Relax, San Francisco: Startups are here to stay

Research shows a ‘network effect’ is still pulling together investors, entrepreneurs and tech workers

Investors, entrepreneurs and tech workers may be working from the couch, but more money is falling between the cushions here than anywhere else. New research shows startups and the venture capital they pull in are not fleeing in the era of remote work.

“San Francisco may have the high cost of doing business, but it’s still getting the returns,” Kyle Stanford, an analyst at the firm PitchBook, told The Examiner. It’s true commercial real estate (even in a city of empty tech campuses) is higher here, as are salaries and taxes on businesses. But Stanford says those aren’t deal-breakers. “The high cost is not going to deter investors.”

Here’s why this matters: The startup economy paces tech salaries, leads to the big payouts of initial public offerings, and creates other spinoff companies. Startups beget startups. As some big tech companies leave for cheaper cities, it may be crucial to the San Francisco economy that startups still gravitate here, leaders, including Supervisor Matt Haney, have argued recently. And nothing lures entrepreneurs like fistfulls of cash.

New research from PitchBook shows investors have collected $105 billion of venture capital into Bay Area-based funds over the past 2.5 years. That’s close to the total for the rest of the country ($111 billion) combined. And that money is headed for local startups, researchers believe.

Investment is way up during the COVID-19 pandemic, and the geographical “network effect” that has pulled investors, entrepreneurs and tech workers together for decades has never been stronger, the PitchBook research shows. The whole world may be on Zoom, but when investors cut checks for tens of millions of dollars, they still like to connect in person.

“If I didn’t live in the Bay Area, it would have been so much harder to raise capital,” Mike Wiacek, CEO and founder of the 20-person Santa Clara cybersecurity startup Stairwell, told The Examiner. Wiacek raised $20 million in Series A funding this month from two titans of Peninsula venture capital, Sequoia Capital and Accel. “I talked to people up and down Sand Hill Road,” Wiacek said, and called that VC capital “hallowed ground.”

Bill Coughran, one of Wiacek’s investors at Sequoia, also believes the Bay Area hasn’t lost its pull. “I do still believe the Bay Area is a nexus for a lot of startups,” Coughran said.

Sequoia, which has offices in Menlo Park and San Francisco, has funded the dreams of startup founders including Steve Jobs (Apple), Larry Ellison (Oracle), Larry Page (Google) and Jack Dorsey (Twitter). “You just have such a strong talent pool, with two great universities. A fair amount of students come out of Cal and Stanford thinking about joining a startup,” Coughran said.

The recent research backs up that notion with data. In Denver, startups are raising smaller funding rounds — and giving up a larger percentage of their companies in return, PitchBook found. Dallas was unable to lure competitive VC funding, and tech salaries lagged, as well. The average annual tech salary in the Bay Area is nearly $158,654, PitchBook’s report found. In Dallas/Fort Worth, that salary is $123,247.

“The fundraising disparity between the Bay Area and every other ecosystem has been well noted,” the PitchBook report, which was written by Stanford, says. “The ability to reach large numbers of people, funds and firms is a surefire way to raise further venture funding should even a small amount of traction be gained. Networks in smaller ecosystems are much less developed.”

The PitchBook findings are in line with research from San Francisco’s chief economist Ted Egan, who found earlier this month that “venture capital investment in San Francisco is at an all-time high,” pulling in more than $7 billion in August alone. That figure was less than $2 billion in August of both 2020 and 2019, Egan’s data showed.

Data from San Francisco’s chief economist Ted Egan shows investment in startups is up during the pandemic. <ins>(Courtesy City of San Francisco)</ins>

Data from San Francisco’s chief economist Ted Egan shows investment in startups is up during the pandemic. (Courtesy City of San Francisco)

Some big tech companies, such as Oracle and Hewlett-Packard, have left the Bay Area for cheaper areas, and that has fueled hype about the disappearance of startups. The PitchBook researcher doesn’t buy it.

“Everyone said San Francisco is down, it’s over,” Stanford said. “But there’s so much competition in the Bay Area for these deals that it’s much easier for entrepreneurs and startups to get funding.”

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