's Pitch to Startups

CEO Marc Benioff is opening an incubator to encourage software companies to develop complementary applications for AppExchange

Workers stand on ladders carefully positioning a company sign above a row of cubicles. A woman walks by carrying a lava lamp destined for the office game room, already littered with beanbag chairs and big blue exercise balls. No, it's not the latest Silicon Valley startup. It's more than two dozen of them, crammed under one roof at the Valley's northern edge in San Mateo, Calif.

They're all taking part in yet another grand experiment by Marc Benioff, the high-profile chief executive of online customer management software provider (CRM). Benioff aims to catapult his company beyond customer management to make it the hub of what he calls on-demand business services—essentially, a bid to help customers run their businesses entirely online.

But he knows he can't do that all by himself. So he's encouraging outside startups to develop online software that complements his company's own. To do that, he's going well beyond the arm's-length practices—such as offering limited access to programming interfaces and holding software developer conferences—of most software companies.

Shaking Off a Bad Rep

On Apr. 24, Benioff will officially open Salesforce's first company incubator, welcoming 32 mostly startup companies, plus a few established partners that want satellite offices. They're all creating applications for Salesforce's AppExchange, a directory of online business services that work with Salesforce software, such as programs to run e-mail campaign programs and customer surveys. "We need to be a little closer to these companies," says Benioff. "We need to remove as much of the risk from their businesses as we can."

It's a rather bold move to call the facility, a nondescript red-brick building that formerly housed Salesforce archrival Siebel Systems, an incubator. Incubators, which sought to turn ideas into companies more quickly by sharing facilities, management, and expertise under one roof, got a bad name after the first dot-com boom turned bust in 2001. The likes of Idealab and CMGI Ventures ran into trouble when many of their fledgling companies died.

But Benioff hopes to succeed by avoiding some of the pitfalls of those incubators. For one thing, Salesforce is not investing in these companies, only encouraging them to develop software for the AppExchange. It's also charging them $20,000 a year for a small space, on which Benioff figures he will break even. Despite the checkered past of incubators, Salesforce, which also maintains offices for some employees in the same building, may have little to lose with its effort.

Exchanging Water-Cooler Dialogue

Salesforce is offering more than office space and related services: It's holding biweekly colloquia on product management, on-demand technology, and the like. And startups can tap the knowledge of Salesforce folks who have offices in the same building.

It's early, but so far some startups that moved into the Salesforce incubator earlier this year seem happy with the arrangement. "I don't want to manage infrastructure," says Narinder Singh, co-founder of Appirio, a 12-person operation that helps companies adopt on-demand services such as Salesforce's and potentially Google's (GOOG) online office software. "We have a business to build, and I want 100% focus on that."

That said, adds Singh, whose company may move completely out of its San Francisco office into the incubator, "it's not so much for the physical space. It's all the other things." They include getting water-cooler dialogue with Salesforce people, learning from what other startups are doing, and even getting leads on potential recruits.

Pricey Real Estate

Others hope the incubator will help them move faster into new markets. "We're using the incubator as a bridge into the U.S. market," says Andrew Walker, founder and marketing director of Clicktools, a three-year-old British company whose services help companies do Web surveys. The company had a San Francisco office, but there, he says, "you never really had a place to bounce ideas off people."

Salesforce's San Mateo incubator is intended to be the first of many, from Silicon Valley to Tokyo, London, India, and possibly Singapore. Caryn Marooney of OutCast Communications, Salesforce's PR agency, notes that the first incubator is so popular that a second phase with more startups is scheduled to open in the same building in June. "I feel like we're building condos," she mutters.

Her aside, in fact, raises one concern about the incubator. Although the downside for Salesforce seems low, the company is incurring significant real estate costs. "At this scale, it could become a real estate business," notes Jeff Clavier, founder and managing partner of SoftTech VC, an angel investor in 20 companies. And in Silicon Valley and other hot high-tech areas, those costs have been rising considerably.

Meet Incubator 2.0

It's also possible that some companies attracted to the incubator will turn out to be those with weak products that couldn't cut it on their own. David Hornik, a general partner with the venture capital firm August Capital, thinks startups that don't develop the ability to manage all parts of their business often fail once they enter the real world. "Incubators can produce incomplete companies," he says.

With what might be called Incubator 2.0, Benioff is trying to pluck the best of not only incubators but also so-called co-working facilities, where independent companies can share office facilities, Internet access, and tips on how to run their businesses better (see, 2/26/07, "Where the Coffee Shop Meets the Cubicle"). Indeed, co-working is an emerging trend among tech startups, some of which are offering up space in their own offices to potential partners. And that model is more appealing to VCs as well. "It's like a Lamaze class," says Hornik.

The corporate wiki firm Socialtext, for instance, just took on more office space in Palo Alto, but isn't using it all yet. So it's offering some of it to software developers who will write open-source wiki software that supports Socialtext's and other companies' wiki software.

"Real estate is the leading cause of death for startups," notes Socialtext CEO Ross Mayfield. "This is sort of a commune for nerds." That's the vibe Salesforce will need to create if it wants to hatch its vision of a new software industry.

Before it's here, it's on the Bloomberg Terminal.