As Costs Soar in Silicon Valley, San Diego Looks for Startup Gains

Venture capital continues to gush into Silicon Valley, but is the Bay Area’s decades-long startup boom sustainable? Talk in the valley has turned increasingly gloomy amid signs that its phenomenal tech boom—like Moore’s law itself—is bumping against its upper limits.

One perspective in this conversation comes from Redpoint Ventures partner Tomasz Tunguz. In a post last year on The Rising Costs of Scaling a Startup, Tunguz cited data showing that office prices in downtown San Francisco almost doubled over five years—from $36 per square foot in 2009 to $63 a square foot in 2014.

Tunguz was focused on the region’s priciest submarket, where the average asking price for office space is now over $72 a square foot. But the affordability and availability of commercial office space has been rising throughout the Bay Area—and it is increasingly a limiting factor for tech startups.

The disparity becomes most apparent in a comparison with office lease rates in premium submarkets elsewhere in California, according to Michael Combs, a CBRE research manager in San Diego. For the most expensive (Class A) office space, Combs says the most-recent data shows that San Diego’s real estate lease rates are half the cost of those in downtown San Francisco or SoMa.

Regional Market Data (credit: CBRE Research)

Regional Market Data (credit: CBRE Research)

CBRE 2 Submarket office lease rate

Submarket Data (credit: CBRE Research)

In his blog, Tunguz also estimated that payroll costs for a San Francisco technology worker roughly doubled between 2009 and 2014, from $90,000 a year—including salary, benefits, stock options, and perks—to well over $180,000.

Some might quibble with his analysis. For example, Kibin co-founder and CEO Travis Biziorek has argued that over-inflated startup valuations are a far bigger factor than payroll costs in the skyrocketing cost of growing a startup in Silicon Valley. (Biziorek writes that he doesn’t disagree that the cost of running a Silicon Valley startup has doubled.)

Tech Payroll Costs by Market

Tech Professional Salaries by Market

But Tunguz was preaching to the choir in Silicon Valley, where the soaring cost of living has precipitated an exodus that has been underway for at least the past year. A recent poll released by the Bay Area Council found that over one third of the residents in Santa Clara, San Mateo, and San Francisco counties now say they are ready to leave, due chiefly to high housing costs and intractable traffic.

So if the bloom is off the rose in Silicon Valley, what does that mean for startups in next-tier tech hubs like San Diego, Seattle, and Austin, TX?

At the San Diego Regional Economic Development Corp., economic development manager Jesse Gipe writes in an e-mail, “It has become more and more apparent that the high cost of living and limited supply of real estate are becoming real challenges for companies in the Bay Area.

“Silicon Valley has been the epicenter for much of the tech ecosystem, but as companies look to reduce costs and retain high-quality talent, this is creating opportunities for other areas: San Diego is an attractive market for growth. Recently, we’ve seen this with companies like Wrike, Bizness Apps, and Experian expanding and relocating to San Diego.”

Mike Krenn, president of the San Diego Venture Group, agreed, saying he now sees a good opportunity to recruit engineers and other high-value employees to San Diego. And Krenn is not alone.

“There is no shortage of really interesting people from really good companies who are willing to move to San Diego—and that is significantly different that it was five years ago,” said Mark Lonergan, founder of the executive recruiting firm Lonergan Partners in Redwood City, CA. “San Diego is primed to become massive as a haven for venture capital.

“We have the same issues in Seattle and Austin,” Lonergan added. “There’s no reason why all three regions couldn’t be as big as Silicon Valley.”

Nevertheless, Krenn still voiced some frustrations with the Silicon Valley mindset.

“When I talk to VCs in Silicon Valley, they say they’re sick of the high valuations, and sick of engineers jumping around from job to job,” Krenn said. “So I ask them if that means they’re going to start hunting deals here, and they say, ‘No. I’ve still got plenty of deal flow.’”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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