Why San Francisco is Still the Place for Startups

0:00The track record, the experience, the mentoring, the networks, all of that's here. If you've got a hot idea and you're thinking like, where's the right place to start it? I think this is the right place to start.

0:19Benjamin Gottlieb here with Shopify on location. This is a special in-person series from Shopify about how place affects business. If you've been listening to the podcast the past few weeks, you know we've been in San Francisco at our offices here chatting with merchants and entrepreneurs. When you're starting a business, the conditions have to be just right. The timing, the tech, product, and then there's that old adage, location, location, location. Well, my guest today has lived in the Bay Area for more than three decades, and he's currently the chief economist for the city and county of San Francisco.

0:57So I guess you could say Ted Egan knows a thing or two about the business landscape of SF and Silicon Valley, and whether this is still the place to be an entrepreneur. Ted, thank you so much for being here. Appreciate it. Oh, it's my pleasure, Benjamin. So, Ted, is it? Is San Francisco still that place to be an entrepreneur? Well, I think San Francisco right now is a land, you might say, of opportunities. The city has had a major economic adjustment in the three years since the start of the pandemic. We had a big population drop. We have a downtown where a lot of people are working remotely. And so the offices are not being occupied.

1:34And we've had a slow recovery in sales. But I think based on past patterns, that's the time of opportunity in San Francisco. We've had so many stories of the San Francisco goes through an economic challenge. And then five or 10 years later, it's booming again. So as you say, timing is everything. And just when it looks like it's not the right time, it might be the right time. So in other words, buy the dip. Is that what you're saying? Well, you know, don't buy the peaks. certainly. So what does opportunity look like? You say there's opportunity here. What does that look like exactly? Well, I think, you know, the thing about San Francisco that I think makes it such an interesting place to come and do a show like this is it has such a tradition of launching retailers and retail concepts that have been, you know, nationally influential.

2:21And you've probably talked to a number of companies that have either done that or are on their way. It's got a unique market. You know, it's a very affluent city. It's a very open-minded city. It's a city where people are experimenting and trying new things in terms of their experiences and their consumption patterns. And so for people with kind of bold ideas of lifestyle and related things, it's a great place to start a business from kind of the market opportunity side. And on the other hand, it's expensive here. It can be challenging to operate here. And those things are still true. You know, It's a big built-up city.

2:56You just don't kind of, it's not like opening a storefront on some suburban mall somewhere. And so it can be challenging for businesses too. And the actual number of brick and mortar stores in the city, as in most other cities, has kind of been on the decline. But retailers here are actively embracing tech. And I think there are a lot of success stories as well. There's lots of success stories. No question about that. when you think about San Francisco and Silicon Valley, there's something about San Francisco that it's like, hey, you know what? I want my business to be here. If I'm going to make it in X, Y, or Z industry, move to San Francisco.

3:33But as we know with the pandemic, this decentralization of so many things, including commerce, is that still the case? For example, if you want to start a retail business or a tech business, do you need to physically be here? Well, if you want to start, it's not clear where you physically are if you're starting up a tech business. I mean, a lot of these startups are kind of virtual. We've seen a lot of tech startups get launched and funded since 2020, and they haven't got office space yet. On the other hand, are they here? Well, the people are here. We can see whether tech workers are moving out of the SF area, and they're really not.

4:09So I think despite the fact that it's an expensive place to live, most of the people in tech see their future here. We've kept up our share of venture capital investment. We're way out ahead of the rest of the other metros in the country for that. So I'm not really worried about the future of tech in the Bay Area. I still think it's the place for tech and, frankly, to start lots of different types of businesses. What you're talking about is the human capital, right? So the human capital is still here, the expertise, the engineering, the entrepreneurial mindset. The track record, the experience, the mentoring, the networks, all of that's here.

4:44So yeah, it's exactly right. If you've got a hot idea and you're thinking like, where's the right place to start it? I think this is the right place to start it. I'm chatting with Ted Egan. He's the city economist and county economist here in San Francisco. By the way, it's a little bit of a funky thing, but the city and the county are very much linked for many things in the city, right? Well, it's actually one thing. The reason we're called the city and county of San Francisco is we're one combined government. So I wish I had two jobs, but it's actually one job. So it's not as impressive as it sounds as just one job.

5:12I'm not that busy. Well, you're talking about this idea of San Francisco still holding the mantle of being the place to be for many things. I'd be remiss if I didn't bring up some of my own observations just being here. I don't live in San Francisco, but we're here all this week and we're having interviews on the show for a few weeks here about what's going on in San Francisco. You talk to drivers of Uber cars or taxi cabs. You talk to people that work in restaurants, service. And there's this depressive type attitude about what's happened to the financial district, especially, which is where we are right now.

