by Kathy Cammarata
In the early 1990s, the world envied Silicon Valley for being a fable of American success – a place where an industrious egghead could become a latte-sipping Apple millionaire overnight. And San Jose, Calif., which could almost see all the high-tech action out its back window, was no exception. At the time, the city served as little more than a bedroom community for Silicon Valley’s workers. While the heart of the Valley lay just north in cities like Cupertino and Sunnyvale, San Jose’s downtown – with its old-line banks and accounting firms – was struggling. For years, San Jose watched its citizens and tax revenues make their daily commutes to other locales.
An aggressive redevelopment project launched by the city of San Jose, combined with the efforts of people like Jim Robbins, cofounder and executive director of the Software Business Cluster (SBC), changed all that. In the ’90s, the city brought to town such high-tech heavy hitters as Sony, Hitachi and Cisco Systems, while the SBC, a nonprofit technology incubator, helped fledgling software and Internet companies get established. To date, SBC start-ups have created more than 1,500 jobs, bringing fresh faces to the once stale downtown.
SBC Managing Director Chuck Erickson witnessed the city’s rejuvenation. “It was really pretty dead,” he says. “Now we have lots of software companies and young people downtown.”
Robbins is reluctant to take any personal credit for San Jose’s rebirth. The impact of the SBC, however, has been anything but modest. Of the 75 software and Internet companies in San Jose today, two-thirds are SBC graduates. Seventy-five percent of SBC-groomed companies say they wouldn’t have started their businesses in San Jose if it hadn’t been for the incubator. On average, 70 percent of SBC clients remain in San Jose upon graduation. The incubator’s amazing track record – 92 percent of its companies are still in business – has helped earn it NBIA’s 2000 Randall M. Whaley Incubator of the Year Award.
In 1994, then-Mayor Susan Hammer made a speech in which she proposed to make San Jose the software capital of Silicon Valley. The idea was to attract large software companies to the downtown area, which at the time claimed only a handful.
After hearing the mayor’s speech, Robbins approached the city with a different plan. Rather than simply attracting companies from other cities, why not encourage home-grown software and Internet companies through an incubator? The city liked the idea and contracted with Robbins’ company, Business Cluster Development, to come up with a business plan and choose a site for the incubator. “Then they asked me to run it,” he says.
Robbins partnered with Barbara Harley, a businesswoman who had spent most of her career assisting start-ups. She worked on all aspects of the incubator’s development and served as acting director for several months. Harley continues to work with the SBC as a member of the board of advisors.
Progressing at uncharacteristic speed for incubator development, Robbins had SBC up and running less than a year after he heard Mayor Hammer’s speech. It opened in December 1994 with about 16,000 square feet on two floors in a modern downtown office building. The price tag also was rock-bottom – just $150,000 to $200,000 in start-up costs, which he raised from private companies including Pacific Gas & Electric, Arthur Andersen, Pacific Bell, Silicon Valley Bank and law firm Gray Cary Ware & Freidenrich. The SBC paid market rent for the building, which needed a few adjustments. “We had to put data wiring in place and convert some lobbies to conference rooms,” Robbins says. “[We] also had to set up our server room.”
Robbins had conducted only a very basic feasibility study, but his belief that San Jose could grow its own software companies was right on target. “There were clearly enough companies starting in the region, and I was confident that the incubator would be of sufficient value to attract them and improve their chances for success,” he says.
The SBC filled up quickly, bringing in future stars of Silicon Valley such as Agile Software and Calico Commerce among its first tenants. Both companies went public in 1999. Agile now boasts 200 employees and a market capitalization of nearly $3 billion, while Calico has about 150 employees and a market capitalization of about $300 million.
How did the SBC find such great clients so quickly? One key was Robbins’ broad network of business associates. But the development effort also included a grand opening that attracted about 350 business people and a public relations campaign that brought newspaper and magazine coverage.
Bill Paseman, Calico founder, chairman of the board and vice president of research and development, says one of his employees found out about the SBC through an article in the local paper. At the time, Calico was in a nearby office park with “five guys in two rooms,” he says. Moving into the incubator tripled the company’s space and enabled it to add another employee. Calico also received customer referrals, assistance with its business plan and venture presentation, and integration into the incubator’s network.
