August 2012

SoMa Becoming Start-Up Central

Liz Melchor

High-tech startups are increasingly forgoing Palo Alto and Mountain View, and locating South-of-Market (SoMa). New tech companies are choosing the City over the Valley because office space is cheaper, hires are easier to attract, and Caltrain and Bay Area Rapid Transit stations make Southside San Francisco accessible to public transportation.

Office vacancies throughout San Francisco have fallen for the last two years, and are now at their lowest levels since 2001. During the same period the number of technology sector workers in the City jumped by 13,000, reaching 44,000, who are employed by 1,805 enterprises, 150 more than in 2010.

The commercial real estate market’s recovery in the City has largely been driven by technology companies moving into SoMa, a neighborhood that provides some of the same agglomeration effects as the Peninsula at a lower cost. “The real estate market is just cheaper in SoMa. Palo Alto is just crazy expensive,” said Avichal Garg, who founded Spool, a sort of Tivo for the web. SoMa has a commercial vacancy rate of 3.8 percent. First quarter average rents in San Francisco were $47 a square foot, up 39 percent from the market bottom in 2010.

With the 4th and Townsend streets Caltrain station, startups can be in the City while still having easy access to Palo Alto. With intense competition for programmers and other technology employees, startups need to find ways to make themselves attractive to potential hires. Minimizing their commute is one recruitment tool. Providing around the clock food, and even beer, is another.

Akshay Kothari, co-founder of Pulse, an app designed to make reading news more fun, decided to move his growing company from downtown Palo Alto to Second and Mission streets last month to better attract new talent. While his current employees are evenly split between living on the Peninsula and in the City, he’s betting that the people he wants to hire are more likely to reside close to SoMa. “We felt like moving to San Francisco we will be able to attract engineers who are passionate about design. We noticed that they live in SF.” Kothari said.

Alexander Muse, chief executive officer of ShopSavvy, an app that scans barcodes to find products at the best price, also chose SoMa as a way to attract employees. He described the City as having plenty of young, single coders, ready to both “go nuts” and work all night. According to Muse, the Valley tends to be populated by married men who can’t dedicate the massive amount of time that startups demand. “I’m the guy we don’t want: a 40 year old man, married, with children. I wouldn’t live in the City,” he said.

Sammy Shreibati, co-founder of SaveUp, a rewards program designed to promote positive financial behaviors, said that being located in SoMa has already paid off. He believes that three of his seven employees wouldn’t have signed on if the company had been located in Palo Alto. “Hiring good talent is difficult and competitive, so we have to make it convenient,” Shreibati said. “The decision to have the company in SF was based on a few things. The rents are cheaper here. You can build upwards. There are so many companies around South Park. There are so many other companies that are there, we felt that we could do it down there.”

According to Parker Emmott, co-founder of Waddle, a photo journal app, it’s desirable to locate in an area with other startups. “It is a benefit to be in working close, sharing knowledge, and helping one another out on the technical side or bouncing ideas off each other. There is a good camaraderie,” he said.

Venture firms have taken note of the activity in SoMa and the Mid-Market district, where Twitter just relocated, and are spending less time on Sand Hill Road and more in San Francisco. Benchmark Capital, a well-respected venture firm which has a stake in Twitter, is opening an office at Second and Market streets. Highland Capital Partners, whose main office is on Sand Hill Road, has located part of its Summer@Highland 2011 program, which mentors fledgling startups in SoMa. “When VC firms start to open, you know the center of gravity is shifting a bit. They are spending so much time up here, that it makes sense to have a center up here.” Garg said.

Garg estimated that that are more companies in their nascent stages in San Francisco than Palo Alto, guessing that two-thirds of new startups are in San Francisco, one-third on the Peninsula. As companies grow, they may move south, deterred by San Francisco’s space constraints. The City’s payroll tax which is the subject of a November ballot initiative can also push companies out once they hit a certain size. The 1.5 percent tax kicks in after a company’s payroll hits $250,000. Because the tax applies to all employee compensation, including stock options, when companies are ready to issue stock or their payroll grows significantly, the suburbs become more attractive. If Garg’s company grows to 50 or more employees it will probably return to the Peninsula.

For startups in their beginning stages, the payroll tax tends to be low on their list of worries. “It is not a deterrent, I haven’t thought about it. Nobody that I have talked to has,” Shreibati said. “We are not a cash-flow company, we all have bigger aspirations, it is small peanuts. You just live with it because of the benefits of San Francisco. It is really nice to be near the baseball park.”

 

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