San Antonio Express-News (Sunday)
Final accounting of InCube deal: Millions wasted
Over the summer, economic development officials did a final accounting of what taxpayers got for one of the city of San Antonio’s most unhinged, extravagant deals with a single private company.
In 2010, under City Manager Sheryl Sculley and Mayor Julián Castro, the city agreed to invest $6 million in InCube Labs, a San Jose, Calif.-based biotechnology incubator.
City leaders also coaxed Bexar County, UT Health, the University of Texas at San Antonio, and the Texas Research and Technology Foundation into kicking in another $4 million, for a grand total of $10 million.
Politicians and bureaucrats, almost as a rule, talk about “investing” taxpayers’ money when what they’re really doing is spending it. Investing sounds more purposeful and businessminded, implying that eventually there will be a tangible return on investment.
As in, we will invest in filling the potholes on your street. Your ROI will be not getting a flat tire.
In the case of InCube, city officials made an actual investment — in a high-risk industry about which they were nearly clueless.
In return for $10 million, the San Antonio Economic Development Corp. — a city-created nonprofit set up to oversee the 2010 contract with InCube — received a fistful of “founders shares” in startups the company committed to operate here.
The untrained eye
Under the agreement, the city received 5 percent of each company’s first batch of stock.
The big idea behind the deal with InCube, founded and led by the highly regarded inventor Mir Imran, was that the company would bring the spark of innovation and entrepreneurship to San Antonio’s biotech industry. InCube would show us how it was done through collaborations with local universities, research institutes and other companies.
In other words, the city made a wobbly investment decision, mashing together fuzzy, hard-tomeasure policy goals with an eagerness to invest in a deal that looked — to the untrained eye — like a reasonably safe bet.
The agreement reflected that muddle of public-minded and profit-seeking motives.
Just imagine a venture capitalist saying to InCube: “I’ll invest in you, but you must commit to two things: creating 50 jobs that pay at least
$50,000 and relocating or launching eight of your startups in my hometown.” Would never
happen. That would be a violation of the VC rule of keeping startups as lean and cost-contained as possible before scaling up.
Yet those two requirements were in the contract that expired last year. And those are the ones InCube failed to meet.
The last time I wrote about this agreement, in late July, the city’s economic development department and SAEDC were conducting a post-mortem.
They recently completed the performance review.
InCube generated 44 jobs in 10 years and set up five startups in San Antonio, three short of what the company had agreed to, according to Assistant City Manager Alex Lopez, who oversees the city’s economic development department.
InCube relocated three of its portfolio companies — Corhythm, Neurolink and Fe3 Medical — to San Antonio in 2010. By mid-2013, it had launched two others here, Theracle and iBridge Medical.
The original agreement required only five InCube startups to call San Antonio home. It was supposed to expire in 2015. But as InCube struggled to meet its jobs goal, the city cut the company a break; City Council approved a five-year contract extension in 2015, giving it more time to make jobs.
It wasn’t an out-and-out gift to InCube, entirely. The city tacked on another three startups the company had to operate in San Antonio, for a new total of eight.
So, what’s the price the company will pay for failing to make good on those two commitments?
On the jobs front, InCube has to pay a penalty of $300,000, or $50,000 for each of the six jobs it fell short of its target, as spelled out in the contract.
For coming up short on the number of startups, InCube will hand over more stock, increasing the SAEDC’s ownership of InCube’s existing San Antonio startups, according to Lopez.
That penalty was also defined in the contract.
The bitter end
The only way the city — and the four other public and nonprofit investors brought along for the ride, including the county and UTSA — will recoup its investment is if any of the InCube companies are acquired or go public.
In 2020, 78 biotech firms underwent initial public offerings in the U.S., “the most ever in a given year and a 77 percent increase from 2019,” reported BDO, an international auditing and tax advisory firm.
If that sounds impressive and promising, consider that the estimated overall number of
U.S. biotechs is about 7,000.
The number of success stories in this industry is small. Most companies don’t celebrate IPOs. Most struggle to survive, and many just fail.
Maybe one or two of the InCube companies SAEDC owns shares in will be winners. But the odds are against it.
Lopez, the assistant city manager, told me last week that some good came from the contract. InCube’s San Antonio startups have collaborated with local industry partners and brought in interns to teach them how the private sector does research and development.
All in all, InCube met most of its obligations under the contract, including the requirement that Imran spend a chunk of his time in San Antonio every month.
“I think the idea of creating this biotech incubator in San Antonio was novel, and we did receive benefits from it,” Lopez said.
Nevertheless, she added:
“Any future projects of this kind we would have to look at further — there’s definitely lessons learned from this experience.”
In my view, the only lesson that matters is this: Never do another wasteful deal like this again. Never, ever.