5:48I mean, how has this part of San Francisco that used to house so many thousands of people working in tech and finance, how has it changed? Well, I mean, I think, you know, what people are telling you is the truth, right? I mean, these office buildings that were 95 % full before the pandemic are 50 % full now. And the main reason for that is their tenants are tech tenants, and tech is the industry that really jumped into work from home with both feet.

6:20And there are a lot of advantages to working from home. You can save yourself the commute. You've got that much more time for work-life balance stuff and doing additional work if you need to. And so workers love it, and employers are coming around to it. And I think the important thing for the city to remember is what people were talking about at the start of the pandemic, which is we're just out of here and I'm never going to see you again in person and we don't need offices anymore. That's not really the model. The model is hybrid. The model has come in now on average three days a week. So what does that mean?

6:52It means businesses have to think, what's our office space look like for three days a week as opposed to five days a week? And for many businesses, not just in San Francisco, but everywhere, it's like, well, we don't need as much space. And so the market has to adjust to that, and the market's been slow to adjust. But I think that that's the main thing that's going on, and it will take time. You know, tech is a lot of the office market in San Francisco. And kind of as a group, they said, we used to think we need a lot of space. Now we don't need so much. And so kind of the office world is kind of looking around for the next opportunity.

7:25They're looking for the next opportunity. What does that mean from a city and county perspective for San Francisco? Well, it means the things that you're talking about, about the Uber drivers or the transit riders or the city tax collections, small business serving lunch and stuff like that. They're kind of in a holding pattern until the office market sorts itself out and find new tenants or new uses for these buildings. And, you know, it's been three years. It's going to be a while, I think, before we get there. But as we were talking about before, I think the fundamentals of the region are still very strong.

7:56The things that made the Bay Area very successful and affluent and attractive to people are still there. And so I'm optimistic for the long term. I was going to say, you sound optimistic. Yeah. Yeah, I mean, maybe it's just because I'm reacting. The city's been getting a lot of bad press. And maybe I'm thinking like, you know, it's getting too much bad press. Like a couple of years ago, I was like maybe waving the red flag a little bit. I was like, look, people, we've got a real issue here with this work from home stuff. Right. Now maybe it's gone a little bit too far in the wrong direction and there's a little bit too much doomsaying.

8:27I actually think, you know, for the long term, before the pandemic, we didn't have enough office space. We don't have to worry about that anymore. Our subways were full to capacity. We don't have to worry about that for a while because people aren't coming to work as often. We had a housing crisis and now our housing prices are down and people are working all over Northern California and coming in occasionally. So basically, the city's biggest impediments to long-run growth, work from home, is helping to solve. So that's the thing that makes me more optimistic for the long term. But yeah, we've got a difficult road in front of us because we've got some painful adjustment to make as these offices find new uses.

9:05I'm not an economist, but I do know that for someone like yourself, projections, forecasts, looking ahead, it's a big part about what you do. And I'm curious, what has changed since you were waving that proverbial red flag to now that's made you change your economic forecast to looking a little bit sunnier? Well, it's still true that the thing I was highlighting is that, you know, we're looking at years of painful adjustment. And so that remains true. But I think the distinction I want to make is I don't think San Francisco is in a downward spiral. I think there's some risks that if we don't do the right thing, we could turn into one.

9:45But I don't think we're there. We're not in a situation where the tech workers are looking at each other and say, let's all move to Miami. What are those risks? Well, I think, you know, there's basically four of them, right? I mentioned the tech workers aren't moving out of the area. If they start doing that and they say, we don't need to be here, let's save money and go someplace else. You know, the weaker that pool of critical mass is, then the less pull there is to join it, right? And it's no longer the place to be. That hasn't happened, but something we got to watch. The pandemic and this remote work thing and the vacancy downtown, that's hitting the city's finances.

10:18So if the city turns around and says, hey, we need to raise taxes because we're short on dough, you know, that's going to make the erosion of the tax-based problem worse. And you might be provoking people to leave. I don't think that's happened yet, but you definitely don't want to get in that kind of a downward spiral. Transit isn't having the riders and the transit agencies have financial problems. If they have to cut service, then you can't get people downtown. And then you're really stuck. So you got to make sure transit is working. And then also, I think it's the small businesses and the kind of urban experience downtown.

10:50You can't have people saying, I don't go to downtown San Francisco because there's nothing to do. And then there's nothing to do. And so there's even less reason to go there. That feedback loop almost, right? We need a positive feedback loop downtown. And the city has its part to do there as well as the business community. I'm here chatting today with Ted Egan, the chief economist for the city and county of San Francisco, although he's told me that's one job. And by the way, if you're listening to our show right now, I hope you're enjoying it. If you haven't already, please do us a favor. Subscribe to Shopify Masters wherever you get your podcasts.

