By Peter Henderson
SAN FRANCISCO (Reuters) - The YouTube video, featuring a young blonde sitting in a strikingly modern San Francisco home, offers a telling insight into the attitudes that are shifting the geography of the Bay Area technology scene.
"Who has a party in Palo Alto?" she asks the camera, in a dig at the suburban capital of Silicon Valley that helped make the two-minute comedy, "Shit Silicon Valley Says," a Web hit. For many of the twentysomething engineers and other professionals who play a central role in the latest Internet boom, the question is purely rhetorical.
More than ever, technology entrepreneurs, and their investors and employees, are choosing the urban charms of San Francisco over the sprawl of neighboring Silicon Valley. In the South of Market district, the nexus of the city's tech industry, rents are soaring and latte lines are lengthening - conjuring memories of the dot-com bubble of the late 1990s.
Late last year the city had 34,000 tech jobs, topping the high set at the peak of the dot-com boom in 2001, according to a Jones Lang LaSalle analysis of California Employment Development Department data. Twitter, Salesforce.com, Zynga, Yelp and other sizable Internet companies now call the city home.
Half or more of graduates of the tech incubator Y Combinator, a widely watched Silicon Valley institution, now move to San Francisco, founder Paul Graham said by email. Four years ago, he said, the city lacked the seriousness of purpose that infuses Silicon Valley. "I'm suspicious when startups choose SF," he wrote at the time. "Things have changed," he declared recently.
"This is really where the center of gravity is," agreed Y Combinator graduate Dan Siroker. He worked for Google in Mountain View but started his own business, a company that lets businesses test versions of websites, called Optimizely, in San Francisco. And the profitable company just got a round of venture funding.
That's not to say that Silicon Valley, which extends roughly 40 miles south of the city to San Jose and includes towns such as Palo Alto, Menlo Park and Cupertino, is no longer central to the tech scene.
San Francisco captured 20 percent of all venture capital funding in the last quarter of last year, its best showing ever, according to a report by Pricewaterhouse Coopers and the National Venture Capital Association based on Thomson Reuters data. Silicon Valley accounted for a strong 27 percent of all VC investment in the same period.
Memories of the dot-com bust, which left parts of the South of Market district all but abandoned for a time and sent rents -and restaurants - into a free fall, also loom large.
But the new generation of Internet companies has a more real-world, and arguably more urban, outlook. Customers of car service Uber, for instance, see a map of nearby cars on their smartphone app and can calls one over in minutes.
Sahil Lavingia, who dropped out of college in Los Angeles to work at Pinterest in Palo Alto, is among those attracted by the city. Last year he left Pinterest and headed north, starting his own online payment service, Gumroad, which lets sellers tweet their wares and bears the design sense that is a hallmark of the San Francisco scene.
"I moved up here for two reasons. One is that Palo Alto is really boring," the 19-year-old chief executive officer said. "For me personally, it's boring. And two, it's boring for other people." To be fair, he says, San Francisco parties are boring, because the people you really want to meet are home working. But the city is international, diverse - and has the people he wants to hire.
Blame the urban revolution on Google, which like so many tech companies was born at Stanford University in Palo Alto. A van pool started by a single Googler in 2004 has turned into a massive system of private buses that hum with the clicks of laptop computers hooked into the onboard Wi-Fi. About a third of Google's employees - about 3,500 as of late last year - climb on a bus twice a day, mostly heading to or from San Francisco.
The environmental effects of the buses are debatable. They take cars off the road, as Google points out, but they also facilitate employees moving far from the company's Mountain View campus. Buses from Facebook and Genentech now crowd San Francisco neighborhoods along with those of Google.
Facebook's decision in 2008 to cancel a housing subsidy for those living near its Palo Alto headquarters removed the last barrier to moving for hipsters in Silicon Valley, says Kevin Hartz, founder of San Francisco-based Eventbrite, an online service for organizing real-world events, from arts fairs to political campaign rallies.
Nowadays, many young techies with jobs in Silicon Valley settle in San Francisco, seduced by the ease of the commute on a cushy bus.
Every day, though, that bus passes SOMA residents strolling to work. "What a bus!" turns to "Why a bus?"
Eventbrite should consider putting up an "If you worked here, you'd be home" billboard, Hartz jokes. "We think that they purposely send the buses onto the freeway away from SOMA these days," he said. "If they came up the Sixth Street on-ramp, they'd literally be going right by our office."
A MATTER OF CHARACTER
There are still plenty of reasons that San Francisco is not a great place for business, starting with taxes. Among them is the city's unusual 1.5 percent local payroll tax, which the business community views as a jobs killer.
Mayor Ed Lee, a mild liberal technocrat, last year helped shield companies going public from the brunt of city taxes - and thus narrowly avoided losing Twitter to suburbia. Now he wants to swap a payroll tax for a revenue tax or other alternative.
"It's all about compromise, and the good news is all of the constituencies are working together," said Ron Conway, a prominent supporter of Lee and an angel investor known for seeding hundreds of early-stage companies.
Conway moved back to San Francisco from the Valley eight years ago for personal reasons. His business followed suit - now 60 percent of the roughly 200 companies his SVAngel portfolio holds are based in the city. Five year ago, three-quarters were in Silicon Valley.
But local progressives - the ultra-liberals who give the city its far-left reputation - have vociferously opposed the tax breaks, arguing that the payroll tax reflects the cost of city services and that newcomers should not be favored over the folks who give San Francisco its character.
The city turned more politically progressive after the "unchecked excesses" of the dot-com boom a decade ago, said Aaron Peskin, a former head of the Board of Supervisors, San Francisco's city council. "I'm always amazed by human beings' ability to conveniently repress recent history," he said.
The last tech boom created jobs - and ill will, Peskin noted. "When you are not taking care of people and families who have lived here for generations and made this the city that it is, it's a little lopsided."
Lee was heckled at an April neighborhood meeting near Golden Gate Park. Residents said he was giving handouts to wealthy tech companies as costs for average San Franciscans went through the roof.
Politics aside, high rents could eventually be problematic for businesses, too. Class B offices, including the industrial-looking lofts that tech startups love, currently go for around $43 per square foot and are climbing, according to Colliers International, a real estate broker. The square-foot rate is double that in 2003, though still comfortably below the 2001 peak of $65.
GROWN-UPS PREFER SILICON VALLEY?
Silicon Valley still has major advantages as a location, including wide-open tracts that can accommodate large corporate campuses. Before his death, Steve Jobs announced a plan for a 2.8-million-square-foot doughnut-spaceship-shaped headquarters for Apple on 126 acres in Cupertino, which would have nature walks, restaurants - and parking.
"As startups get beyond startup stage and start hiring people, they look to move out of San Francisco," said Chuck Reed, the mayor of Silicon Valley capital San Jose, where Cisco Systems Inc's campus stretches along several stops of the city's light-rail system.
One of Cisco's former top executives, Mike Volpi, recently returned to Silicon Valley after a few years abroad. It's a good place to raise a family, he says. But Volpi drives north to SOMA every morning, talking to his European colleagues at venture capital firm Index, which established its West Coast headquarters in San Francisco.
"Skate to where the puck is going to be," he said, quoting a hockey adage.
The high-ceilinged, white-walled Index office, accented with steel and blond wood, is all San Francisco style. And Volpi and the young company CEOs with whom he meets can visit one another on foot.
(Additional reporting by Gerry Shih in San Francisco)
(Reporting By Peter Henderson; Editing by Jonathan Weber and Douglas Royalty)