Silicon Valley has long been considered the world’s leading technology and innovation hub in the world for over 50 years.
Much like Israel’s Startup Nation origins, Silicon Valley’s foundation for innovation originated from the military industrial complex. Allied military technology was built in Silicon Valley during WWII with the help of Fred Terman, who is often called the founder of Silicon Valley. After the war, Fred, who was the dean of Stanford’s engineering department, single-handedly created the university, government, private industry partnership by leading the development of Stanford Industrial Park, where a large number of hi-tech firms comprised the military-industrial complex including Varian Associates, General Electric, and Lockheed Martin. Fred was also the inspirational mentor to HP founders William Hewlett and David Packard.
Nevertheless, over the past 5 years founders have been increasingly flocking to San Francisco as the destination to launch a startup rather than Silicon Valley.
As someone who grew up in Israel, moved to San Francisco in 1995, and launched a startup organization in 2009, I got to witness this shift firsthand.
I came to San Francisco from Israel in 1995 during the mid ‘90s tech boom. My father, who at the time was a research scientist and post-doctoral fellow at Tel Aviv University’s Applied Physics Group, joined Measurex, a Cupertino (Silicon Valley) based company that was one of the first corporations to develop computer control systems for the industry. In 1997, Measurex was acquired by Honeywell, a Fortune 100 conglomerate for almost $600 million.
This was how I first learned about Silicon Valley: a fast paced, dynamic place that imports the world’s best innovators and technologists.
When I arrived, San Francisco was a residential, somewhat eccentric town where many people had lived most of their lives. Many neighborhoods that you have heard of, such as SOMA or Mission Bay, were industrial land zones, completely unfit for residential life. Five years prior, in 1990, less than 1% of the city’s population worked in tech. Those who were working in technology companies like my father would commute south to the “valley” from “the city.” The driving commute would typically range from 30 minutes to 1.5 hours, depending on the destination and traffic.
Silicon Valley 1995-2005
In the late 1990s and 2000, Silicon Valley companies received great amounts of venture capital, giving rise to thousands of new businesses in the area. Venture capital investments reached their highest level in 2000, when $32.3 billion was pumped into the ecosystem by the end of 1999.
Then in 2001-2, the dot-com bubble burst and had a considerable impact on the Valley. The majority of hi-tech businesses born in 2000 did not survive past 2003. By 2009, fewer than 1 in 5 hi-tech startups born in 2000 were still in business.
Nevertheless, the Valley recovered and companies started to form again as the region of 3 million people continued to draw talent from all over the world. Between 1995-2005, 52% of all tech firms in the Valley were founded or co-founded by immigrants.
The Great Recession of 2008
In 2008, the Great Recession, one of the worst recessions in recent U.S history, hit the U.S. and world economy. Between 2008 and 2010, the recession had decimated the stock market, lead to investment bank collapses and consolidations, job losses, and shrank the financial services industry in the U.S. In the U.S., 8.8 million jobs were lost, which went beyond the financial sector to include manufacturing, retail, construction, and hospitality.
This time, as for many others, was the catalyst for my transition into tech.
At the time, I was a recent UC Berkeley grad with a degree in economics and some work experience, hoping to find a good job in financial services. But opportunities were few and the available ones were extremely competitive. I had considered business school but so did everyone else. College grads started applying to business schools in order to wither the storm and stay out of the job market until an economic recovery, creating the most competitive admissions process for graduate schools in decades.
In 2008, I ended up taking a position at a medical device startup and started volunteering at tech organizations and conferences in Palo Alto to learn more about the industry. In 2009, I co-founded the startup organization JFE (Jews For Entrepreneurship) in San Francisco to help professionals, many coming from finance and other industries, to transition into tech and learn from experienced entrepreneurs how startups were built. In 2010, one of our first entrepreneur guest speakers explained how to build scale startups. He was the founder of WhatsApp.
Incidentally, the recession played a significant role in the future of San Francisco and paved the way for an unexpected shift in the technology balance between Silicon Valley and San Francisco.
The shift to San Francisco (2010-2015)
In 2011, to alleviate the 9.4% jobless rate in San Francisco, the city’s Mayor Ed Lee passed the “community benefit agreement” – a tax break to incentivize the city’s economic growth by bringing companies such as Twitter and Zendesk to San Francisco’s Mid-Market street district. Other companies to benefit from the tax break later includedOne King’s Lane, Spotify, Yammer, and Zoosk.
At the same time, many popular and well-developed tech centers in Silicon Valley such as downtown Palo Alto and Stanford Research Park only had expensive and limited office space. High-demand tech hubs such as Sunnyvale, Mountain View, Palo Alto and Menlo Park almost had no space in existing buildings – much less than San Francisco’s 10.6 percent vacancy rate. This was one of the reasons that companies like Google, LinkedIn, Apple and Facebook built their own San Francisco campuses.
In short, because of San Francisco’s office vacancy after the recession, tax incentives, and limited office space availability in the Valley, fast growing hi-tech firms decided to move to San Francisco to take advantage of the more available and cheaper rent.
In fact, since 2010, San Francisco has seen 2.5 million square feet taken up by Silicon Valley or Peninsula firms opening a new office or relocating to San Francisco. Between 2012 and 2013, 24 companies relocated to San Francisco from the Peninsula and Silicon Valley, including Gigwalk, Detercon, and Seal Software. Other out-of-town tech firms that opened up an office in the city included Amazon, Microsoft, Yahoo, Google, Mozilla, eBay, and LinkedIn.
