Silicon in the city

Article by: PETER DELEVETT , San Jose Mercury News
Updated: September 25, 2012 - 5:12 PM

Northern California's garden of technology, Silicon Valley, is expanding from its San Jose base into San Francisco.

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Employees work while they eat in the rooftop patio at Twitter headquarters in San Francisco, California, August 2, 2012.

Photo: John Green, Dml - Mct

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Webster's defines a valley as "a stretch of low lands between hills or mountains." But for a growing number of tech entrepreneurs and workers, "Silicon Valley" is a squared-off patch surrounded by water, not mountain ranges.

Consider this: San Francisco has led the world in venture capital funding for three years running, and the city has more than 4,000 start-ups in the area south of Market Street alone, according to San Francisco tech incubator the Hatchery.

Of course, the South Bay remains the home of Silicon Valley's dominant companies: Apple, Google, Oracle and Hewlett-Packard.

But the rise of social media, with fast-growing companies like Twitter, Zynga and Yelp setting up shop in San Francisco, has led to a northward shift in Silicon Valley's center of gravity.

"Silicon Valley is starting to migrate to San Francisco," said Chris Foley, co-founder of real estate analysis firm Polaris Group.

The two regions' vibes are, of course, quite distinct.

In the Peninsula and South Bay, Silicon Valley's traditional geography, "you're driving from one business park to the next," Foley said. "In San Francisco, everything's happening in a one-mile radius."

And that, he and others argue, plays an even bigger role than chic urban restaurants and coffee bars in the city's climb to the top of the technology heap.

"It's about running into people and building relationships, because people want to work with and invest in people they know and trust," said Bill Maris, managing partner of Google Ventures, which is seeding an average of two new startups a week -- roughly half of them in the city.

With so many techies in such a small place all thinking about the Next Big Thing, Foley added, "You're seeing an explosion of new ideas."

And an explosion in real estate costs: Foley notes that units in a new Mission District condominium project just sold for a record $900 per square foot. Office rents are equally superheated.

Twitter last year cut a deal to avoid a 1.5 percent city payroll tax on new hires for the next six years. As part of the controversial pact -- which is expected to save the social media powerhouse $22 million -- Twitter and other startups looking to avoid the tax have to base themselves in dodgier pockets of the city's downtown, including the Tenderloin district.

Mayor Ed Lee recently persuaded San Francisco's Board of Supervisors to go even further and place on the November ballot a measure that would replace the payroll tax -- which the mayor said "punishes companies for creating new jobs" -- with a more broadly based tax on receipts that won't increase as fast when companies grow.

To be sure, San Francisco still faces a bragging-rights competition for the Startup Central title from Mountain View, which, though much smaller, is home to Google, top incubators like Y Combinator and Redmond, Wash.-based Microsoft's southern outpost.

Yet many say Google kicked off the current craze toward San Francisco.

Santosh Jayaram was a senior manager at the search giant five years ago when it began running free, Wi-Fi-equipped employee buses between San Francisco and Mountain View. "They were busing 3,000 people every day," he recalled. "Then Yahoo started doing it, and it became this arms race."

Freed from the hassles of commuting, techies could live in their neighborhoods of choice, and San Francisco's cultural riches beckoned.

Derek Anderson, founder of entrepreneur networking group Startup Grind, argues there's yet another reason San Francisco has snatched Silicon Valley's mojo. With vacancy rates in Palo Alto and Mountain View barely above 2 percent, hot startups like Pinterest are finding themselves practically forced to relocate. "There's no room in the freaking inn," he said.