San Antonio Sticks to Growth Playbook, Despite Turndowns by Startups

San Antonio—There’s plenty of scrutiny of whether it’s worthwhile for governments to offer incentive packages that aim to attract businesses and the jobs they bring. Still, city and state leaders across the nation continue to do it, among other efforts to bolster their business communities.

Most arrangements aren’t gargantuan billion-dollar deals, like the tributes offered to Amazon for its proposed second headquarters. Officials in San Antonio, TX, and its surrounding Bexar County have for years promised cash, tax breaks, and other incentives to dozens of small businesses and large corporations—cumulatively worth tens of millions of dollars—often with the caveat that the businesses relocate to San Antonio, or at least bring in new jobs.

Xconomy reviewed city data this week. The main takeaway is that financial incentives have had mixed results in San Antonio, but local economic development officials still see them as a useful tool in their toolbox, as they try to lure and keep businesses here.

The city currently has 61 active agreements with startups such as Easy Expunctions and Pelican Therapeutics and giant corporations such as Microsoft, Toyota, and Hulu. (A reported $1.3 million cash grant to Hulu from the state of Texas surely helped out, too). San Antonio has distributed more than $15 million in grants and loans and has abated $44 million in taxes for 57 of those companies, according to the city’s economic development department. (About five of the companies are tech or life science startups; the rest are more traditional businesses. Four companies have agreed to deals but haven’t yet received any funding or tax abatement.)

Not all the proposed deals work out. As Xconomy reported Tuesday, Houston-based immunotherapy biotech Kiromic decided not to accept a $200,000 preferred equity investment offer from the San Antonio Economic Development Corporation, a business growth-focused nonprofit corporation created by the San Antonio city council in 2010. In addition to giving up an equity stake, Kiromic would have had to relocate its headquarters to San Antonio and create at least 20 jobs. The company still plans to have a presence in the Alamo City, according to the economic development group, and it’s possible Kiromic could choose to move its headquarters here for some other reason. (Kiromic officials aren’t making themselves available for comment until next week.)

Last year, a deal with a more prominent company had a sudden end: Dialpad, a San Francisco-based software startup, closed a satellite office it had opened in San Antonio only one year earlier. A few months after the closure, it opened a new office in Austin, about 90 miles north, in central Texas.

Dialpad, which announced a $50 million Series D round of venture funding two days ago, had accepted $175,000 in incentives from the city and county in 2016 to open the San Antonio office, where it intended to create a few dozen jobs. By August 2017, the company had filed paperwork in Bexar County to terminate the deal and repay the money it received.

These losses haven’t caused San Antonio economic development officials to rip up their playbook. Rene Dominguez, the director of the city’s economic development department, said the fact that Dialpad left—and that other companies such as Kiromic have turned down incentive packages, whether or not it creates a presence in San Antonio—doesn’t cause him or his colleagues to rethink the financial incentives or other efforts they make to attract and retain businesses, he said.

The fact that Austin is so close by, and could possibly draw more business away from San Antonio, is something Dominguez said he does not worry about. Instead, he said he focuses on his goals of attracting businesses that operate in sectors San Antonio has targeted, including cybersecurity, healthcare, and energy.

“It’s a great regional asset to have Austin and San Antonio next to each other,” Dominguez said. “What we try to focus on is those subsectors and industries that we have a competitive advantage in. We want to continue to build off of those, and focus on what we do well.”

Austin may be the smaller city of the two, but it is more widely recognized for its tech community, with troves of early-stage businesses, co-working spaces, offices for tech giants such as IBM and Facebook, and events like South by Southwest. San Antonio has a growing startup scene in its own right, with multiple co-working spaces and tech training programs, a cybersecurity hub at Port San Antonio, and a stronger life sciences cluster. In 2017, San Antonio came in 14th place out of the top 40 metro areas in the annual Kauffman Index, a closely watched national measure of entrepreneurship growth; Austin ranked second.

The two cities have exchanged companies before, and economic incentives in San Antonio have indeed drawn companies south from Austin. Two examples, among others, are cancer immunotherapy biotech Pelican Therapeutics and Easy Expunctions, which has an automated method of expunging digitized criminal records. Both moved to San Antonio after making deals with the city government. Easy Expunctions has brought in some seed money, and Pelican, which is owned by Durham, NC-based Heat Biologics (NASDAQ: HTBX), has raised at least $15 million in other state grant funding.

Neither are as large as Dialpad, which sells various conference calling products and services to businesses, including the voice and video calling tool UberConference. Dialpad didn’t say much about its decision to depart San Antonio, other than that it would not be able to meet the local hiring requirements it had agreed to, according to its termination agreement.

In a news release announcing its Austin office, Dialpad gave two basic reasons for opening in Austin: The city’s vibrant tech scene has a skilled workforce that’s “similar to Silicon Valley’s,” and Dialpad hired a chief revenue officer who is from Austin. It was his decision to move the sales team there, a Dialpad spokesperson wrote in an e-mail to Xconomy. The company has about 40 people on the Austin staff, including employees from the San Antonio office who now work remotely, the spokesperson said. Others moved to Austin.

Dialpad liked San Antonio, the spokesperson said. In response to a question about why it would give up $175,000 in San Antonio, she referred to a comment Dialpad gave to the San Antonio Business Journal last year: Dialpad is focused on mid-sized businesses and large enterprises, and Austin has “a strong enterprise market opportunity.”

That doesn’t leave much explanation for San Antonio officials. The Dialpad chief revenue officer’s relationship to Austin aside, a talented workforce and business opportunities are two things that San Antonio touts as strengths of its economy.

Dominguez, the San Antonio economic development official, attributes the departure of Dialpad to a one-off situation, where the company left for specific reasons—reasons that he said he only heard secondarily because he didn’t speak with Dialpad when it left. But he contends the decision wasn’t a knock on what San Antonio has to offer in terms of talent, business assets, or infrastructure. The city tried to keep Dialpad (and its higher-wage jobs) with the incentives and other support, like offering resources for the local workforce and making permitting and other business processes easy, Dominguez said.

While $175,000 in cash and tax incentives is certainly attractive for any company, it obviously wasn’t the most consequential thing for a business like Dialpad, which has now raised $120 million from investors since its founding in 2011.

Dialpad’s most recent venture funding round won’t move the needle much in the Austin market: companies there raised more than $824 million in the first half of 2018, part of a national venture capital surge that could see the most money invested since the dot-com era. Hypothetically speaking, Dialpad’s $50 million round would have caused a big uptick in San Antonio’s venture capital numbers had the company remained: Venture-based businesses in the city raised a little more than $66 million during the first six months of the year, according to data from PitchBook and the National Venture Capital Association.

Local economic development officials are still actively trying to draw in other tech companies. In June, The Hut Group, a U.K.-based e-commerce retailer that is reportedly valued at about 2.5 billion pounds ($3.34 billion), is considering an offer of a $250,000 grant from the county and $500,000 in other incentives from the city. The company is still negotiating the deal with the local governments.

Beyond financial incentives, continuing to develop the skills of the local tech workforce is a key goal for Dominguez and his colleagues. The local business and education communities have been working on that. The University of Texas at San Antonio has unveiled programs that aim to train people for IT jobs, in particular cybersecurity. Meanwhile, local businesses like coding school Codeup and privately owned cloud computing business Rackspace are providing additional workforce training.

“A big part of the decision-making process for a lot of companies right now is a strong, stable workforce, and I think that’s exactly what San Antonio has,” Dominguez said.

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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