San Francisco Is Fast Becoming a Technology Hub

San Francisco-Oakland Bay Bridge.
Bob Horowitz | Flickr | Getty Images
San Francisco-Oakland Bay Bridge.

Start-up Pulse is moving to the new heartbeat of Silicon Valley.

The news aggregation app, created by a brainy duo of Stanford grads, rocketed into popularity. So founders Akshay Kothari, 26, and Ankit Gupta, 25, did what any company does today and moved Pulse to technology's latest party: San Francisco. Besides, most of its employees were already here.

"It's a very strong pull right now," says CEO Kothari of the move from Palo Alto. "San Francisco has definitely become the center of activity — it's definitely become the hotbed of a lot of exciting start-ups."

The City by the Bay is fast becoming the new silicon club. Its growing appeal as tech's nexus is powered by affordable office leases relative to the old Valley, favorable business taxes, and the allure of a major city.

Young designers and software engineers also prefer the urban landscape, so companies are flocking to San Francisco to recruit top talent. Big and small tech companies are setting up headquarters here — Twitter, Zynga , Pinterest and Pulse, among them.

"This is where the action is for younger people. The heat is in social, mobile, design and software," says Aileen Lee, a partner at venture-capital powerhouse Kleiner Perkins Caufield & Byers. Her firm and Benchmark Capital recently opened offices here.

Since Hewlett-Packard was hatched in a Palo Alto garage in 1939, Silicon Valley has been centered in or around the Peninsula and South Bay, some 40 miles south. San Francisco was usually the province of creative types in design.

"Everyone said the exact same thing about Palo Alto five years ago: It had Stanford, affordable prices and all the (tech) talent," says Julia Hartz, co-founder of online-ticketing service Eventbrite, which has stayed here since it was founded in 2006. "The entire picture is flipped."

What remains constant is that "start-ups want to be around start-ups," says Hartz, whose company employs 200 here.

Today, however, there is a new wave of tech firms set up in lofts and apartments near coffee shops and bars as workplaces and products alike become more social. These spaces, often industrial-looking, with brick walls and steel-beamed high ceilings, are usually left in an open floor plan with shared long wooden tables in lines, topped with giant Macs.

San Francisco boasts the highest tech-jobs growth rate in the nation, according to real estate services firm CBRE. Current growth is about double the rate of the next two fastest-growing markets of New York City and Silicon Valley, a boost that's lifted the city's tech jobs to more than 36,600, or 13% higher than the dot-com peak in 2001, according to CBRE.

Money flow

Venture-capital funding for San Francisco companies in the second quarter shot to $991 million, up 41% from a year ago, according to a PricewaterhouseCoopers/National Venture Capital Association MoneyTree report released Friday. That comes as funding of companies was lower across major Silicon Valley cities Mountain View, Menlo Park, Santa Clara, San Jose and San Mateo.

San Francisco officials say many firms have announced expansions or moves to the city in the past two years, including: ; LinkedIn ; Yelp ;; Riverbed ; Airbnb; Yammer; Tagged; Zoosk; One Kings Lane; ; Pac-12 Enterprises; Zendesk; Kabam; Funzio; 6waves; StumbleUpon; and Pinterest.

While some of tech's hottest start-ups — companies such as TaskRabbit and Twitter — plant roots in the city, established companies such as, Google and Yelp have signed long-term leases.

The latest coup came early this month, when Internet phenom Pinterest said it was moving from Palo Alto to "one of the world's great cities" and cited "reasonably priced" space.

San Francisco has vacancy rates of 9% to 10% for premium spaces that run about $50 per square foot, compared with 4.4% vacancy and $73 per square foot in Palo Alto.

"Supply is still there from the last (boom-bust) cycle," says Caroline Green, Northern California director of research for real estate firm Cushman & Wakefield.

Commuting headaches to Silicon Valley along the freeways have forced companies such as Apple, Google, Facebook and Yahoo to offer free bus shuttles for the hour-plus ride from the San Francisco area.

