technology
culture

Is SF Finished As the Capital of Tech?

Chief Economist, San Francisco
Susa Ventures
Genesis
Response
Penultimate
Finale

Leo Polovets

Susa Ventures

April 28th, 2021
Shortly after college, I was lucky enough to join LinkedIn when it was only a dozen people. Ten years later, I had the additional good fortune of being on the founding team of Susa Ventures, an SF-based VC fund that was an early investor in multi-billion-dollar companies like Robinhood and Flexport. But despite these professional successes, my wife and I moved out of the SF area two years ago because we couldn't afford a high quality of life. Moving to another city is one of the best personal decisions we’ve ever made.
My journey is increasingly common, with many tech workers and entrepreneurs coming to SF seeking professional success, then leaving after seeing SF’s full costs and its lack of benefits.
The current COVID-accelerated tech migration begs two questions: first, will there still be a tech capital post-COVID? And second, if there is a tech capital, will it still be SF? I believe the answer to the first question will soon be No, because increasingly the capital of tech is the internet, and not a specific city. The answer to the second question is also No, because the rate at which SF’s costs and downsides have been growing is only matched by the rate at which its advantages have been shrinking.

Will there still be a tech capital?

Remote work and Zoom have transformed the tech industry in the same way that the internet transformed the movie industry. Will Hollywood be displaced by another city more suited for filmmaking? No. But Hollywood’s real competition isn’t other cities, it’s YouTube and TikTok.
The tech industry is undergoing a similar shift. In recent decades, many of the most successful US startups were born in SF because the city has massive network effects in terms of startup knowledge, engineering candidates, executive candidates, and funding. However, these network effects have been steadily weakening. Knowledge and playbooks are increasingly shared in blog posts and tweets, engineers and execs are more dispersed than ever, and as startup formation spreads out across the US, venture funding continues to flow out of the SF Bay Area.

If tech has a capital, will it still be SF?

In the short term, of course tech centers like SF and NY will still exist, but their relative advantages are shrinking. SF faces four major challenges to remaining the top tech hub: its family and business unfriendliness, its weakening advantages, increased competition from other cities, and remote work.
SF is family unfriendly and business unfriendly.
(The brown pins on this map represent exactly what you think they do.)
SF is less safe than 98% of cities and its streets are covered in feces. Despite these conditions, the cost of living is astronomical. The median house costs $1.4m, and the highest taxes in the country leave less take-home pay for housing, daycare, and schooling. This dynamic is a high barrier to entry for aspiring entrepreneurs and creators.
In addition to its high costs, SF has been hostile to startups for years. It vigorously fought local companies like Airbnb and Uber, and its rising taxes have led companies like Stripe to relocate. Every business has its breaking point, and it often feels like San Francisco is doing its best to find those points.
SF's advantages for tech companies are dwindling away.
SF’s key benefits for tech companies have long been abundant funding, executive talent, and engineering talent. However, these perennial advantages are no longer unique to the city. The monopoly over top engineering talent has dwindled, and many larger cities now have enough great local engineers to support a healthy tech ecosystem. Executive talent is also easier to find locally -- and when it’s not, it’s more commonplace to assemble great teams via Zoom. Finally, the abundance of capital and funding competition in SF is driving many venture funds -- including mine -- to spend more time in other tech ecosystems.
SF still produces many amazing, world-changing companies, but lots of great companies are now being built and funded in other places.
Other cities are becoming increasingly attractive to tech companies.
SF’s weaknesses are strengths for other regions. Other cities increasingly have similar access to talent and funding paired with much lower office rents and costs of living -- and their governments are welcoming.
It has been incredible to watch Miami’s mayor successfully recruit prominent techies to move to his city. Unsurprisingly, founders and investors like being appreciated instead of literally being told to f--- off by local and state politicians. Think about how little people in tech must like living in SF if a handful of nice tweets is all that it takes to get them to move to a hot, humid city that’s 3,000 miles away.
Miami is a strong preview of the increased competition that SF faces.
Remote work is here to stay.
Even when things are “back to normal” it will be a new normal. Remote work is not going away. Most companies have been hiring across the US -- or the world -- for the past 12 months, and when pre-COVID life resumes, these companies won’t just fire their new employees or ask everyone to move to a single city. Instead, they’ll continue being remote friendly. Remote work is not a genie that we can put back in the bottle, and companies that stop supporting remote work will be outcompeted by those that do. This makes it much easier for SF workers to relocate while keeping their jobs, and for non-SF companies to recruit SF talent.

Conclusion

While San Francisco will remain the best US tech city for a while, it’s no longer number one by a substantial enough margin to justify moving. Instead of being the capital of tech, SF will be a good tech hub, and even that title will fade as tech work migrates to the cloud. The founders and builders in SF are special, but the city of SF is especially broken and successfully pushing those people out.
I do believe that if the city could figure out how to solve its problems it could be a utopia for entrepreneurship. And having been an area resident for decades, I want nothing more than to see SF succeed. But given its high costs, low quality of living, and open hostility to the tech sector, it's edging closer to a dystopia. If SF doesn’t change -- and the past decade suggests that it won’t -- its tech exodus will accelerate.
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