San Jose Mercury News: San Jose City tech incubator program scrutinized

San Jose's touted incubator program under scrutiny

By Tracy Seipel

San Jose Mercury News

Posted: 08/12/2011 10:23:43 PM PDT

 

Two years ago, consultants told San Jose Redevelopment Agency officials that a highly celebrated program aimed at spawning technology startups was falling far short of its goals. Among their findings: The longtime program was producing few new jobs and the vast majority of the new companies didn't stay in town.

But that $76,475 report for the agency was never publicly released or debated -- and now at least one elected official is calling for an investigation into whether the city should continue to invest in a program that has already sucked up at least $30 million in leases and building improvements since it began in 1994.

Under the program, the redevelopment agency's "incubators" and business service programs provide facilities and support to emerging tech companies.

"For years we have been told about the extraordinary success of these incubators and all the jobs and tax revenues they generate as a result of their operation," Councilman Sam Liccardo said Friday.

"No elected official likes ruining a good story with facts," he said. "But in this case it's hard to ignore those facts and hard not to feel betrayed by those who felt it inconvenient to allow those facts to surface."

Liccardo on Thursday afternoon released a three-page memo asking the city auditor not only to review whether the city should still fund the program, but also to investigate why redevelopment agency officials sought to suppress the report.

City officials acknowledge that the June 2009 report by Chico-based Chabin Concepts was made available to San Jose State's nonprofit Research Foundation, which jointly funds the program with the redevelopment agency. The agency pays for the leases, while the foundation has spent at least $2 million overseeing the incubators and paying for staff members.

But no one seems to remember why the City Council -- which acts as the agency's board and oversees its budget -- never got the report.

Mayor Chuck Reed said he was aware the report had been commissioned in January 2009. He also said he recalls that a May 2009 deadline was established for the report's release to the council's Community and Economic Development Committee, which then included Liccardo and council members Ash Kalra, Rose Herrera and Nancy Pyle.

All four members this week, however, said they could not recall receiving any such report. Neither could the mayor.

Reed said he recalled being told by agency staff members that they didn't think the report was "well done" and that the agency would not be using it.

Records indicate the report was first mentioned on a June 22 committee agenda, then dropped. The incubator topic, however, bounced along on the committee's monthly agendas for months until Dec. 14, 2009, when agency officials gave a glowing PowerPoint presentation on the incubator program to the committee, with no mention of the report.

Harry Mavrogenes, the chief of the redevelopment agency at the time, said he didn't know why the report wasn't forwarded to either the committee or the council. "There was no conspiracy," Mavrogenes said.

But Abi Maghamfar, former deputy executive director of the agency, said he remembers attending a meeting in Reed's office June 11, 2009, with the mayor and Ru Weerakoon, the mayor's senior policy adviser for economic development and land use. Also attending were John Weis, then the agency's assistant executive director, and agency staffer Leslie Parks.

Weerakoon was out of town this week; Weis and Parks did not return repeated calls from the Mercury News.

Maghamfar said the meeting was called to discuss the report as well as a recommendation to close the Software Business Cluster incubator, which the report said had run its course.

Maghamfar also said the report showed that although some aspects of the incubator program had been positive, it was "not complimentary" and that the incubators had not shown a return on investment.

Maghamfar said that everyone in the meeting agreed that the report would not be made public, except to the university's research foundation.

Reed said Friday he did not recall the meeting.

Faced with a damaging 62-page report that might tarnish the incubators or San Jose's proud designation as the "Capital of Silicon Valley," city leaders might have been reluctant to share such findings as:

Only a small number of companies graduating from the incubators remained in San Jose -- less than 11 companies were reported by the incubator managers as still being in business in June 2009.

The redevelopment agency had reported $12 million in annual sales tax revenue to the city's general fund. But the consultants had deemed that figure "highly unlikely."

Although large figures are reported for the "economic impact" of the incubators -- some $515 million in total -- 79 percent of the total appeared attributable to a single company, Callidus Software. Since that time, Callidus has moved to Pleasanton.

Not counting Callidus, the four incubator companies that had "graduated" from the program produced a total of about 150 employees in San Jose from 1994 to 2009.

Reed this week said that for some time he has had misgivings about the incubators and how much money was being spent on multiple leases. After the report was issued, for example, the Software Business Cluster was closed and the SDForum moved to Menlo Park. The rest of the entities, except for the BioCenter in the Edenvale area, were consolidated into one downtown location at 100 E. Santa Clara St.

Reed said he thought the consolidation has saved the agency almost $1 million annually.Reed on April 29 also issued a memo asking Mavrogenes and the city manager to work with the university to extricate the agency from the leases.

Kalra said he doesn't understand Liccardo's push to investigate something he said the city already plans to end.

Asked Kalra: "Why are we doing an audit of a program that we're no longer going to be funding in another year?"