All of this added up to a lot of value for the company, which graduated in 1995, and that’s why it chose to remain in San Jose over the years. Although Calico could have moved to other cities while keeping operating costs about the same, it preferred to give back to the city that helped get it off the ground. The thought was, “Let’s go ahead with San Jose. They helped us out, and now let’s help them out,” Paseman says.
Within six months of opening, the SBC program took on a third floor and today operates on four floors in the same downtown building, with 32,000 square feet of space.
The SBC had three initial goals: attracting software and Internet companies to downtown San Jose; creating a network of business support services to improve SBC companies’ chances for success; and addressing the financing needs of its start-ups to ensure adequate capitalization.
The incubator formed a formal partnership with San Jose State University (SJSU) and the City of San Jose in 1996. The university, through its fundraising arm, the San Jose State Foundation, oversees the incubator’s finances. The city pays SBC’s rent, which represents half of its operating costs. The remaining operating expenses are covered by rent client companies pay to the SBC. “That’s the only real charge to businesses,” Robbins says. “They pay market rent.”
Clients receive furniture, conference rooms, kitchens and reception areas, local area network access and home page hosting facilities at no additional cost.
Robbins designed the SBC to break even at 80 percent occupancy, but it consistently runs at 95 percent occupancy and has amassed a substantial reserve account. This makes fundraising unnecessary for normal operating expenses.
In the past year, the SBC instituted a program it hopes will make it financially independent of the city. It began charging 1 percent equity to each new client company, to be placed in a fund. “Over time, it should make the incubator self-sufficient,” Robbins says. He expects that in four years, SBC no longer will need a city subsidy. In about five years, the fund should create a surplus large enough to fund other SJSU programs.
The fund was designed in such a way that it wouldn’t be a burden to clients. The equity is taken in warrants executable at a business’ first institutional financing of $1 million or more. Businesses that don’t receive substantial financing while in the incubator owe no equity to the SBC. Robbins estimates that if the SBC had started this fund five years ago, it would be worth about $25 million, but he believes the incubator needed to establish its success before instituting such a program. Such financing strategies allow Robbins and Erickson to devote most of their time to working with client companies.
Vivek Gupta, founder and chief executive officer of SBC client Citium, is impressed with the amount of time the SBC principals have dedicated to his company, which offers software that helps companies manage on-line promotions and coupons. He says he’s not aware of other incubator programs that get as deeply involved with client companies as the SBC. “These guys have almost no direct interest in the company – it’s almost like a public service.” he says. “The amount of excitement and enthusiasm and cooperation is simply amazing.”
Erickson’s enthusiasm and dedication come from simply enjoying what he does. “It’s a fantastic opportunity to pass on my experience to keep people from making the same mistakes I made,” he says. “This is a really very smart, very dedicated group of people.”
He counts among his experience executive roles in start-up and turnaround companies, including a post as president and CEO of Digital Pathways, a software company that he rebuilt from virtual bankruptcy into an industry leader with a valuation of more than $200 million.
The SBC incubates 20-24 companies on-site, graduating about half each year, and the program almost always has a waiting list. In five years, more than 100 start-up software companies have applied to the incubator, and the SBC advisory board has accepted more than 50. These days the incubator’s reputation attracts many applicants.
A Web site, media attention and Robbins’ and Erickson’s involvement in community events also help. “There’s a constant flow of deals coming in the door,” Erickson says.
Most SBC clients hail from within commuting distance of the incubator. The high cost of living in Silicon Valley makes it difficult for people to move to the neighborhood – especially fledgling entrepreneurs. “If you don’t already live here, it’s pretty tough to move here,” Erickson says. San Jose is now the most expensive residential marketplace in the country. A 2,200-square-foot home sells for an average of $708,600, according to Runzheimer International. Compare that to pricey-enough Washington, D.C., at $332,100.
Despite this drawback, 10-20 percent of SBC clients come from outside of the area. The incubator makes the transition easier, plugging these start-ups into its network and saving them the stress of finding such necessities as office space or support staff.
