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The Care and Feeding of a Tech Boom

Farhad Manjoo | September 27, 2013 | Story Tech World

Further reading: "The Case Against the Perma-Boom" by Paul Carr

By the time I catch up with Austen Allred this summer, he's already an expert in voluntary homelessness. At age 23, he self-identifies with three tribes: “Minimalist. Nomad. Entrepreneur.” runs the bio line on his blog. A Mormon reared in Provo, Utah, he spent two years on a mission in eastern Ukraine and couchsurfed for a while in China before realizing what he wanted to do with the rest of his life: Yes, he had an idea for an Internet company.

As dreams go these days, Allred’s isn’t unusual. Over the last half decade, launching a startup has become as commonplace an aspiration among middle-class millennials as forming a rock band was for their parents. Allred’s idea— hatched with Garrett Thornburg, a pal he met in Ukraine—would make social media sites less susceptible to rumor and half-truths during moments of breaking news such as the Boston Marathon bombing or the Asiana Airlines crash. In April, Allred and Thornburg showed a version of their site, called Grasswire, to Hacker News, a startup-focused discussion board. The crowd loved it, and the partners decided to pursue the company full-time.

There was just one problem: Allred was in Provo attending Brigham Young University. In theory, he could have started Grasswire from there, or from anywhere else. One of the great promises of the Internet, after all, is liberation from the petty constraints of geography. But in practice, that would have been absurd—Allred had to move to the Bay Area.

In the depressing aftermath of the dot-bomb years, many assumed that the region’s reign as the world’s innovation epicenter was coming to a close. But rather than watching its influence diminish as the Internet and its many-fingered inventions spanned the globe, San Francisco and the 1,700 square miles of suburbs to its south have been transformed anew into the red-hot center of the information economy. “I wouldn’t have moved to Austin or Cambridge to become an entrepreneur,” Allred tells me one afternoon on the phone from Utah, where he’s preparing for his upcoming wedding. “Only the Bay Area offers a big enough differential advantage that…well, you have to do anything to get there.”

Anything, for Allred, means living in his car. When he researched local housing last spring, looking both in the city and on the Peninsula, he found that he would have to spend at least $800 a month for a small room in a house with strangers. By living in his 2002 Honda Civic EX Coupe instead, he could bring his monthly burn rate down to less than $300.

Allred arrived here in May and quickly figured out a routine. He’d start his day with a shower at the YMCA in Mountain View. By 7 a.m., he would be at the Hacker Dojo, a tech coworking space nearby that’s home to a passel of startup entrepreneurs looking to make it big. He would spend all day there, building the site, networking, collaborating on ways to market his idea, and getting leads on financing. Then, after a dinner of canned food, he’d drive to a quiet suburban street or church parking lot, lay out his air mattress on the Civic’s folded-down backseat, and go to sleep—his feet in the trunk, his head in the cab.

Allred lived that way for three months—and he wasn’t alone. “There’s a decent-size nomadic community that makes camp at the Hacker Dojo,” he says. “In the places that I would go to sleep, there were lots of vans that had been set up for permanent living.”

What is it about the Bay Area’s tech scene that drives young people like Allred to endure such conditions in order to make it here? And should we celebrate their influx, or deplore it? The region’s tech economy is once again at full throttle, and we are, as ever, growing wary of our good fortune. A surge in rental prices (up 9.3 percent in San Francisco and 6.9 percent in the larger Bay Area in the past year, according to Zillow) and home prices (up 18.8 percent across the Bay Area) has raised the specter of a metropolis populated solely by the wealthy. How long before we’re all forced to consult the Quora thread on tips for sleeping in our Hondas?

That growing worry over where we’ll live—over affordability and gentrification— reflects a deeper anxiety about how we’ll live. A year ago, in one of this magazine’s most discussed stories, Salon founder David Talbot suggested that the bulging tech sector was threatening to swallow the city whole and turn San Francisco into a “one-dimensional company town.” Talbot, echoing fears held by longtime residents, argued that the boom would alter, and very likely ruin, the peculiar cocktail of innovation, idealism, activism, civic responsibility, and pride that makes San Francisco such a beguiling place. His essay’s headline cut to the heart of the worry: “How much tech can one city take?”

