Despite downsizings by some larger tech firms, interviews and data suggest that San Francisco will likely remain a premier hub for early-stage entrepreneurs
San Francisco and Silicon Valley recorded 2,500 venture capital deals in 2020, a likely record despite the pandemic, and hundreds of new startups were formed in the City
San Francisco startup founders told Public Comment that the concentration of capital, talent and 'serendipity' outweighs the City's downsides for the time being
Bay Area VCs have raised an average of $34 billion in each of the past three years, dwarfing the amount raised in any other region, according to Pitchbook
Although they were outweighed by people moving out, an analysis of postal records shows that as many as 40,000 customers moved to San Francisco between March and November 2020
Qasim Salam was running out of time and money.
The tech startup that he founded to help companies track their engineers’ performance wasn’t catching on. He only had enough money in the bank to pay his employees for 30 more days.
That’s when, at the beginning of last year, he decided to email Marty Ringlein, who he had met at an invite-only poker game in San Francisco for tech founders. The timing of the email turned out to be just right. Salam had a team of engineers, and Ringlein had a friend whose company needed engineering help, fast.
The idea for Salam’s current startup, Remotebase, was born from that introduction. Remotebase, which connects companies with its Pakistan-based engineers on a contract basis, has grown its revenue steadily each month since it started last April and in February, Salam closed a $1.4 million seed round with Ringlein, the poker friend, as one of the investors.
“Yes, Miami is getting popular and Austin’s getting popular,” Salam said. “But for entrepreneurs, San Francisco still offers an ecosystem that’s better than both of those places combined.”
It’s a sentiment that was echoed by almost all of the 10 startup founders who spoke with Public Comment—while starting a company in San Francisco may not make sense on paper from cost of doing business perspective, the concentration of talented people, out-of-the-box thinkers, mentors, and potential investors still outweighs the downsides for many, even during a pandemic when most interactions have gone virtual. And while the next billion-dollar company may not build a massive headquarters or require future employees to be in San Francisco, most of the founders we spoke to say they think it’s important that they themselves are in the City. With rents falling, some are seizing the opportunity to double down on the City—at least for now.
“The day I realize that living in San Francisco is like 0% value add, that's when I leave,” Salam said. “As long as it's adding value, as long as I'm meeting people like Marty, I’m still going to stay.”
Even before the pandemic, there were signs that San Francisco was losing its luster as a place to run a large tech company. Exorbitant housing costs, an inconsistent tax structure and seeming hostility on the part of some policymakers have been “an increasing concern year over year,” said Jennifer Stojkovic, executive director at sf.citi, a tech trade association in San Francisco.
“When the pandemic hit, it reached a breaking point,” she said. “San Francisco has been a very, very expensive place to do business for a long time, and it has gotten a fair bit worse in the past few years...how are you supposed to grow in a city that’s made it clear you’re not necessarily welcome by some city leadership?”
Over the years, that sense of unwelcomeness has been borne out in everything from protests of company shuttles to efforts to tightly regulate e-scooters, delivery robots, facial recognition systems and other emerging technology. In November 2020, San Francisco voters approved several new taxes, including Proposition F, an overhaul of the City’s business tax code that eliminates the payroll tax in favor of steep gross receipts tax increases on tech and biotech firms; and Proposition L, known as the “CEO Tax,” that increases gross receipts on companies with disproportionately high executive pay. Collectively, these and other tax measures proposed or enacted in recent years have been viewed by some in tech as a rebuke of the industry.
The City’s mercurial tax code makes it difficult for companies to plan, added Stojkovic.
“We’ve been on the side of taxes, and against taxes over the years,” she added. “But there’s a new tax on the ballot every election...if you’re a startup and need to forecast your runaway, you can’t have new tax bills every year. Why can’t we commit to one citywide tax?”
It’s unknown what the total impact of these new taxes will be. A report from San Francisco’s budget office forecast that Prop F could incentivize jobs in less-taxed areas like manufacturing, but not necessarily in the tech sector. Bay Area Council, a business group that opposed the tax overhaul, said that while the tax increases may not be a big deal for young startups with little to no sales, growth-seeking startups expecting a big jump in revenue may seek to expand elsewhere: “The issue is still the overall message that these taxes convey,” said Rufus Jeffries, spokesperson for Bay Area Council.
For now, tax concerns aren’t worrying Nikolas Huebecker. The 18-year-old co-founder of Quinn (a chat-based personal assistant app), said the allure of San Francisco—with its big thinkers and access to venture capital—hasn’t faded for him amid the recent exodus when tens of thousands of households left the city between March and November of last year.
“It’s like you could walk into a Philz and be like, ‘Y’all I’m raising a Series A.’ And someone will write you a million dollar check,” Huebecker said, who moved to San Francisco last June from his hometown of Atlanta. “That's the ridiculous explanation of it, but it's just like, there are so many insane people here and I don’t think it’s reached its maxima yet.”
Huebecker lives in a house (or, more accurately, two apartments stacked on top of each other) in the Polk Gulch area with fourteen others who consider themselves a part of the “Gen Z Mafia”—a network young tech entrepreneurs who derived their name from the famed PayPal Mafia, comprised of early PayPal employees like Elon Musk, Peter Thiel, Reid Hoffman and Keith Rabois. The house on Washington Street is home to six startups, including the assistant app Quinn. Huebecker says it’s just one of six startup houses in the city that he knows about.
