program helps put San Jose at center of software universe
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 win- dow, was no exception. At the time, the city served
as little more than a bedroom com- munity 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 startups have
created more than 1,500 jobs, bringing fresh faces to the once
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."
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 mn it," he says.
Robbins partnered with Barbara Harley, a businesswoman
who had spent most of her career assisting startups. 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.
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 startup
costs, which he raised from private companies including Pacific
Gas & Electric, Arthur Andersen, Pacific Bell, Silicon Valley
Bank and law firm Gray Gary Ware & Freidenrich. The SBC paid market
rent for the building, which needed a few adjust- ments. "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."
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,"
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
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.
Paseman, Calico founder, chairman of the board and vice president
of research and development, says one of his employees found out
about llie 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.
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 years,
the fund should create a surplus large enough to fund other SJSU
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 work-
ing with client companies.
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
online 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."
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."
counts among his experience executive roles in startup 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 onsite, graduating about half
each year, and the program almost always has a waiting list. In
five years, more than 100 startup 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.
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.
SBC clients hail from within com- muting 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.
this drawback, 10-20 percent of SBC clients come from outside
of the area. The incubator makes the transition easier, plugging
these startups into its network and saving them the stress of
finding such necessities as office space or support staff.
You Be My Incubator?
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.
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.
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?"
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
1 1/2 hours," he says. "The thoroughness with which they went
about their jobs really impressed me."
everything goes well, Robbins and Erickson recommend a company
to the advisory board, which evaluates the materi- als and makes
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 cookiecutter 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."
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.
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 startup
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.
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.
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.
and other services are a 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
system seems to be working. SBC startups 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.
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."
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."
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
rigorous preparation process has garnered the SBC designated slots
for its com- panies 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.
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."
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.
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.
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
says Robbins' help throughout the process was invaluable. "Springboard
has provided excellent expo- sure 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.
of the Streets
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,
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.
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."
advice does he have for others trying to start incubator programs?
It sounds a lot like what he might say to a software startup:
"Have a business plan and a clear cut set of goals. Have support
in the local business community. Learn from what other people
he says "other people," he just might be speaking of himself.
Not only is he a patriarch of San Jose's software com- munity,
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 Technology Cluster and the Panasonic
Internet Incubator, where he also is executive director.
the catalyst for San Jose's boom in software business and technology
incuba- tors has earned Robbins the respect of an entire community.
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." ®