Submitted in Partial Fulfillment for the Degree of Master of Science in Urban Planning

ECONOMIC DEVELOPMENT POLICIES THROUGH BUSINESS INCUBATION AND CO-WORKING: A STUDY OF SAN FRANCISCO AND NEW YORK CITY

JORDAN HARRISON SALINGER

Submitted in partial fulfillment for the degree of Master of Science in Urban Planning

Graduate School of Architecture,

Planning and Preservation

May 2013

RESEARCH QUESTION

Why has the New York City government used publicly-funded incubators and co-working spacesas industrial policy while San Francisco’s has not? Can targeting of certain industries and geographies help revitalize certain neighborhoods and ensure a diverse and stable industry mix?

ABSTRACT

The growth of business incubators and co-working spaces since 1980 has been incredibly rapid, with nearly 1,400 facilities currently operating in the United States. San Francisco and New York lead the way, with public and privately-run facilities fueling business growth.Through my research, which includes 15 structured open-ended interviews, and geographic information systems analysis, I hope to determine if and how industrial plans and targeting should be carried out, how the governmental policies are different in each of the cities as it relates to the public funding of incubators, and how the impacts of industrial targeting and land use strategies impact start-up web-based software firms.

INTRODUCTION

To facilitate entrepreneurship and promote the long-term economic growth of a city, should municipal governments create explicit industrial policies and plans for business incubation?

Given the nascent state of tech growth in New York, the Mayor’s office and the New York Economic Development Corporation (NYCEDC) recognized in 2008 that a proactive approach to economic development was necessary. By funding incubators, New York’s municipal government has the opportunity to decide which industries to support, and which neighborhoods to target. Has this led to a strategy that equally targets communities in the five boroughs? Are there demographic realities that make this an impossible goal?

Business incubation has only recently become part of the city’s economic development strategy. In March of 2012, Mayor Bloomberg announced a $22 million fund, the New York City Entrepreneurial Fund, which received $3 million from the NYCEDC and is to be managed by FirstMark Capital. This fund will be used to help support incubator services and facilities throughout the city, while also providing start-up capital for entrepreneurs and early stage start-ups. In total, the city operates 10 incubators, all of which have opened within the last five years, which support 550 businesses at any given time. The New York City Economic Development Corporation has made individual investments in incubator spaces ranging up to $250,000, and the total city investment to date has been $3.5 million. Incubators range from sector specific, i.e. with only bio-tech clients, to more broadly focused co-working spaces. Plans are in place for four new public facilities, at which time all boroughs will have at least one incubator.

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Recent Industrial Policy in NYC / Cost / Scope
Small Business Manufacturing Fund / 8 Million / Reactivation, renovation and subdivision of privately held vacant industrial loft building/space
City Council Small Manufacturing Investment Fund / 2 Million / Create Step Up Space for food incubators
Food Infrastructure / 112.5 Million / Redevelopment of a new market facility for the Hunts Point Terminal Produce Cooperative in the Bronx
Brooklyn Army Terminal / 9.6 Million / The renovation and subdivision of larger floor plate spaces at Brooklyn Army Terminal. Approximately 300,000 square feet of large vacant units in Building B at Brooklyn Army Terminal will be subdivided into smaller units, ranging from 2,500 to 10,000 square feet.
Business Improvement Districts / 300 Thousand / The creation of approximately three new industrial Business Improvement Districts (BIDs) within Industrial Business Zones and Ombudsman areas.
10,000 Small Business Initiative / 10 Million* (Partnership with Goldman Sachs) / Fund to provide loans to food entrepreneurs to grow their business in New York City
New York City Entrepreneurial Fund / 22 Million* (Partnership with FirstMark Capital) / Provide promising New York City-based technology startup companies with early-stage capital
Engineering and Applied Sciences Campus / $100 Million / Grant funding for the building and implementation of an applied science and engineering educational facility on Roosevelt Island.
Business Incubation Program / 3.5 Million / Affordable and community oriented workspaces to support startup businesses.