SBC’s application process begins when a company submits a business proposal and a set of financials. Robbins and Erickson review the quality of these materials and make sure there is no conflict of interest with other companies in the incubator. They evaluate applicants based on business potential, clarity of market focus, the reality of their assessment of the competition and the ability to use cluster services.
“If we think there’s a potential fit, we ask the team to come in and interview,” Erickson says. The SBC likes to make sure a company isn’t just a single person with an idea. “We look for people with the charisma to bring a team together,” he says.
Typically, Robbins and Erickson both interview applicants, and at this point, the selection process becomes more about people and less about business. Erickson says they look for people with a passion for what they do, people “with a fire in their belly. ... Do they know what they don’t know? Are they willing to take advice? Are they willing to let us help them?”
The focus on people is what hooked Citium’s Gupta. He says SBC’s interview process was not typical of other incubators he’d seen, and he felt it was a good indication of what he could expect from the SBC. “They really sat down with me and interviewed me for about 11/2 hours,” he says. “The thoroughness with which they went about their jobs really impressed me.”
If everything goes well, Robbins and Erickson recommend a company to the advisory board, which evaluates the materials and makes recommendations.
Companies can stay in the incubator for up to two years, but most stay 12 - 15 months, Robbins says. The SBC regulates turnover based on space: “No company takes more than 10 percent,” he says. “When they reach that point, they have to move.”
The SBC program does not take a cookie-cutter approach to incubation. “We actually ask companies to come to us to ask for what they need help on,” Robbins says. “It’s a very customized approach.”
At any given time, Robbins will have three to five items a business has listed as priorities, which helps a company stay focused and the incubator program to provide help where it’s most needed. “Our incubator is not highly structured,” he says. “There’s not a set of training courses people have to take.”
Those who need some extra business training, however, are not without recourse. SBC clients get free membership in the nearby Software Development Forum, the largest entrepreneurial training program and software networking organization in Silicon Valley.
Within the incubator, Robbins has brought together a community of professionals that provides SBC businesses with access to a slew of resources – just about anything they need to help move them through the start-up process.
For sound advice on particularly thorny problems, SBC has an executive associates program made up of 15-20 business people with executive level experience who provide pro bono assistance to companies to work on a defined issue. By limiting the number of individuals involved, the SBC can provide business development opportunities to each executive volunteer to justify his or her time commitment to the program. Of all SBC services, this one gains the highest grades from clients.
A monthly seminar series brings in guest speakers to provide further business training. In an effort to build community within the incubator, the program also holds monthly CEO meetings, where founders of SBC companies come together to present success stories, share advice, exchange ideas and discuss common problems.
Senior partners at local law, accounting and consulting firms have agreed to work with SBC companies on a deferred billing basis until the companies receive financing, or for equity in lieu of pay.
These and other services are á la carte – take as you need. The only SBC requirement comes into play when client companies want to take advantage of its venture capital referral program. If a company wants to meet the money, it first must work with SBC to restructure its business plan and develop a venture funding presentation. The effort takes many hours of work, and the incubator program refers companies to funding sources only after they’ve come up with a presentation and business plan the SBC feels is viable. “We send them out to investors with sophisticated packages,” Robbins says.
The system seems to be working. SBC start-ups have attracted more than $300 million in venture funding, and Robbins says about 80 percent get venture funding – that’s compared with one out of every 10 high-tech companies in Silicon Valley. “The process is popular with people,” he says. “They’re anxious to be in that eight out of 10. They know they have a better chance if they go through this.”
Gupta, in the midst of preparing a venture funding presentation, had the opportunity to practice his pitch in front of 12 people at an SBC board of advisors meeting – a sort of high-pressure game of show and tell. “They ripped us apart,” he says. “That’s what we wanted. So we used that, and that was great for us.”
As head of a 16-employee company nearing the end of its time in the incubator, Gupta appreciated the dissection of his presentation: “I have one chance with the VC, and guess what happens if I’m not prepared?”
The rigorous preparation process has garnered the SBC designated slots for its companies to present in several venture capital forums. Sixteen SBC clients have presented in such forums in the past three years, and all but one received a term sheet offer.
