For years, my take on San Francisco has been less enthusiastic than many who hold it up as an information-age
role model. This is based on many factors -- its extremely high costs, anti-business politics -- that have driven away many businesses, large and small, and almost wiped out the city's middle class families. Most of all San Francisco has a dismal record of job creation; according to the most recent Inc. "best places" issue, the city ranked a dismal #358 out of 393 places we ranked.

Yet, when I speak up there, or talk to friends, many of them ask -- OK, but what about the future of the city? And in many ways it might be better than its ranking would suggest. The reason, more than anything else, is that the city continues to attract and retain a uniquely talented group of people who love the place and are unlikely to leave. Many of these people own or work in small business. This is one reason why the city survived the dot-com downturn, which wiped out more than 10% of its jobs, without collapsing a la Detroit or like New York in the 1970s.

This was one of the finding of a new study commissioned by local insurance entrepreneur, Scott Hauge. The study found that smaller firms -- those with less than a 100 employees -- lost jobs between 2000 and 2004 at half the rate of larger employers. The actual number of small businesses, amazingly enough, even increased.

Consultant Leslie Parks, who is working on a new strategy for the city,agrees that small firms represent the future for the city. Certainly it's not the big business that used to dominate; their percentage of city employment has dropped from over 20% in 1977 to almost half that today."The
majority of the business opportunities are being generated by small firms," she observes. "It's the smaller firms that make the place go."

The key issue for the future, she think, is what type of small businesses grow. Many, she says, are "neighborhood servng" firms -- restaurants, shops, copy shops -- that add jobs, but do not bring in money from the outside, except for tourists. Tourism is not generally a generator of high-wage jobs. The key to the future, she suggests, lies with those specialty firms who contract with companies from outside the city, including globally. Many of these firms could be even home-based; she estimates 70,000 such businesses in the city -- a remarkable number for a place wth just over 700,000 residents.

This may be the future not only for San Francisco but for other ultra-expensive, very liberal cities which can no longer compete for many middle-income jobs and families. It's an idea I explored for Inc. over a decade ago in a piece called "A City of Artisans" which profiled several small and micro-businesses in the city. Like pre-industrial Venice or Amsterdam, a place like San Francisco may be able to carve out its future by selling the peculiar, specialized skills of its unique and often very talented population. It may not be the city of big banks and companies it was in the 1970s, but San Francisco may be still be a success, securing its niche as an agglomeration of very small enterprises.