As New York has emerged as a new player in the tech and entrepreneurship world, privately-run spaces have also flooded the market. In 2008, New Work City was launched as the first co-working space in the city. As of 2013, New York currently supports 46 co-working spaces, 30 incubators, and 14 accelerators.[1]Of these spaces, more than ¾ have occupancy rates at or above 90%.

In terms of venture capital spent on tech start-ups, New York only trails California. According to venture capital expert Vivek Wadhwa, “In 2006, Iwouldn'thave put New York anywhere on the map. If there is any second to Silicon Valley, it’s now New York, not Boston.” Wadhwa’s claim is supported by a 32% increase in venture capital deals between 2007-2011. During this same period, New England experienced a 14% decrease. See figure below.

New York’s ascent into relevancy within the new tech firms can’t simply be attributed to incubator spaces, but their role should not be underestimated. In discussions with tech firms, this thesis will assess whetherNew York has been successful in creating anentrepreneurial community.Has this method of economic development been successful in changing the image for entrepreneurs of New York City from a finance and fashion-driven town, to an area that supports techstart-ups? By providing the bridge to venture capital firms,have incubators have really proven their worth to entrepreneurs?

Additionally, what should these incubation strategies be compared against? Traditionally, cities have used industrial policy in the form of business attraction and retention strategies, providing tax breaks, infrastructure, and other services to keep and recruit middle and large size firms. How valuable are the recent efforts of the city to create new firms?

While the Bay Area has long been considered at the forefront of technological innovation, the city of San Francisco was never the epicenter for technology jobs or start-ups. Silicon Valley, with its cheaper real estate and proximity to venture capital, universities and research facilities, claimed most of the employment on sprawling campuses in suburban environments. In a very literal sense, Silicon Valley was naturally quite good at providing incubator-like services to new start-ups, allowing them to survive and expand.

For the first time in almost a century, large American cities are growing at rate faster than the surrounding suburbs.[2] This is particularly true for the demographic of 18-29 year olds, many of whom are looking to start their own companies or join start-ups.[3]Because firms want to locate close to their workers, San Francisco has become a magnet for start-up growth. Using a range of economic development measures, including creating a payroll tax exemption zone, improving communication between the Mayor’s office and the tech community, and passing changes to the tax code,the City of San Francisco has been working to keep the most recent wave of start-ups in the city. These sort of business retention efforts have been successful, with tech giants like Twitter and Zendesk remaining within the city limits, while also keeping a variety of fast-growing yet smaller firms around as well.

In regards to business creation, their efforts are less concrete than those of New York. San Francisco does not financially support incubator spaces, and while they do engage in partnerships, their roles in the partnerships are less defined. According to government officials in San Francisco, their role is providing the proper climate to allow success to happen across the board. This, they offer, is a result of both their economic

development policies, and the tech ecosystem that has been built. People seek out San Francisco for this culture, thus leading to job creation. Would a more direct approach to business creation, the government sponsoring of incubator spaces, provide additional benefits for the city?

The above chart shows the industrial policies of tax abatements and spatially targeted strategies, and the economic development initiatives of incubation and co-working.

METHODOLOGY

Economic Development Initiatives / New York / San Francisco
Publicly Funded Incubators / Yes / No
Tax Abatements / Yes / Yes
Spatially Targeted Strategies / Yes / Yes
Incubator/ Co-working Spaces / 100 / ?

In this study I use structured, open-ended interviews, and GIS analysis of the incubator and co-working facilities in the NYC metropolitan area. For this project I completed interviews with members of governmental institutions who help to support the growth and development of incubator spaces. I also interviewed management of these facilities, including incubators, accelerators, and co-working spaces. Additionally, I interviewed the firms which operate out of these facilities, or have taken advantage of other city-led economic development initiatives. In total, I conducted 15 interviews, each lasting between 30 minutes and one hour.For this research, I will use the term “tech” as a way to describe firms that are seven years old or younger, and provide software services on a web-based platform. Classification of these new firms is particularly challenging given the lack of consensus both within the industry, and by leaders who create policy that influence them, in regards to a uniform sector terminology.

