AGILEVC My idle thoughts on tech startups

April 13, 2012

I was back in the SF Bay Area last week for a bit of work and a bit of fun.

I spent some time with some startups in San Francisco proper, as opposed to the heart of Silicon Valley (see Note 1).  Startups in the city of SF are not exactly a new phenomena… a bunch of startups have been founded/built in SF in the last five years or so.  And going even further back there have been a few random ones have been built before like Salesforce.com and e-tailer RedEnvelope (IPO’d in 2003 though now defunct as a company).  But it’s only very recently that you have a large number of startups reaching scale in SF – companies like Zynga, Yelp, Square, Dropbox, Twitter, AirBnB, Yammer, and others that employ hundreds of people.  The kinds of places where you have to sign an NDA when you walk in the lobby…

When I lived and worked in the bay area (2000-2005) virtually all the startups were down on the peninsula somewhere.  The prevailing view of senior startup execs was that trying to build a company in SF would be too distracting for employees, and frankly most startup employees at the time preferred to live in the suburban areas of the peninsula rather than in the city.  If my memory serves me, <10% of our pre-IPO employees at PayPal lived in SF and literally 1 of the first 40-50 folks at LinkedIn were city-dwellers.  Also all the big anchor companies that a startup might want to partner with at that time (eBay, Google, Oracle, Yahoo!, et al) were down on the peninsula.

“Silicon Valley” (see Note 2) is hardly alone in this urbanization of startups trend.  Here in Boston the same dynamic as Silicon Valley has been afoot… at least in the software/internet sphere, the majority of startups have migrated from the suburban loop of Rt 128 back into the urban core of Boston & Cambridge.  New York never went through a phase as a suburban startup hub… basically just an urban boom as Silicon Alley 1.0 in the late ’90s and then again a renaissance in the last 5yrs (both in Manhattan & Brooklyn) which has roughly coincided with a broader urbanization trend.  And if you look elsewhere at places like Seattle you see the same pattern; Microsoft may have been built in Redmond, but Amazon and many of the more recent startups like Zillow, Redfin, Zulily, etc are all in Seattle’s downtown core.

So why are software & internet startups more urban today than 5-10 years ago?  And what are the implications for these various startup hubs at an ecosystem level?

1) Younger people building companies - Many of the biggest technologies companies ever built were started by people in their 20s.  This is true well before the internet era of Facebook, Yahoo!, and Google… Bill Gates & Paul Allen at Microsoft were a decade or two earlier and going even further back Bill Hewlett & Dave Packard were fresh out of grad school when they started HP in 1939.  And the potential rewards to joining a startup as a young person have always been there… not just financial if a startup is successful, but also the ability to have outsized influence and leadership roles relatively early in one’s career.

But the last 3-5 years has seen a significant increase in the number of young (<30) people starting companies and working in startups, relative to the ’90s and early ’00s.  I describe this in part as the “Social Network” effect… not just the movie itself but the example of Mark Zuckerberg and many other high profile young founders as role models (who can forget this image?) for college students and recent grads to work in startups.  But more broadly than just that,the direct costs of launching a startup have obviously plummeted which makes being a founder more accessible than historically.  And for non-founder employees, as the broader employment markets even for college grads has gotten softer, the opportunity costs of a joining a risky startup have never been lower.

2) Design ethic vs engineers - Over the course of the last 5-10 years, many software-based startups are being built on competitive advantages of design and business model rather than technical differentiation.  I’m not suggesting that there aren’t lots of hard technical problems being solved in today’s startups… nearly any developer worth his or her salt could build Facebook or Twitter like products for a few hundred users, but few can make them scale to hundreds of millions.

But as design and UX become more core elements of startups, it’s natural that companies will be started by and increasingly staffed by design-oriented folks.  And many of these folks are drawn to working and living in urban centers.  I know this is a gross generalization… there are plenty of developers sporting Warby Parker frames or designer shoes rather than a Warcraft t-shirt and beat-up sneakers.  A hacker ethic is compatible with an urban setting just as design oriented one is compatible with a suburban one.  But generally speaking as more startups are being built with a “design first” mindset, it’s natural that the kinds of talent attracted to these places changes slightly and more of them are being built in city centers.

