Tuesday, July 31st, 2012

Why Technology Is Driving More Urban Redevelopment by Mark Suster

[ Mark Suster is a former Accenture guy like me who left to become a serial entrepreneur and is now a partner in a Los Angeles based venture capital firm. He writes an excellent blog on the tech industry called Both Sides of the Table that draws on both his entrepreneurial and VC experience. I consider it a must-read for those interested in tech. A recent story of Mark’s caught my eye as it’s relevant to cities and comes from a bona fide investor, not urban booster, perspective. He graciously gave me permission to repost it here – Aaron. ]

Like many I read the headlines about Pinterest moving from Palo Alto to San Francisco and thought about the trend it portends. For those not familiar with the local geography, Palo Alto is the north end of what most consider “Silicon Valley” although nobody local calls it that. Palo Also is about 35 miles south of San Francisco.

Palo Alto is home to Stanford. It is the birthplace of Hewlett Packard. And Facebook. It is adjacent to Mountain View, home to Google. Further to the south are the legendary companies of Cisco, Apple, Intel, eBay, Yahoo!, Juniper and countless others.

Back in 2006/07 when I sold my company and then worked at Salesforce.com there were very few options in SF for technology folk to build their careers at big, growing companies.

Today there’s many. In addition to Salesforce.com (the 800 pound gorilla) there is also Twitter, Zynga and Square – just to name a few. And now Pinterest.

So why all the movements towards cities? It’s clearly more expensive for office space and living. In addition to higher rents many cities impose city taxes on local businesses. It’s clearly a complex topic without black-and-white answers.

Fred Wilson ponders this in his post “Cause and Effect

Technology innovation doesn’t occur in a vacuum. It happens in a dialog with society. And sci-fi writers are but one example of the way society impacts technology.

I think that’s one of the reasons that many of the most interesting Bay Area startups are choosing to locate themselves in the city. And it is one of the reasons that NYC is developing a vibrant technology community.

Society is at its most dense in rich urban environments where society and technology can inspire each other on a daily basis.”

I’m sure there’s a lot of truth to that. I see it first hand in Los Angeles where given the growth of YouTube networks the worlds of art & technology are colliding. It’s becoming harder to distinguish tech companies from media companies.

Many “tech companies” now have green screens. And make-up artists. And costume & set designers. And sound engineers. And post production. And writers! And even … yes … actors.

I can’t say for sure, but it feels to me like the re-urbanization of technology companies is driven by a broader trend of the tech industry overall – cloud computing. In driving down the costs of building businesses it’s driving down the age of startup founders and thus they’re starting companies where young people want to live – in urban environments.

I’ve been meeting with LPs (those who invest in VC funds) over the past year and discussing trends I see in the market and where I think we need to be as a firm to be near to and meet the needs of our customers.

One of the major trends I’ve outlined is this movement of entrepreneurs (and as a lagging indicator venture funds) to more urban environments.

And it’s not just the movement from Palo Alto to San Francisco.

The same phenomenon is happening in many places.

  • In Massachusetts companies (and VCs) have migrated from out by Waltham to Back Bay (Boston) or Cambridge.
  • In LA companies used to be concentrated near Pasadena or in the San Fernando Valley. These days it’s Santa Monica and Venice. Not exactly “urban” in the way you think of SF or NY but certainly relative to the suburban communities of LA and at a minimum it’s where young people want to live / hang out
  • In England they were all in The Thames Valley (45 minutes west of London) and these days they’re all near Shoreditch east of London
  • I think NY has always – by definition – been urban. But there does seem to be huge startup energy around the Flatiron District / Union Square.

For those that aren’t aware of the broader technology shifts of cloud computing, the trend is described in a post I did about changes in the software industry.

The costs of building a company have gone down dramatically, from $5 million to get to launch in the late 90’s to $500,000 (or even lower) today for web companies.

As a result younger people are creating startups because they can. It’s far easier as an inexperienced 23-year-old to get $200,000 from somebody than $2 million or $5 million.

So we’ve seen an explosion in the number of startup companies and subsequently a huge burst in the number of incubators.

I think the urban tech renewal is happening for the same reason.

It’s not that young people wanted to live in Mountain View in the past. In fact, so many DID NOT that companies like Google & Yahoo! had free buses with wifi from San Francisco to their Palo Alto and Sunnyvale headquarters.

Young people want to live where the action is. They want to live amongst other young people. They want nightly restaurants, bars, dance clubs, karaoke, or whatever other late night activities are available to those with fewer encumbrances.