This methodology was preferred because of how recent a phenomenon incubation and co-working space is. Collecting data on the number of facilities not only would have been challenging to collect, but ultimately it would not have told the full story. In 2009 New York had one co-working space. Now, New York has a hundred. With such dramatic growth, capturing figures from a particular year would not have been the most revealing. Instead, qualitative research, including structured interviews with several open-ended questions, allowed for a level of storytelling that is more revealing.

My questions did, however, have a very specific research goal in mind. In particular I was interested in what type of industries were attracted to these different facilities. I also asked questions about spatial targeting, funding, and competition, and larger economic development goals.

Interviewee / Employer / Title / Location
Egon Terplan / SPUR (San Francisco Planning and Urban Research) / Economic Development/ Regional Planning Director / San Francisco
Shannon Spanhake / Mayors Office of Civic Innovation / Deputy Director / San Francisco
Jeremy Wallenberg / SF CITI / Director of External Affairs / San Francisco
Jeremy Neuner / NextSpace / Founder and CEO / San Francisco
Laurel Barsotti / Office of Economic and Workforce Innovation / Business Development Manager (Tech Sector) / San Francisco
Todd Elsberg / Rocketspace / Founder and CEO / San Francisco
Tiffany Apczynski / Zendesk / Community Relations and PR Manager / San Francisco
Daria Siegel / Hive at 55/ Alliance for Downtown New York / Assistant Vice President / New York
Cheni Yerushalmi / Bronx Sunshine Business Incubator / Founder and CEO / New York
Anonymous / New York City Economic Development Corporation / Director Entrepreneurship Initiatives / New York
Jonathan Vigiano / OkFocus / Founder and CEO / New York
Satjot Sawhney / Tapfame / Founder and CEO / NewYork/San Francisco
Micah Kotch / NYU Poly / Executive Director / New York
Ellyn Parker / Office of Economic and Workforce Innovation / Creative Strategist / San Francisco

GIS ANALYSIS

To supplement my interviews I also be performed Geographic Information Systems (GIS) analysis of incubator spaces in New York City. To understand the landscape of incubators in the cities, I first separate the incubator spaces by their structure. Are they publicly or privately funded? Operated by a research institution? Or do they simply provide space and coffee service, and thus are only considered co-working spaces?

This analysis will help me understand the spatial arrangement of these spaces as it relates to a broader incubator strategy. How do public officials choose where to locate incubators? Do clusters exist? If so, why are they focusing on incubating particular parts of the city while neglecting others?

LITERATURE REVIEW

GOVERNMENT INVOLVEMENT

The debate surrounding incubators also involves the fundamental question of whether and how government should be involved in business creation. Bill Gates, the founder of Microsoft, once claimed, “There isn’t an industry in America that is more creative, more alive and more competitive. And the amazing thing is that all this happened without any government involvement.”Fred Block, a professor of sociology at the University of California, Berkeley, disagrees with this premise entirely. In fact, he cites U.S. industrial policy as accelerating the rise of the computer software and electronics industries. According to Block,

“Historians recognize that ARPA played an indispensable role in advancing the computer and microelectronics industry in the U.S. The agency funded the initial creation of computer science departments in major universities, financed many of the most important hardware and software innovators, and its ARPAnet ultimately became the Internet.”[4]

Opinions like that of Bill Gates remain prevalent as part of the ethos of the strength of American entrepreneurship. In Alice Amsden’s Asia’s Next Giant, South Korea and Late Industrialization, she writes about the United States, “Ignoring its own history, the United States credits the free market with having developed the productive forces.”[5]

Another successful government-funded industrial policy has been the Small Business Innovation Research Program. Qualcomm, the telecommunications giant, is just one of the many successful companies to emerge from that government-funded research incubator.

