Moving On Up: Why Valley Start-ups Are Relocating to San Francisco
BY Eric Markowitz
Starting up? Don't head for the Valley. A culture shift is well under way, and San Francisco has become the new destination for Millennial entrepreneurs.
THEN AND NOW: The Warfield Theater brought vibrancy to Market Street in the 1920s, then witnessed the neighborhood's decay before a recent resurgence, no small thanks to the start-up boom.
The Warfield, the historic vaudeville theater turned music venue on Market Street in San Francisco, celebrated its 90th anniversary in 2012. During its glory days back in the 1920s, the stage hosted entertainers such as Charlie Chaplin, Rin Tin Tin, and Al Jolson. The theater's opening turned the area--now referred to as Mid-Market--into the city's cultural epicenter.
Over the years, though, the Warfield's surrounding neighborhood along Market Street saw a wave of crime, poverty, and neglect. It was a classic tale of urban decay. By the 1980s, office vacancy rates in the area hovered around 50%, and many landlords simply walked away from formerly lucrative commercial interests.
But recently, as tech start-ups have migrated north from more traditional office parks in Menlo Park and Palo Alto, these stretches of forlorn city streets, especially around Mid-Market, are seeing a revitalization.
"Tech companies are helping redo central Market Street--it used to be our Skid Row," San Francisco Mayor Ed Lee told a packed room at the TechCrunch Disrupt conference in September, drawing applause from the crowd. It's not just Mid-Market, either, Lee said: "San Francisco is the innovation capital of the world."
Twitter, Instagram, Zynga, and Airbnb are among the more notable companies that have recently set up shop in San Francisco, and Lee said the movement has had a significant economic impact. Last year, Lee said, the city experienced a 30% annual growth in technology jobs, which now number some 32,000 positions at 1,600 tech or start-up companies.
Lee has been a champion of start-ups and small business, and he's even offered some economic incentives for companies to stay--reducing the employee payroll tax, for starters. But many believe there are other outside factors at play.
"We ran out of space in the South Bay," says Jason Freedman, co-founder of 42Floors, a San Francisco-based start-up that runs an online database of available office space. "There's nothing in Palo Alto. It used to be that there was tons of space, and you could start a start-up there, and it was easy as people transitioned out of Stanford. But a big part of the movement is that they ran out of space. And San Francisco was there to collect them."
Another factor, Freedman says, is also important in understanding the shift. But it has less to do with physical real estate. As design has become a stronger focus at most consumer-facing start-ups, engineers with design sensibilities are the hottest commodity. They also, unsurprisingly, want to live in urban areas with an artistic vibe.
Chris Foley, a co-founder of Polaris, one of San Francisco's preeminent real estate consulting firms, agrees. "It's a cultural shift," he says. "San Francisco is full of creativity--it has art, great restaurants, and a scene. Plus, they can live a good lifestyle, not have a commute, and not be in a bland landscape of Silicon Valley."
And Freedman, who opened 42Floors in the city's SoMa neighborhood, says that finding a "cool" office space is an important consideration to attract start-up talent. "For our employees, the office is the second home," he says.
Last month, the mayor's office unveiled a San Francisco start-up map, which pinpoints the addresses of about 650 start-ups within the city limits. And in addition, the map lists the investors in the city--an important facet of the shift away from the South Bay.
"If you go to the corner of Sixth Street and Mission, you see venture capitalists who used to be on Sand Hill Road [in Silicon Valley] but have moved up to the city," Foley says. "The venture capitalists are coming up to the city because they realize that the start-ups don’t want to schlep down to Sand Hill Road to pitch. And they don't want to move down there, either, because they want to be in the city."
Benchmark Capital, the Silicon Valley company founded in 1995, whose early investment in eBay put the firm on the map (yep, on Sand Hill Road), has led the VC charge north into San Francisco. In early 2012, Benchmark Capital inked a deal on new space--10,000 square feet in a refurbished office above the old Warfield Theater on Sixth and Market.
WOULD YOU RATHER...? California Street near Market Street in San Francisco (left); Sand Hill Road in Menlo Park (right)
The move made plenty of sense, too: Since 2009, two-thirds of Benchmark's investments have been in start-ups within San Francisco, and the firm believes the number may only get higher.
"Benchmark's model of working shoulder-to-shoulder with entrepreneurs who aspire to change the world requires we be close to our customer, the entrepreneur," Peter Fenton, a managing partner at Benchmark, wrote recently. "Our approach requires us to be available 24/7 to our entrepreneurs. In the past decade, this commitment increasingly means being in the city. Our center of gravity is no longer limited to the 5-mile radius around Stanford."