Continuing this shift to San Francisco, the next crop of fast-growing companies founded between 2004-10 chose togrow up in San Francisco: Twitter (as described above), Dropbox, Airbnb, Uber, Yelp, BitTorrent, Square, Slack, and Pinterest.
This newfound tech density attracted even more young energy directly to the city to create startups that relied on San Francisco’s new ecosystem of companies.
Between Q1 of 2010 and Q2 of 2013, the number of technology companies with offices in San Francisco grew 40% percent to 1,957 and the city had a 57% increase in technology jobs. By 2014, it had over 2,000 new technology firms. In 2015, 60% of all leases were for technology companies.
As job opportunities grew in the city to accommodate growth, so did the population of millennials and tech professionals. Young tech workers, with their careers less tied to long-term employment at any one company, now wanted to live and work in San Francisco rather than commute to the Valley. They enjoyed the hipper, denser atmosphere of the city over the suburban feel of the South Bay.
This trend made it even more reasonable for startups to set up offices in San Francisco in order to hire employees who lived in the city and didn’t want to commute to Silicon Valley.
As Salesforce Co-Founder Marc Benioff commented about being located in San Francisco, “We get great energy of the city but we have the virtual extension of the valley.”
The shift to San Francisco has become so visible that having a “San Francisco employee strategy” has become Silicon Valley’s biggest challenge according to Jeff Clavier, Managing Partner at SoftTech VC. To accommodate the new reverse work commute to San Francisco, companies in the Peninsula and South Bay started to drive employees up and down Highway 101 in shuttles.
San Francisco’s new tech density also meant that there was more opportunity to get customers and meet workers from other companies.
“We want to be in an environment where you go for coffee and meet an employee from Zendesk or Slack. We just get to meet with them and have a chat and learn something new,” said Gadi Shamia, whose company, Talkdesk builds call center software users can access through a web browser. Talkdesk moved from Mountain View to San Francisco to have additional office space because it’s been hard to plan for growth in a downtown office space in the Peninsula.
Venture capital follows talent north
In San Francisco’s SOMA district, a small park enclave called South Park became a hub for many Sand Hill Road investors over the last two years. Those include Redpoint Ventures, Shasta Ventures, True Ventures, Norwest Venture Partners, and Kleiner Perkins. Google Ventures also set up shop in South Park in January 2014, and Accel Partners and SoftTech VC have offices less than a block away.
More venture firms now call San Francisco their home: Benchmark, Greylock Partners, Venrock (the Rockefeller family’s venture capital arm), Matrix Partners, Highland Capital Partners, Alsop Louie Partners, Homebrew, Hummer Winblad Venture Partners, Sigma West and Next World Capital, among others.
The venture funding numbers have been reflecting the shift as well.
In 2013, the city of San Francisco lead with $4.39 billion in venture capital investment, roughly a third of the Bay Area total. Palo Alto fell far behind with $1.29 billion (4.8 percent of total U.S. VC funding) at second place. Silicon Valley notables followed closely afterwards, with Redwood City getting $1.06 billion, Mountain View $918 million, Sunnyvale $800 million, Santa Clara $733 million, and San Jose $688 million.
In 2014, of the $26.8 billion of venture capital funding invested in California companies, 41 percent, or $11 billion, of it went to San Francisco hi-tech firms.
In the same year, San Francisco also garnered more deals than any other region in the Bay Area – 584, which trounced Palo Alto’s 103 and Mountain View’s 85, the next-highest cities. No other tech heavy region, including New York, Boston, Seattle, or Austin, had nearly the amount of VC investment that San Francisco received. In total, 23% of the $47.3 billion of venture capital funding that United States startups got went to startups in San Francisco. The upwards funding trend continued in 2015 up until its last quarter, when the funding slowdown began.
The investment landscape of 2016 has seen a drop in venture funding in Q1 across both Silicon Valley and San Francisco. The city garnered $3.04 billion in 155 deals whereas the Valley raised about $2.9 billion in 162 deals.
It is still unclear how the rest of 2016 will unfold.
After the Great Recession and the decimation of corporate stability, we are still witnessing the growth of technology hubs worldwide. Due to an industrial power vacuum, it was almost inevitable that tech would overflow from Silicon Valley into San Francisco and the greater Bay Area.
The growth of San Francisco as a technology center, however, has not been painless. Since 2010, 50,000 people have moved to the city, creating rising prices, shortage of housing and apartments, big traffic jams, as well as cultural clashes between long-term San Francisco residents and the new tech elite. San Francisco’s real estate market became the most expensive in the U.S., with only 11% of the city’s population able to afford home ownership and 85% of the city’s new real estate development targeting high income dwellers rather than affordable housing. Many residents have left the city to the East Bay, which in turn, has raised prices there, particularly in cities like Oakland.
Nevertheless, the growth of San Francisco as a tech powerhouse over the last 5 years has been tremendous. As of January, more than 15% of global venture capital investments went to San Francisco companies, making it the leading place to raise VC funding in the world. This is the reason that we chose San Francisco as the destination to launch Jemm Ventures Accelerator, a new 3-month program for Israeli B2B startups.
Originally published in GeekTime:http://www.geektime.com/2016/06/08/why-san-francisco-is-the-new-tech-titan-not-silicon-valley/