At the Rules Committee last week, we voted 4-0 not to pursue an audit of the incubator program that was started in 1994. Instead, we decided to stay with the current work plan that includes an audit of the Environmental Services Department.

Incubators are located all over the country. They are backed by cities, universities, foundations and venture capitalists. Cities have been involved in incubators since residents pushed them to do so. As national and international economies ebb and flow, residents ask cities, “What are you going to do about creating high-tech jobs?”

Therefore, in wanting to try and please everyone, city government—instead of pointing out that the private sector creates high-tech jobs—funded incubators with a hope and a prayer. This same conversation could take place in any city that assists incubators. The fact is there was a shared belief by the entire San Jose City Council past and present, up until recently, that this was a worthwhile investment.

One example that I am personally familiar with is Agile Software. I worked for Agile Software, which came out of the incubator program started during Mayor Susan Hammer’s tenure. (Unfortunately for me, I joined after the company’s successful IPO.) Agile Software grew in downtown San Jose, with approximately 900 employees worldwide and 450 employees in San Jose. Many of the company’s employees lived and spent their paychecks in San Jose.  As a company, Agile also spent money in San Jose.

For example, Agile from time to time paid for the catering of lunches and dinners for employees. Agile also hosted events that resulted in over 1,000 downtown hotel rooms a night being used for its conference. In addition, the company had partners and customers flying into San Jose to visit corporate headquarters and booking hotel rooms. Agile also generated sales tax on the sale of their software, which was prior to the now-common customer request to download software electronically to avoid paying sales tax.

Agile stayed in downtown from 1995 to 2003. In 2003, Agile ran out of space in the downtown area. As a result, the company moved to Edenvale and stayed there from 2003 to 2008, before being moved out of San Jose by Oracle, which bought Agile in 2006.

This is an example of one company starting in a San Jose incubator and remaining in San Jose since many employees, including Agile’s CEO, lived in San Jose. Other companies, like Datasweep and Sierra Atlantic, wanted to be close to Agile so they also located Downtown.

Agile’s CEO, Bryan Stolle, was loyal to the city of San Jose and generous to local charities. However, part of the evolution of business includes growing, possibly to an IPO, being bought by another company or, as is the case with most high tech start-up companies, ceasing operations and laying off all the employees. There is no guarantee of success.

No city incubator can control:
_ the success or failure of the start-up company.
_ the relationship between the founder and venture capitalists.
_ the relationship between executive management and commercial real estate brokers.
_ the specific cost of real estate in neighboring cities or from building to building.
_ whether or not the company has new management that lives up the peninsula and wants to move offices to another city closer to their own home or employee base.
_ merger and acquisitions
_ intellectual property that is spun off and sold to someone else who carries on in another geography.

Essentially no city incubator can control free market decisions. However, we do need to credit the time a company is in San Jose, as well as other attributes the incubator program has brought to the city.

There are many decisions that the council has made without audits. For example, did we get all the jobs for the thousands of affordable housing units we built? What was the retrurn on investment from spending $835 million of RDA money on affordable housing? What are the ramifications to our city by exempting affordable housing from paying over $100 million in fees and taxes when these developments require more city services?

I have asked for an audit of the housing department and the impacts of exemptions on taxes and fees. But, I also understand that there may no longer be a Housing Department after Jan. 15, 2012. Perhaps we should do an audit often requested by city employees, which is a performance audit of management positions.

When we invest in Intellectual Property or essentially “people,” there is no guarantee that individuals/companies will stay in San Jose. The council voted in June 2011 that it no longer wants to fund the leases for incubators going forward. Moving forward, the city should focus on established companies like Polycom, Microchip and Maxim, which are all looking for larger space rather than early-stage companies.