A Blog by Jonathan Low

 

Apr 14, 2018

Silicon Valley's Astronomical Housing Prices Are Creating Problems For Startups

Tech talent can not afford to move there. And many already there no longer believe they can afford to stay. JL

Sisi Caro reports in the Observer:

House prices in San Francisco are 76% higher than five years ago. That cost translates into pressure on startup founders. For startups that rely on venture capital, rising payroll  means a lower chance to survive. Software engineers in San Fran earn 20% more than in other parts of the country. “Startups need time to find a profitable business model before they burn VC money. It takes three years to infinity. When a startup compensates employees with an enormous salary, that shortens its time to find a profitable model.”
Silicon Valley’s skyrocketing housing price is not only driving away top-earning engineers at Google and Facebook, but it is also concerning founders of much smaller startups.
As the Bay Area’s local newspaper The Mercury News noted, pressured by enormous salary expectations, the Valley’s startups are increasingly hiring from outside the Bay Area.
“Startups that decide to keep all their employees physically in one office in the Bay Area by default become vehicles that transfer cash from venture capitalists to Bay Area landlords,” Chris Nicholson, co-founder and CEO of Skymind, an open-source artificial intelligence startup, told the paper.
Software engineers in San Francisco on average earn 20 percent more than similar jobs in other parts of the country, according to Glassdoor data. Yet, even they struggle to afford a home near their offices.
According to Trulia data, average house prices in San Francisco are 76 percent higher than five years ago.
That cost eventually translates into pressure on startup founders. For early-stage startups that rely on venture capital dollars, rising payroll spending means a lower chance to survive the brutal startup game.
“Eighty percent of startups never make it,” Nicholson told Observer. “Startups need time to find a profitable business model before they burn out the VC money. It takes anywhere from three years to infinity. When a startup compensates employees with an enormous salary package, that shortens its time to find a profitable model.”
Since its founding in 2014, Skymind has hired engineers from across the country as well as internationally. Currently, only six out of its 37 employees are located in San Francisco.
“Everybody was doing that at the time,” Nicholson said. “Silicon Valley is still the global hub of technology. It attracts top talent from all over the world to come here, but that doesn’t mean it’s a monopoly. Many good engineers choose not to move here because of cost of living or tightening visa regulations [for foreign workers].”

“As the founder of a small tech company in the Bay Area, I’m trying to use my venture capital money wisely. But I’m constantly competing with Facebook and Google, which can offer more money and better benefits,” Lynn Perkin, CEO of UrbanSitter, a booking platform for babysitting services, told Observer.
Two years ago, an engineer at UrbanSitter told Perkin he was moving to Portland, Ore., so his two young kids could have more space to grow up. Soon, another employee with a kid also decided to move to Portland. To accommodate employees with children, Perkin made an arrangement for them to work remotely from their new homes.
UrbanSitter now has four engineers based in Portland, one of whom was hired locally. Perkins said the salary for the Portland engineer is lower than that for the same position in San Francisco but is on the higher end compared with local standards.
According to CNN’s cost of living calculator, a person who earns $100,000 a year in San Francisco only needs $71,000 in Portland to maintain the same living standard. Not to mention the wildly differing cost of owning a home. (The median home value in Portland is less than a third of that in San Francisco.)
Perkin said she hasn’t noticed any decline in company morale since the setup of the Portland team. However, venture capitalists warn that this approach is not for every startup.
“We see lots of companies hiring remote workers; it’s a practice that works for some types of companies and products and not for others,” Kim-Mai Cutler, a partner at Initialized Capital and a columnist for TechCrunch, told Observer.
“It depends on the kind of company culture a founder intends to build and on the type of product they’re creating. Some kinds of products are better suited for remote work. In general, I’d say it’s hard for a team that’s pre-product-market-fit to rapidly iterate and coordinate if they’re distributed,” she explained.
Cutler added that having a home base in the Bay Area still has huge benefits for startups in the longer term.
“We have a very deep pool of engineering talent and talent that is necessary for the middle-stages of company growth, in things like user acquisition or monetization or in hiring experienced managers who can lead engineering or product design teams,” she said.
“The Bay Area is still the best place to start a company,” said Michael Dougherty, CEO of San Mateo-based advertising startup Jelli, which has a quarter of the staff in Boise, Idaho. “The whole ecosystem supports that phase of a startup—everything from a significant density of seed investors to support services like legal, co-working and other services that help you get off the ground.”

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