Title	Equity Leasing:
Date:	10/20/2000
Author:	Dan Logan
Source:	Silicon 2.0

The Santa Barbara Technology Incubator has made quite a splash in its short life. Now Dennis Cagan is throwing another boulder into the pond by promising a quarter-million square feet of office space will be available to startups in exchange for stock in their companies.

Since May 1, the incubator has processed 250 business plans and made four investments. It has 13 employees. But SBTi is looking ahead by planning the launch of four service companies-one specializing in recruiting, another in property management, the others in public relations and investment banking.

The creation of these service companies builds on SBTi's primary vision, which is to provide the office space most high-tech startups need; to provide that space fully outfitted with furniture, computers and broadband access; and to get those startups up and functioning in their new space within a very short time.

In its newest venture, SBTi, proposes to offer office space to a startup in return for a reduced monthly rent plus shares of stock in the company.

"We hope to gain equity, which will make us cash eventually," Cagan says. "We will put ourselves in a position to get equity from a broad range of companies."

Companies leasing space in the incubator will pay a fully burdened rate, including all the added services (receptionist, conference rooms, kitchen, Internet connectivity, phone systems, etc.), but they will pay part in cash and part in shares of stock.

For example, a lone entrepreneur might have 100 square feet of office space, which could cost $200 a month plus 200 shares of stock.

Cagan says this amounts to a premium for SBTi for the office space being fully equipped, occupant-ready, and having no long-term lease.

Cagan and Jim Acos, president of Santa Barbara Technology Properties, LLC, have different terms for their business model: "venture equity for services," "venture leasing," and "equity leasing." Whatever the terminology, the model is an unusual one.

Cagan says he hasn't turned up anything like it, anywhere, although news of some dot-coms having to fork over stock options to landlords in exchange for office space has been part of the Silicon Valley lore for some time.

Available office space is critical to the concept. The conventional wisdom holds there is no office space, or precious little anyway, available in the city of Santa Barbara.

"Everyone told me we'd never find space downtown," Cagan said. However, SBTi has 12,000 square feet in two buildings on Nopal and Edison streets, and by the time you read this, the company will have taken over 26,000 square feet on Gutierrez between Olive and Laguna.

Cagan said SBTi aims to have a combined 250,000 square feet next year.

While the SBTi crew may be demonstrating a canny ability to find space in Santa Barbara's locked-up commercial space market, the skeptics are out there.

"It's just so hard to be a landlord," said Steve Cushman, executive director of the Santa Barbara Region Chamber of Commerce, citing a litany of the time-tested pitfalls of leasing, including companies that go south owing several months rent, and the periods when the space isn't rented. "It will probably work in this kind of economy, [but] what happens when the economy softens?"

Cushman adds that the recovery from the recession of the early '90s didn't come until mid-'90s.

"The cycle is usually seven years," he said. "I think we're in year four, year five of the recovery." Cushman said he doubts whether skills and experience will be enough to ferret out the space SBTi would like to command, and then make that space consistently profitable.

He said he believes Cagan is underestimating the difficulties of being a landlord, but he doesn't underestimate Cagan's ability to sell the idea.

"[Dennis] is the greatest salesman," Cushman says. "You can't listen to him; you have to step back."

Cagan and Acos argue SBTi's management team has the skills and expertise in both high-tech and real estate that make it possible for them to tackle the market in a way others can't.

"I have a whole different model for looking at space than real estate people," Cagan said. He notes that the plan is going to demand a broader perspective and more flexibility than most landlords demonstrate.

The typical landlord wants to know you're stable, your credit references and customers. And he wants a five-year lease, Cagan said.

"Their view is typically leasing the whole space to one party," he said. SBTi's approach will be driven more by a startup's good idea and solid business plan than by its credit references.

"For us to be successful, we're going to have to have an intuitive sense of who to rent to," Cagan explained.

The SBTi team is banking on its ability to identify the future winners, and to be able to quickly cut loose the wannabes who begin missing their projections.

As part of its month-to-month lease agreements, SBTi will monitor the startup's progress against its business plan.

"We're right there; we're watching them every single day. They have to make their milestones," Cagan said.

Under this system, SBTi gets an early warning that the startup has hit the slippery slope; the incubator can pull out sooner rather than later and avoid taking a big hit on lost rent.

Will other landlords glom onto the equity-leasing model? Cagan and Acos don't think so.

"It's not necessarily intuitive for a real estate person to make that judgment [about high-tech startups]," Cagan said. He thinks most landlords will be scared off by the risk. Even if some take a shot at using the model, "Those few-the first time there's a hiccup, they'll go running backwards," he said.

By providing fully functional space and services to promising companies, Cagan and Acos believe they will help entrepreneurs spend less time on tasks that aren't critical to the startup's future success.

"You don't want the CEO running around town for one or two months, looking for space," Cagan said.

SBTi's plans don't stop with the City of Santa Barbara. Acos, who is tasked with finding the space that meets SBTI's needs, is looking for space from "…Carp to Goleta. Ideally, we'd have a site in each one of those cities," Acos said.

And while the team is focusing its efforts on its Santa Barbara core, they are also envisioning a virtual incubator that stretches from Thousand Oaks to San Luis Obispo.

The four professional service companies SBTi is forming will enhance the incubator's appeal to startups in the area and generate additional equity opportunities, they say.

"We're certainly going to charge for that, but it's going to be reasonable, given the alternative," Cagan said. Companies will be able pick and choose from SBTi's menu of professional services in the four key areas the SBTi team feels aren't being adequately addressed in the Santa Barbara area.

They'll be offering high-tech public relations, high-tech recruiting "bottom to top," and property management.

There also aren't many local venture capital firms, Cagan says, citing SBTi and Bertelsmann Ventures as the two primary firms, and SBTi is planning to license part of its company with the Securities and Exchange Commission and NASDAQ to create an investment bank.

If the services gambit is successful, the companies will be spun off.

Cagan said SBTi also aims to make its facilities flexible enough to enable easy reorganization within the space as companies grow or leave. SBTi will sustain the startup "up to and just past when they get venture capital," Cagan said, which is roughly when the company begins to require more than 5,000 square feet.

SBTi will be both physical and virtual in a mix that can almost immediately meet the entrepreneur's needs, whatever they are, Cagan promised. The incubator properties will be linked with a single phone system and have broadband access.

They will be the kind of space a high-tech startup wants for its prime assets and its employees: bright and cheery, with conference rooms, lunchrooms and even a game room, if desired.

A company could hire someone "way north or south" (in Ventura or Goleta, for example) and provide an office in the incubator nearest the employee. Cagan even sees SBTi serving as buffer space for growing companies of all sizes.

"They can hire people at the rate they need them and put them in our space until they've got their own room-as long as they're willing to give us equity," he says. Companies would be able to hire immediately, without having to spend much time worrying about coming up with functional space for the new employee.

First things first, however. SBTi expects to fill its 26,000 square feet of available space rapidly, and expects to have a waiting list by the end of October.