11:20And tell your friends and family about us. Let us know what you think by leaving a review too. And thank you so much for your continued support. We were talking a little bit earlier about support that the city and county had been giving to business owners post-COVID. I'm just curious from a financial perspective, what are the plans the city has for supporting small businesses as we enter this next three or four or five years? Well, one of the things the city just announced, which I think is a really cool program, is they are encouraging retailers to open up pop-up spaces and actually providing financial support to do so in the vacant storefronts of vacant office buildings downtown.

12:02So it's a way of letting startup small businesses have an opportunity to get kind of prime retail space as downtown recovers without a major financial commitment. And the city is supporting that process financially.

12:20And the city is doing a lot of things downtown around event programming and cleaning up the place. And it's starting to get better. And so I think that that's the right direction for the city. I'm glad you brought that up, cleaning up the place, because that is a broad statement for what I would imagine would be some of the societal ills that are plaguing not just San Francisco, but cities all across the country, and frankly, the world. Rise in crime, rise in unhoused people. These are not unique San Francisco problems, but there have been increases in your city and region over the last few years in those areas.

12:56From an economic perspective, also from a business perspective, how does that affect the recovery of San Francisco? It's a great question, but I want to clarify, when I meant cleaning up, I meant physically cleaning up. If I want to talk about crime and homelessness, I would use those words. And I'm happy to do that. I mean, look, they matter, right? They particularly matter to retailers. And it's a problem about the city as it is in many other cities. They being crime and problems with unhoused folks. Yeah, exactly. You can go into retailers in San Francisco, again, like in a lot of cities, and see all of the merchandise kind of wrapped up as a theft prevention method.

13:34And we've had well-publicized examples of stores closing down for property crime reasons. And, you know, San Francisco has had high property crime for a long time, and it's been part of the cost of doing business here. But I think we've been in a new territory the past few years, and we're seeing retailers disappear for that reason. And that, you know, we need to address that. That needs to be fixed, or you're just not going to have a healthy business environment. But I do think on the property crime thing, There's a direct connection between there and the business climate. And we're going to need small businesses to stay open, you know, take us through this period of adjustment, hopefully new ones to start.

14:12We really need to create a supportive environment and safety for themselves and their customers is a big part of that. I want to get back to this issue of what's next for San Francisco, because as I mentioned, and please correct me if I'm wrong, but a big part of being an economist is looking ahead, planning, and business owners do this too. what's my two-week plan, but also my six-month plan, my six-year plan. For us here at Shopify, it's our 100-year plan that we're trying to build to be a 100-year company. Looking ahead at what's going to happen with hiring, right? San Francisco has thrived because not only is the best talent here, but you can attract the best talent to San Francisco.

14:52I would imagine there are some struggles because of what's happened with that. What does the employment pipeline look like right now? Well, you know, it's interesting for all of the kind of negative press you hear about the San Francisco economy, our unemployment rate's like below 3%. And it was 2 % until a couple of months ago. What does that mean for businesses in response to your question? It's actually not great. It means it's hard to hire people. And one of the things that happened during the pandemic is that there were a lot of layoffs. In San Francisco, we had a fantastic public health outcome.

15:23Like, we had the lowest COVID death rate of any city. But one of the ways we got there was, you know, strict rules and also extremely cautious people. Like people in San Francisco stayed home and shopped online or just, you know, socialized in their houses way past the time that the public health department was kind of mandating. I mean, they just didn't want to get sick. And so that meant that retail, restaurants, a lot of small businesses had a very hard time with customers and laid folks off and people left. It's an expensive city to not have a job. So the upshot of that is like more than half of the food service workers who were living in San Francisco in 2019 were not doing that job in the city in 2021.

16:08And wages that the restaurants have had to pay have been really, really high as they're trying to get people. We're talking about, you know, young adults in their 20s who may have flocked to San Francisco during the boom times and were quick to leave, you know, when things turned out. We need those people back. And the businesses that you're talking about need to get them back. They're not just going to provide labor, but they're going to provide business, customer opportunities. That's always been a big part of what makes San Francisco fun is the all ages that are enjoying living here. So that's something that's got to recover.

16:43And that's going to be a help for the labor supply issues for businesses too. But again, it's a time of opportunity. It's time to take a risk at San Francisco. Time of opportunity to take a risk on San Francisco. I think if you were abetting person looking at the history, you wouldn't bet against this city. Yeah. And again, with the publicity, I would say the reputation is not great. But yeah, you look at the history, you look at how many times the city has been written off and bounced back. I mean, I actually think what we're going through now is kind of minor compared to like the collapse of the internet sector in 2000 or, you know, the problems the city had in past time.