“As much as people are saying tech is leaving SF, like it’s not. From what I see it’s a lot of older people who have been wanting a reason to leave for a while,” Huebecker said. “Maybe that’s my young person's perspective, or whatever you want to call it. But at the same time, I know more people moving to the city than I do leaving.”
An analysis of USPS records by Public Comment found that as many as 40,000 postal customers relocated to San Francisco between March and November of 2020, although the new arrivals were well outweighed by those moving out.
Entrepreneur Tiago Sada, who came to San Francisco in January from Mexico City, is among those new arrivals to San Francisco. So far, he’s been couchsurfing at his friends’ apartments, taking walks with VCs, and planning a new startup in the crypto space. Although investors don’t require face-to-face meetings, they “tend to go a lot better when they’re in person,” Sada said. And despite the high-profile departures of investors like Keith Rabois, who recently announced a move to Miami, the Bay Area still boasts the greatest density of venture capital of any region by far.
A recent report by Pitchbook illustrates the staying power of the Bay Area’s venture ecosystem. San Francisco and Silicon Valley recorded 2,500 venture capital deals in 2020, a likely record high despite the pandemic, and “dry powder”—capital yet to be deployed—remains heavily concentrated here. Bay Area VCs have raised an average of $34 billion in each of the past three years, a figure orders of magnitude higher than any other region, according to Pitchbook, and Stanford and University of California at Berkeley produce more entrepreneurs than any other two institutions in the world. Crunchbase data shows that 356 startups were founded in the city of San Francisco last year, though the true number is likely much higher given delays in reporting.
“The Bay Area will remain the center of venture if for no other reason that it is simply entrenched itself as such,” said Kyle Stanford, an analyst at PitchBook. “When in-person meetings are able to take place, we do expect these to carry a high value to investors, just as they had before the pandemic.”
A similar dynamic applies to co-founders, especially in the early stages when tinkering and iterations are constant. Stan Chang, who helped start the security-focused startup SafeBase with two of his classmates at Harvard Business School, moved from Boston to San Francisco in October 2020 so he could live in the same apartment as one of his co-founders.
“We tried to make it over Zoom, but it didn’t feel the same,” Chang said. “When I moved into the house, we got a whiteboard and things felt a bit more normal. I can just walk down the hallway, or at the dining table we can chat about something we’re working on and it’s less effort [than hopping on a video call].” Chang says they’ve been meeting once a week in the backyard of their third co-founder’s house for brainstorming sessions as well.
“At an early stage startup, you kinda yearn for that ‘spark,’” Chang said.
For some entrepreneurs, the pandemic created a window of opportunity to gain footing in the City that might have otherwise been too costly or difficult. As tech giants like Dropbox, Yelp and Pinterest shed space, office vacancies climbed to 16.7% citywide by the end of 2020, according to Cushman & Wakefield, and asking rents plunged. Seeing a need for in-person work eventually, Scott Patterson opted to snap up an office for his startup, Tumble, which outfits multi-unit buildings with laundry services.
“We have a manufacturing part of our business, and a design part— some things just work better in person,” said Patterson. “Anything that’s collaborative is just really difficult to do virtually.”
Others noted that the exodus from San Francisco, if temporary, has made other necessary services easier to access. Valerie Coffman, co-founder of the data company Swayable, said that the daycare across the street from home that once had an “epic waitlist” suddenly had openings for both of her kids, making it easier to remain in the City while growing her business.
As for where they’ll hire future employees, and whether they’ll build out a big headquarters in San Francisco, that’s an open question for most.
In January, Initialized Capital partner Kim-Mai Cutler released survey data from around 90 companies in her firm's portfolio that found only 26% planned to have a primary office once the pandemic passed. Thirty-six percent said they would favor going totally remote, while 37% said they’d move to a “hub and spoke” approach, with smaller offices scattered across multiple geographies.
And while 42% of respondents to the Initialized survey said if they were to start a company today, they’d do so remotely, the second top choice for that question was San Francisco at 28%.
Despite rent drops, San Francisco remains the most unaffordable housing market in the country, and costs of living and doing business still loom large for many.
Marie Fiorita, who started an interior design consultancy, Fiorita Grant Studio, last September, says she thinks about the cost of rent almost every day: “Especially this year, is it worth it to be here?” Fiorita asked. Ultimately, the answer was yes, due to the proximity to top design stores and high-end clientele willing to spend money on trendy updates to their homes, like redesigning rooms to look good on Zoom calls.
Huebecker, the teenage founder, says he loves the “serendipity” of San Francisco, where he can tweet about something and end up grabbing coffee with someone with interest or expertise on the topic. Lately, as the city has started to open back up, he’s been going to more socially distanced hangouts in parks with “super smart, super intelligent people.”
“There's nowhere else in the world, or that I've ever seen in the world, where you just kind of get to hang out with really insane people doing really crazy things,” Huebecker said. “It’s kind of like a rite of passage to come to SF.”
