Councilmember Sam Liccardo submitted a memo late Thursday calling for an audit of four incubator programs funded by the San Jose Redevelopment Agency. The request responds to a 2009 study—unseen by most city officials for two years—which finds that RDA spent more than $30 million on business-building incubator programs which, it says, showed very poor returns on investment. Many of the incubated companies left San Jose for neighboring communities, the report noted.
Other companies stayed too long. “One company has been in the incubator for 11 years, occupies the entire fourth floor of the incubator and some space on the third floor. The company ... is clearly beyond incubation,” the authors observed.
The study, conducted by three consulting firms hired by RDA to assess its $30 million-plus investment in four incubators, found that the incubators had an estimated overall economic impact of $515 million to the local economy.
However, the study lists the annual revenue to the city at only $280,980, or about $4.2 million total.
According to the study, only 11 percent of the 288 companies that “graduated” from the incubator and were still in business were located in San Jose. Annual tracking of businesses ceased in 2004. The study also noted a serious lack of oversight, as 58 percent of the incubator companies did not even have a business license in the city of San Jose.
“Suffice to say, it’s plenty frustrating to those of us who have been asking what kind of return we’re seeing on taxpayer’s investments and the answers have been buried for a couple years,” Liccardo says. “It undermines the ability of those accountable to residents and taxpayers if we don’t know the truth.”
During the 15-year period covered in the study, the RDA worked in partnership with San Jose State University Research Foundation (SJSURF), which co-sponsored and managed four incubators: the Environmental Business Cluster (EBC), the Market Access Center (US MAC), the Biocenter, and the Software Business Cluster (SBC). The SBC has since been shuttered.
The study says that from 1994 to Nov. 30, 2008, the RDA spent $19,385,351 in annual lease payments (incubators and business service programs), $10,474,760 in building improvements and equipment (BioCenter) and $568,511 on business outreach and studies. All management and oversight of the incubator programs was done by SJSURF.
It’s unclear why councilmembers never saw or heard details of the report until now. According to Mayor Chuck Reed, he and Councilmember Nancy Pyle drafted a memo to include it on the Community and Economic Development Committee agenda for May 2009. Reed says he was not part of the committee, which had Pyle as its chair and included councilmembers Liccardo, Rose Herrera and Ash Kalra. The committee—or RDA staff—deferred the item multiple times until it was ultimately dropped.
Liccardo’s memo says it is important to note that about 80 percent of the $515 million positive economic impact was “attributable to a single company, Callidus Software, as of the date of the 2009 report.” Several months later, Callidus relocated from San Jose to Pleasanton.
Taking Callidus out of the equation, the incubators created only 150 jobs in San Jose over a 15-year period, according to Liccardo’s memo. He adds: “It appears unclear whether some or all of those 150 employees are the same people employed at the [firms] prior to [their] incubator tenure.”
Harry Mavrogenes, who was Executive Director of the redevelopment agency from late 2004 until May of this year, says the agency took the report to heart and encouraged SJSURF to pay cloiser attention to the incubators.
“Bottom line is [RDA] monitored the programs,” Mavrogenes says. “They did this study to make sure things were going as well as possible. Based on the study, corrections were made.”
Mavrogenes adds that incubators are always “risky”—similar to many start-up ventures, but steps were taken by the SJSURF to address the 2009 study. Those steps included managers being replaced, eliminating the software cluster and consolidating rented space to one office on Santa Clara Street.
“It looks like the only fault along the way is the report never got to the council,” Mavrogenes said. “It probably should have. I’m not sure what happened. But it wasn’t buried somewhere. The results were taken to the operators.”
Mary Sidney, Chief Operating Officer of the SJSURF, was not available for comment. But in Liccardo’s memo, at a June 17 session where the City Council unanimously approved a $400,000 rent payment for the Biocenter inclubator—Sydney “candidly admitted that the 836 jobs that Redevelopment claimed that the Biocenter had ‘created’ actually included many of the company founders and other employees who pre-dated the company’s tenure in the Biocenter.”
Mayor Reed said the council has begun to take steps that will eliminate city funding for incubators within about a year. Stopping RDA lease payments for the Biocenter—and roughly 100 other businesses contained in the other two incubator programs—is impractical due to ongoing lease agreements, he says. The city is taking steps to transition to a new model that would allow incubators to continue operating independently.
“Whether you’re a fan of incubators or not a fan of incubators—poeple can argue with about their success—we can’t afford to continue to do that,” Reed said. “That’s been a concern of mine for years and we’re working on it.”
The mayor added that there have also been successes to come out of the incubators.
“To be fair to the incubator program, you have to look at what they did, and one of the objectives for the bioscience incubator was to create a biotech industry to help diversify our economy,” he said.
“I think one of the lessons here is knowing what the metrics are when you start something so you know if you’ve succeeded.”