You know the story. You get older. You get married. You have a kid. Then another. Suddenly you feel the pull for a backyard and nearby parks. And a bigger house wouldn’t hurt so that when your mother-in-law is in town for 3 weeks it doesn’t feel like you see her quite so much.

So you move outside the city – even though you feel a strong pull to stay. It’s why many of the older executives at San Francisco startups live in Marin County and commute in. Or they do so from Burlingame, San Ramon or even Palo Alto.

I suspect the shift from the burbs to urban environments – or more specifically to places where young, single, technical startup people WANT to live – will continue into the future and will not decline.

And with startups so go VCs. Spark Capital, Flybridge, Founder Collective, NextView Ventures … all in Boston or Cambridge not west of the city.

In San Fran you find more recently established VCs like True Ventures, First Round Capital, Freestyle, Kii Capital and others.

And there has been a similar move from Sand Hill Road to Palo Alto itself with firms like SoftTech VC, Felicis Ventures, K9, Accel, True Ventures (other office) and Floodgate.

In NY you find the broader Flatiron / Union Square are home to USV (obviously), IA Ventures, First Round Capital, FF Ventures and the incubators General Assembly and TechStars.

I’m sure I’ve forgotten many who have moved or set up anew since I wrote the list in one sitting and with no research.

In LA the VC shift is clearly to Santa Monica / Venice, home of Rustic Canyon, Greycroft, Anthem and just about every incubator (Amplify, Launchpad, Mucker, Science).

GRP’s offices are near Beverly Hills. Our lease runs out in 2013. No prizes for guessing where our new offices will be located ;-)

Image courtesy of Philip Bouchard from Flickr

This post originally appeared in Both Sides of the Table on July 10, 2012.

Topics: Demographic Analysis, Economic Development, Talent Attraction, Technology
Cities: San Francisco

8 Responses to “Why Technology Is Driving More Urban Redevelopment by Mark Suster”

  1. the urban politician says:

    Wow, amazing how much some people are hard wired to only talk about coastal cities.

    Nevermind that perhaps the greatest migration of companies from suburbs to the urban core is occurring in Chicago (both tech and non tech companies).

    Also, this so called “tech boom” in NY is really quite the bit of hype. If it were taking place in any other city, I”m sure it would be cast off as “me too” boosterism, but we all know that among elite urbanist circles, NY always has and always shall be given a pass.

    Rant over.

  2. the urban politician says:

    I would also like to add that there really is a lot, lot, lot more to the economic energy of an “urban” place than mere VC funded startups. This whole VC startup thing is almost the definition of a cliche.

    Perhaps when everybody is done trying to be the next Facebook they will go back out and work for regular companies again–you know, accounting and law firms, banks, management consultancies, industrial firms, etc.

    Come to think of it, I”m glad that Chicago hasn’t entirely hitched its wagon to this pipe dream bubble of an industry.

  3. Brett says:

    I thought Facebook got it’s start at Harvard, not Stanford??

  4. TUP, I believe you’re right to be skeptical of the new wave of digital startups. There’s plenty of evidence this is a bubble market again.

    The jury is still out on New York tech as well, but they have a key advantage in that NYC, as the media center of the US, has a leg up in digital, and also in a lot of marketing type apps. Chicago’s strength has always been B2B, which is why I find the digital push a bit strange.

  5. Chris Barnett says:

    Agree with TUP: where’s the beef? These fast-paced startups are starting to look like 2000: cool stuff in search of a revenue/earnings model.

    The value of tech has proven over and over to be either integration into existing companies, or creation of new companies around new business models for doing something that is already done.

    For instance: Google and Facebook have become advertising media. They compete with print and broadcast. From 30,000 feet, they are not much more than a new way of selling advertising (alongside free gadgets).

    Amazon, Ebay, Craigslist all disrupt and supplant storefront retail/distribution on a massive scale, driving the last wave of retail business-model innovation (big-box specialty retail such as B&N, Circuit City, Best Buy, etc.) to the brink. Netflix kills Blockbuster and Hollywood Video.

    Big retail operations develop a significant online component and integrate it into their existing retail/distribution system: Target.com, Chase.com, etc.

  6. Peter says:

    “where’s the beef? These fast-paced startups are starting to look like 2000: cool stuff in search of a revenue/earnings model.”

    Can’t disagree. Facebook is just outright creepy.

  7. Alon Levy says:

    Facebook started at Harvard, but Zuckerberg moved to Palo Alto early to base the company in Silicon Valley.

  8. Frank Navarrete says:

    Funny how no mention of people’s desire to be rid of the 2-3 hour roundtrip commute (mostly by car) is offered as a reason why one would want to live in the city. Not driving for the last three years has changed my life.

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