii-based businesses with heightened caution due to the overall discouraging business creation metrics.
Real Estate Owners
Property owners and developers catering to the business community, particularly those with commercial, retail, or flex spaces suitable for startups and small businesses, may experience reduced demand. A persistent decline in new business formation and slow growth in existing ones translates to fewer potential tenants. This could lead to increased vacancy rates or pressure on rental prices for commercial real estate over the medium to long term, especially if the trend continues without significant counter-initiatives.
Second-Order Effects
Hawaii's isolation and high cost of living are exacerbated by its poor business creation climate. The difficulty in starting and scaling businesses leads to a less diversified economy, which in turn can suppress wage growth and limit job creation beyond established sectors like tourism and government. This, coupled with the high cost of goods due to shipping, creates a cycle where local businesses struggle to thrive, making it harder to attract and retain a skilled workforce, thus further hindering new business formation and innovation. This economic stagnation can increase the reliance on external economic drivers, making the islands more vulnerable to global or national economic downturns.
What to Do
Investors
- Action: Re-evaluate Hawaii-specific investment theses. Conduct deeper due diligence on the operational and competitive advantages of any Hawaii-based startup, considering the systemic challenges to scaling. Explicitly factor in higher risk premiums and potentially longer exit timelines when assessing deals. Explore co-investment opportunities with firms that have established expertise in navigating the Hawaii market.
- Timeline: Immediately. Begin reassessing existing portfolio risk exposure and apply new criteria to upcoming investment evaluations.
Entrepreneurs & Startups
- Action: Prioritize securing diversified funding sources outside of Hawaii if possible, and develop robust talent acquisition strategies that effectively recruit and retain employees despite the islands' geographic and cost-of-living challenges. Consider establishing a secondary operational hub on the mainland to facilitate scaling and access to larger markets and talent pools. Focus on building strong, defensible market positions early on.
- Timeline: Within 30-60 days. Develop a proactive plan for funding diversification and talent retention. If considering a secondary hub, begin feasibility studies now.
Small Business Operators
- Action: If planning expansion, conduct a thorough financial feasibility study that incorporates the potential for increased operational costs and slower revenue growth due to the challenging local business climate. Build stronger relationships with local banks and community lenders, as they may be more attuned to local economic nuances. Focus on operational efficiency and customer retention.
- Timeline: Within 60 days. If a business expansion is planned within the next 12-18 months, initiate updated financial planning and explore all local funding avenues.
Real Estate Owners
- Action: For owners of commercial or flex spaces, consider diversifying tenant portfolios beyond startups. Explore opportunities to attract established, remote-first companies seeking a Hawaii presence or businesses in sectors less sensitive to startup ecosystem dynamics (e.g., healthcare, essential services). Be prepared to offer more flexible lease terms or tenant improvement allowances to secure strong tenants.
- Timeline: Ongoing. Review current lease agreements and tenant profiles. Begin exploring new tenant segments and adjust marketing strategies within the next 90 days.
