why tech companies are in San Francisco when they could have cheap offices and fast internet pretty much anywhere?
In: Technology
The companies are there to stay because the talent is there to stay because the companies are there to stay…
The only solutions to the high costs of housing and office space are:
1. Substantially improve transportation in and out of San Francisco, maybe with high-speed train tunnels taking people non-stop from San Francisco to at least as far as Stockton and Davis.
2. Change whatever zoning laws are keeping everything between San Francisco and San Jose from turning into high apartment buildings and office buildings.
The general concentration of talent and access to private equity have been answered, but one other thing to call out is that engineers/the office aren’t actually that expensive.
A decent Silicon Valley company can be expected to be valued at least 10x revenue. So that is if they want to IPO as a billion dollar company, you need 100 million in revenue. Some companies can do much better (Salesforce just bought Slack at 70x revenue).
So the number everyone cares about is what do it how quickly can you secure that revenue. A startup wants to first prove its product has market fit, that is people will buy the product. Then the next step is to go from some people/companies are buying my product to people are buying 100 million of the product. So the companies are literally trying to spend money as fast as possible to grow. Since the cycle is:
1. You have an idea
2. You get some initial capital
3. You prove your idea works, you’ve either created a new market (ex: electric cars) or have build a better mouse trap and are stealing from existing companies (ex: Facebook crushing MySpace, Google crushing Alta Vista/Yahoo Search, etc).
4. Other people notice this and clones of your company are founded/existing companies begin retooling to compete with you
5. Your initial funders from Step 2 give you more money
6. You are now in a race to secure enough market share that you can have that say 100 million revenue and go out as a 1 billion company, because whoever captures the most of the market (you vs the clones) gets the good IPO and the biggest return to the investors.
Companies (and the investors feeding money into them) want to leverage the networks because once they get into Step 5 is can literally be life or death with regard to how quickly they can scale engineering, operations, sales, etc. We call it chain hiring. That is a company head hunts and engineer, hires them, onboards them, determines they are a good engineer, and then asks “Hey who were your favorite engineers at your last job?” All those engineers can expect to get approached and offered big money to follow you over to this new company within weeks. It sucks when you’re the place being raided, but great if you’re doing the raiding. Often times companies will both be raiding a smaller company and also being raided by a bigger shop at the same time.
Or in more realistic reactions:
Company: “We would like to hire you.”
Me: “I kind of like my job, but for a 25% increase in compensation I’d move.”
Company: “We can do 30% if you’ll sign the offer letter today.”
Me: “Done.”
Company. “So which of your buddies would move for a 30% raise?”
This also scale for the humans. You start out there thinking “Okay the 150k I’m making as a junior software engineer is good money but houses are 2 million a pop in Sunnyvale, CA how am I ever gonna afford one?”
Six years and a few of those “I’d move for 25% more” conversations later that’s how you do it.
e:
As a concrete example, the last startup I did:
* First round of funding: For every 98 cents an investor put in they got one share of stock
* Second round of funding: For every $1.92 an investor put in, they got one share of stock
* Third round of funding: $8.57 for a share
They were 25 million shares outstanding at IPO, each of those 25 million shares was worth $26.43 on IPO day. Company had about 200 employees, one office for 70 of them in SF, one office for 130 in Fremont. Those investors aren’t thinking about the rent savings or that they could have saved say a median of 70k per person in salary if they were in Denver, they’re thinking about that delta between what they paid for a share and sold them for on IPO day. For easy math assume all 25 million shares were bought in the third round and subject to short term cap gains taxes of ~50%. That’s still 225,000,000 in pure profit on IPO day assuming everyone hits the sell button. I think our finally numbers showed a little over a billion in gross profit for the investors when we went out since you have those first and second round shares as well. No one was saying “Hey we could have saved 5 million in office costs if we’d done this with a remote team” when that day came.
It’s starting to change. More of my tech clients are looking to reduce their footprint or completely exit the area because of costs of facilities and cost of talent.
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