17:19So yeah, I think there's a risk there, but it's not a bigger risk because it's been in the past. If I could drill in on one issue you brought up earlier, which is the tax revenue for the city. I'm sure you're thinking a lot about this, especially sales tax from selling food, but also just taxes from these office buildings being empty and how that affects the bottom line of the city. Is that an actual real problem or is this a perceived issue? I don't think it's a perceived issue. I think it's a real issue. It's not an immediate issue because of the way our property tax works. It's going to take a long time for us to feel it, but it's kind of like that iceberg that's a mile away that you can't miss.

18:03unless people start going back to work five days a week like they did before the pandemic those office buildings just aren't worth what they were before and one way or another eventually that's going to work its way into our property tax

18:21now that's 18 of our property tax from offices we also get a lot from from housing but the reality It really is. A lot of the reason San Francisco housing was so expensive is you had to live in San Francisco to access these great San Francisco jobs. Sure. And in a world of remote work, you don't have to live in San Francisco. And so our housing market's been pretty soft while the rest of the country, you know, the housing market's been on fire. So we may also see weakness from property tax from housing. You know, from a running the government point of view, it's good that you have that kind of runway and you can sort of get used to the idea that maybe the next 10 years aren't going to be quite as lucrative as the last 10 years, but it's definitely a real issue for us.

19:01And so does that mean a reimagination of what some of these buildings look like? Right now, we're an office building in the financial district, but, you know, this building, I would imagine, is not full right now. I mean, what do you think? Well, there's going to be an adjustment in rents that hasn't really happened yet. And then we'll see what happens. San Francisco office rents have grown a lot faster over the last 25 years than offices in a lot of other places. And many businesses and industries across the Bay Area were kind of priced out of San Francisco. And if rents come down, we may wind up with a more diverse set of businesses occupying these offices.

19:36If they come down a lot and they just can't find tenants, then people will start to say, what else can we do with these buildings? You know, some of them may get turned into housing. The housing market is still depressed, though. And so developers are saying, until I see the housing demand, I really don't want to pay top dollar for an office building. So we're not seeing that yet. But again, this is going to take years to unfold. And so that's a long way of not answering your question. But I was going to say. Are you being an economist is not answering questions you don't know the answer to? Well, and you were telling me when you walked in, you've been doing a lot of press recently for obvious reasons, not just because of the large number of tech layoffs we've seen.

20:13But there's also a little bit of a bank issue that's been, let's just say, close to a number of the employers in San Francisco. I'm just curious what that was like for you as the city and county economists here in San Francisco when we found out that one of the largest banks in the country was going under. And just to put a fine point on this, we're talking about Silicon Valley Bank for our listeners. Yeah, it was a crazy few days, right, because on Monday, no one would have expected it. On Friday, it was awful news. And then on Monday, depositors are protected, nothing to worry about. So that was going 360 on that particular issue.

20:51You're particularly worried because they had a lot of depositors' money, and those depositors are tech startups. So it's great that that was protected and that from the standpoint of the regional economy that those businesses just didn't lose the cash. Now, lending conditions are going to change for startups in the future. And I'm not the banking expert to say whether that's good or bad. But how might they change? Well, you know, Silicon Valley Bank was giving loans to startups that weren't profitable. Maybe your average bank wouldn't have done that. And maybe banking in the future won't act that way.

21:27Did Silicon Valley hinge on getting cheap loans backed by venture capital investment? I don't think so. I think it runs on innovation. And yes, easy money is nice, but it's not a must-have for the tech ecosystem. So I'm glad that the tech layoffs weren't exacerbated by people suddenly losing their money. But I think, again, the underlying strength, as we were saying before, of the Bay Area is the human capital, not the financial capital. If you have the human capital, the financial capital will find it. And so I'm not super worried about the banks at this moment. But again, it's only Wednesday.

22:03So who knows? It's only Wednesday, and this episode, of course, is going to be airing in a few weeks. Who knows what will happen by then? So it's hard to predict. But that in and of itself must be an uncomfortable position to be an economist, right? I mean, to be an economist is to look at data, to look at what's in front of you and say, we can forecast X, Y, and Z. But things seem somewhat volatile right now. Well, you know, there's economics and there's news. And they overlap, but they're definitely not the same thing, you know? And so when you watch financial news every day, some of the time they're talking to economists and some of the time the economists can say this is what the big trend is.

22:42But a lot of the time it's driven by events. And the economist is just as much a spectator as everyone else. Ted, you mentioned the tech layoffs, and I just want to cover that quickly. What has that meant for San Francisco? Have we seen folks that have lost their jobs here? Are they staying? You were talking earlier about retail folks, service industry folks moving out of San Francisco. But the tech workers that have lost their jobs from maybe the COVID hiring boom, are they sticking around? It's a great question, and it's too soon for us to know because the tech layoffs really started in earnest in the second half of last year.