While clients stand to gain from SBC’s program, their success helps build the SBC’s reputation and strengthens its network. “We have a real good batting average of people who survive,” Erickson says. “We’ve helped the city significantly.”
In addition to Agile and Calico, a third SBC graduate, E-Gain Communications, went public in 1999. Robbins says he expects two or three more SBC companies to go public this year.
One client the SBC takes pride in is Kovair Software, which joined the incubator in April 1999. One of a growing number of women entrepreneurs in Silicon Valley, Kovair CEO Krishna Subramanian cofounded the company with her husband, Kumar Goswami.
Springboard 2000, the first venture forum ever created for women entrepreneurs, selected Kovair to make a presentation. Of the 350 companies that applied, 27 would be chosen. “Jim helped coach Krishna,” Goswami explains, and based on the company’s strong pitch, Kovair was chosen as the first presenter at the forum. The company received a term sheet offer for $8 million from a prominent Silicon Valley venture capitalist.
Subramanian says Robbins’ help throughout the process was invaluable. “Springboard has provided excellent exposure for Kovair,” she says. “We were featured in several press and media articles, and we have been booked with VC calls and meetings.”
Goswami points to this exposure and to the SBC program’s networking backbone as two assets that garnered Kovair such quick notice. “We came in, plugged in and started,” he says.
Robbins has hit the occasional pothole on the road to incubation superstardom. An ongoing frustration has been helping client companies find seed money without spending too much time looking for it or making bad deals to get it. There’s an early stage when the amount of money a business needs is small, but difficult to get, he says.
Ever eager to serve its clients, the SBC is working on the problem. “We’re looking to start our own venture fund separate from the incubator, but linked to it,” Erickson says. The fund would provide a small amount of seed capital to companies accepted into the incubator – a big advantage for fledgling companies.
Choosing companies for the incubator is another challenge for Robbins, as he tries to walk the line between good will and practicality. “It’s hard to identify promising companies at a very early stage,” he says. “You want to bring in companies that need help, but also make an educated guess as to who will be a success.”
What advice does he have for others trying to start incubator programs? It sounds a lot like what he might say to a software start-up: “Have a business plan and a clear-cut set of goals. Have support in the local business community. Learn from what other people have done.”
When he says “other people,” he just might be speaking of himself. Not only is he a patriarch of San Jose’s software community, he is also a sage among incubator developers. Through his development firm, he helped create 11 technology-focused incubators in California, including the Women’s Technology Cluster, the Communications Technology Cluster, the Environmental Business Cluster and the Panasonic Internet Incubator, where he also is executive director.
Being the catalyst for San Jose’s boom in software business and technology incubators has earned Robbins the respect of an entire community.
“I think he’s played a far bigger role than you’d ever get him to admit,” Erickson says. “This is a guy who has the empathy, the vision, and the demeanor to be an incubator guru.”
2 N. First St., San Jose, Calif.
Year opened: 1994
Size: 32,000 square feet
Focus: Software and Internet companies
On-Site Clients: 20
Sponsorship: Partners include Arthur Andersen, Citibank, Compton’s New Media, Microsoft, the San Jose Redevelopment Agency and San Jose State University. Sponsors include Comerica Bank, Cornish & Carey Realtors, Cupertino National Bank, Hewlett Packard, Intel, Pacific Bell and Silicon Valley Bank. All are financial contributors.
Tax Status: Operates under 501 (c) (3) status of San Jose State University
Jobs Created by Clients and Graduates: 1,500
Cost of Business Assistance Services: Core services included in basic lease rate
Bill Paseman, Calico Commerce founder, chairman of the board and vice president of research and development, kept his company in San Jose after graduating from the Software Business Cluster in order to give back to the city that helped it get established.
The CEOs of Software Business Cluster client companies meet once a month in the incubator's main conference room for CEO Forum, where they can discuss issues and share ideas.
Keywords: best practices, client selection/admissions, equity and royalty agreements, technology incubator
Phone: (740) 593-4331
Fax: (740) 593-1996
PO Box 959
Athens, OH 45701-1565