3) Big companies follow – As more startup talent is concentrated in urban centers, it’s not surprising that large tech companies may follow.  Google started and is still headquartered in Mountain View, but they opened an office in SF at the end of 2007.  Here in Boston both Microsoft and Google have made significant expansions in recent years in Cambridge, and PayPal/eBay is poised to do the same in downtown Boston through acquisition and organic growth.  And to some degree these are reinforcing trends… as big tech companies build their presence in urban centers, it promotes additional startup growth nearby.

To be fair, an urban location isn’t for everyone.  Facebook’s in Palo Alto, LinkedIn is in Mountain View… clearly the ‘burbs still work just fine for building monster companies.  Apple’s been in Cupertino since inception and that seems to be working just fine.  And for the record NextView’s office is in downtown Boston but my wife & I choose to live in the ‘burbs.  But I think the urbanization of startups nationwide is here to stay.

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Note (1):  For those not familiar with the geography of the SF Bay Area, the city of San Francisco proper sits at the north end of a peninsula that stretches down to the smaller city of San Jose.  In between is the area generally referred to as “Silicon Valley” which literally sits between the Santa Cruz Mountains to the west and the western shore of San Francisco Bay itself.  It encompasses a stretch of towns including Palo Alto, Mountain View, Menlo Park, Sunnyvale, Cupertino, and others.  Most local folks don’t use “Silicon Valley” as a geographic term, rather people talk about the “City” (San Francisco proper), the “Peninsula” which is most of the middle part of Silicon Valley, or the “South Bay” which is the southern reaches around San Jose and further south.

Note (2): Now even startups in SF have co-opted the term “Silicon Valley” as it has more global recognition as a tech/startup hub than “San Francisco”.

  • Alex Panelli

    Lee,

    Thanks for the good read. I am one of the few 40-somethings who was born and raised in Silicon Valley (Cupertino to be exact), and I have observed the “center of gravity” of SV gradually moving north. It started in Santa Clara (the original ground zero of “silicon” in Silicon Valley), then migrated toward Sunnyvale/Mountain View/PA and further up 101.

    Just a minor nitpicky point: San Jose is actually much larger than SF, in both population and land area.

    I believe that the urbanization of startups that you describe is really an arbitrage…as we approach another bubble period sometime in our future, we will see another diaspora to the suburbs for cost reasons (as well as to Silicon Forest, Silicon Hills, Silicon Desert, Silicon _______, etc.).

    The pendulum swings to and fro.

    Cheers!

    • http://www.agilevc.com/ leehower

      Great points.  I knew San Jose was obviously larger than SF in area, but didn’t realize the population was technically larger too (900K vs 700K).

  • http://lexspot.com/ Chris G. Shaw

    Thanks Lee, this was an interesting read, here’s a recent article I read that expands on my generation’s desire to be in cities. We have NO desire to be in Waltham.

    http://placeshakers.wordpress.com/2012/04/09/generation-ys-great-migration/

    • http://www.agilevc.com/ leehower

      Thanks Chris, good read and hadn’t seen it before.

  • http://www.linkedin.com/in/matthewtagg Matthew Tagg

    Interesting article! I think the long-tail (size in terms of market cap, revenue, employees etc – pick one doesn’t matter) is moving towards the city. But if you consider the opposite side (the short tail?), far more huge companies in Silicon Valley. (Apple, Google, Facebook etc) It’s really a who’s who of tech.

    So if you want to build something huge… history says that’s the place to be. I don’t know if the recent move by smaller startups to the city will change that.

    I’d be interesting to see if there is a large tech corp (on the aforementioned scale), come out of the city.

    PS I way prefer the city (on a personal level) and would also professionally recommend it as a great place to do a startup.

    • http://www.agilevc.com/ leehower

      You’re right that the absolute largest companies at least in the Bay Area remain in suburban locations.  But 10 years ago there were basically zero tech companies in SF proper that were 1,000+ employees, publicly traded, etc.  Now you have Salesforce, Zynga, Yelp in that category and others on their way to it like Twitter and Square.  So that in itself is a big shift.

      I agree though we’ll see if you can build a Google scale company in an urban area.  The only example I can think of today is Amazon which has now consolidated it’s various offices in Seattle in a single location.

      • http://www.linkedin.com/in/matthewtagg Matthew Tagg

         “Now you have Salesforce, Zynga, Yelp in that category and others on their way to it like Twitter and Square.  So that in itself is a big shift.”
        Good point, Lee.

        Also, had no idea Yelp was that large! Wow

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