Amsden explains the successful industrial expansion of Korea, a country in which the government made “most of the pivotal investment decisions.”[6] This included nationalizing of banks and offering significant subsidies, creating a protectionist environment. And while this level of government involvement is not what will be investigated, it is still useful to understanding what types of impacts can occur.

In the first twenty-five years of Korean industrial expansion, “long‐term credit was been allocated by the government to selected firms at negative real interest rates in order to stimulate specific industries.”[7] Amsden explains this as the government picking “wrong” rates, rates lower than were available domestically, in order to protect certain desired markets.

During the first years of government intervention, however, the Korean government focused their investments on large firms, neglecting small and medium size firms. “In the early years of Korea’s drive to industrialization, however, most SME’s (small and medium size enterprises) barely survived as petty traditional firms. In contrast to the governments heavy involvement in promoting and supporting larger firms, SME’s were largely neglected, especially in the 1960’s and 1970’s.”[8] When doing a comparison with SME’s in Japan and Taiwan, SME’s in Korea represented one-half of the shares of manufacturing employment. In the 1980’s, this policy shifted, and banks were obligated by the government to earmark a certain percentage of loans for SME’s. Additionally, “the government also took initiative in promoting the venture-capital industry and established several SME-related infrastructures such as technical extension agencies and training institutions.”[9] These sort of investments had a significant impact, as the SME share in manufacturing employment from 1976 to 1988 rose from 37 to 51 percent.

There are also notable examples of where government assistance has had negative impacts on certain industries, particular firms, and even the spatial landscape. In 1999, the Building on Information Strengths (BITS) program was launched in Australia. This program was launched with $158 million in federal funding dedicated to “promote innovation and commercial success in the information industries by encouraging the creation and growth of new high technology firms.”[10] The focal point of this project was the creation of 11 incubator sites dedicated to assist small and medium firms in the information and telecommunications sectors. From the start BITS attracted severe criticism, due in part to the relatively small share of money that went to the companies. “One example was the incubator operated by Allen and Buckenridge Seed Stage Ventures, where ultimately a mere 31 percent of the BITS funding went to the start- ups.”[11]

This program also limited the flexibility of the firms, by limiting their ability to shop for the best service providers. “Instead of finding a specialist lawyer to negotiate a licensing deal, for instance they were forced by the incubators to use the in-house counsel (for whose services the incubator management charged a substantial markup). The quality of the advice often did not compare with that offered by more experienced lawyers and accountants in private practice.”[12] Not all of the 11 incubators forced their clients to pay for these overpriced and underperforming services, but those who did were certainly at a competitive disadvantage. Incubators like InQbator and BlueFire, which allowed firms flexibility, received much of the funding in the second round of funding, $36 million dollars, which arrived in 2004.

INDUSTRIAL TARGETING

One of the reasons that both San Francisco and New York have sought to retain and create tech and bio-tech companies is that both are high-growth industries. “Gazelles,” referring to companies which grow at an annual rate of 15 to 20 percent in revenue or jobs per year, are very rare, accounting for less than five percent of all US businesses.[13]This small set of businesses, however, “create a majority of net new jobs in the American economy and generate a high proportion of major innovations.”[14]Just the fastest growing 1% of companies are responsible for nearly 40% of new jobs each year.[15]Start-ups have typically created three million net jobs every year, while all other existing companies combined to lose roughly one million per year.[16]There is also a direct relationship between a country’s per capita GDP and the level of entrepreneurial activity.[17]And while predicting which company may become a Gazelle is almost impossible, it is not impossible to predict which industries produce the largest number of Gazelles.According to the Bureau of Labor Statistics, “Employment in computer systems design and related services is expected to increase by 47 percent, driven by sophisticated computer network and mobile technologies,”[18] between 2010-2020.