"Companies are moving to San Francisco from the Valley because (their employees) don't want to be riding a Wi-Fi bus. They want to ride a bike to work," says Green. Companies "are trying to get any advantage they can — and location is a key advantage."

San Francisco Mayor Ed Lee has "an affinity for tech, which leads to job creation and (an improved) economy," says Ron Conway, the high-powered angel investor who has had a major hand in attracting start-ups to the city.

"I am committed to ensuring San Francisco remains a center for tech and the innovation capital of the world," Lee says. "Top creative and innovative talent wants to live in a vibrant, transit-friendly, global city that offers access to not only great jobs but also great food, entertainment and culture."

San Francisco offers six-year exemptions from its payroll tax to firms such as Twitter that agree to create more jobs in a zone targeted for redevelopment. The city expects those new employees will spend in local businesses, boosting tax revenue overall.

San Francisco's unemployment rate, at 7.4%, is significantly below California's 10.7% rate and the nation's 8.2%.

For now, San Francisco is drawing the action, in a second digital gold rush that looks more at odds by the day with a penny-pinching nation.

This reimagined landscape has cities such as New Orleans, Los Angeles and Las Vegas vying for a slice of the attention. Zappos founder Tony Hsieh, for one, is extending Zappos' creative culture into Las Vegas' downtown by helping finance a performing arts center and events.

"The tech ecosystem creates jobs, helps the economy and enhances the local culture," says Hsieh, who has poured $350 million of his fortune into burnishing the case for downtown Las Vegas as a tech hub.

SFO bound?

The narrative has been building for three to four years, set in motion in 2007, when Google opened an office in a striking brick office building that holds 900 employees in San Francisco, says Roger McNamee, co-founder of venture-capital firm Elevation Partners.

Demographics in the Valley have grown younger, and the focus of the industry has shifted from chips to Web- and mobile-focused businesses. Plenty of companies are taking advantage.

Twitter creator Jack Dorsey's start-up, Square, chose San Francisco over New York because it's where many of the best designers and engineers live, he says. Square's workforce has tripled, to 400 people, from a year ago, and a considerable portion are engineers and designers.

Cloud-software company EVault, a division of Seagate Technology , relocated 100 employees from the East Bay and South Bay to a sparkling new headquarters near the Moscone Center this spring. It hopes to double in size over the next year.

"Logistically, we wanted everyone to work under one roof," EVault CEO Terry Cunningham says. "Public transportation was easier, and there are obvious benefits being in a major city. So many cool venues."

Moshi, which makes accessories and electronics for mobile devices, hopes to move in early October from Sunnyvale. It employs about 100 worldwide, 15 in the U.S. It intends to more than double its domestic workforce here in the next six months.

"Being close to a cluster of R&D facilities made sense (in the South Bay) when you needed lots of engineers," says Jon Lin, executive director for Moshi. "That's no longer the case, with so many designers, and social-media and mobile companies, in S.F."

It took tiny online shopping service Reclip. It only a few months in Mountain View to decide to head 30 miles up Highway 101. CEO Cheryl Yeoh, 29, said the company's young, single staff was drawn to the city's lifestyle and culture.

The Peninsula may be home to megaplexes such as Facebook and Google, but for smaller, nimble companies such as HYFN, San Francisco is the place to be, says HYFN CEO Morgan Harris.

The 40-person Los Angeles company, which develops mobile and social apps, is adding 10 in the city rather than in the Peninsula.

Flush with $7 million in venture funding, Dotloop opened an office here with plans to hire 15 to 20 people.

The real estate software firm is based in Cincinnati. San Francisco "is the obvious hotbed for technology companies, and it is an attractive city for younger, talented people," CEO Austin Allison, 27, says.

Foreign-based tech start-ups that have recently established operations in the U.S. will consider only San Francisco, because of its European flavor, the allure of living in a major city, its proximity to so much talent and investors, and its proximity to Silicon Valley.

"If you're a coder, you go to San Francisco. It's just like moving to Los Angeles if you're an actress," says Henrik Lenberg, 30, vice president of platform at SoundCloud, which is based in Berlin but opened its first U.S. office here in September.