Here’s one answer: As much as we can get. Where the agonists—and, for that matter, the cheerleaders—get it wrong is in characterizing this moment as a boom. The very word connotes unsustainability, a what-comes-up-must-go-down foreshadowing of trouble. It carries the threat of immediate displacement, the forced exodus of an entire class of people who lacked the foresight to pursue a computer science degree. Then, too, it’s associated with an undercurrent of suspicion: The techies are taking us for a ride. San Francisco has been a boomtown from the beginning, and we all know how that movie ends. Big, too-good-to-be-true booms are inevitably followed by bigger, too-sad-to endure busts.

Some might see an influx of young Honda-squatting entrepreneurs as evidence of an irrational exuberance that is sure to come crashing down. But what if they’re wrong? What if it’s different this time? As a tech journalist in constant contact with industry executives, founders, investors, and engineers, I’ve been struck lately by how giddy the techies have become—how often they seem to pause in slack-jawed awe at their industry’s potential to reshape our lives over the next decade. To many in the business, the idea that our latest local economic revival might be a mere short-term spike is absurd, a gross misunderstanding of the forces that the industry is unleashing across the world economy. To be sure, hype is the mother’s milk of innovation, and many of these people are professional smoke blowers. And yet I believe them.

Study the roots of our new tech economy, and you’ll find that it differs in important ways from the Internet bubble of the ’90s. That blip was fed by the promise of future billions that we were certain to realize from the web economy. Today’s tech industry, on the other hand, feeds off of three megatrends that are already minting billions by revolutionizing every sector of the global economy, including healthcare, manufacturing, energy, media, and advertising. The first of these trends is the transition from hulking desktop PCs to ubiquitous mobile devices that allow tech firms—most notably Bay Area behemoths Apple, Google, and Facebook—to address their customers’ desires at a proximity never before achievable. The second is the rising urge to incorporate software into every corner of our lives: from booking restaurants (OpenTable), to hailing cabs (Uber), to searching for jobs (LinkedIn), to adjusting our home heating and cooling systems (Nest), to paying for everything (Square, PayPal), to finding a room anywhere in the world (Airbnb). Third is our full-throated embrace of personalized services—from algorithmically determined TV programming (YouTube, Netflix) to geographically targeted advertising (Google, Facebook, Twitter)—that are fueled by ever-larger storehouses of data collected through our mobile gadgets. And all of these forces amplify one another. More mobile devices make for more personal data, which allow for better personalized software that we use more often, which in turn makes mobile devices more attractive—and on and on in a gilded upward spiral.

Page two: The Bay Area is the perfect hothouse for innovation.

Of course, even the most bullish of venture capitalists don’t assert that these trends will overturn the business cycle. We’ll still undoubtedly see economic peaks and troughs, and the tech sector is certain to remain just as volatile as it has always been. You’d be a fool to bet on any single company, any single technology, any single CEO. Apple, Google, Facebook, eBay, Oracle, and other local tech giants could all die tomorrow—and some of them well might.

But to the extent that we can predict anything, it’s this: Networks matter. Ecosystems matter. The Bay Area has created a perfect hothouse for innovation, and if you’re going to bet on anything, bet on the hothouse: No other region is better positioned to take advantage of the new tech forces shaping the world. Nowhere else has anything close to the density of funders, product managers, engineers, journalists, strategists, and data miners that you fi nd here—or our cultural interest in creating world-changing hardware and software.

So, sure, many of today’s hottest tech companies will fail. But when they do, the cause of their demise—and the manufacturer of their replacement—will almost certainly be found here. Note how Zynga, the largest recent Bay Area tech flameout, has been hobbled by the ascent of mobile devices—that is, by the rise of Apple- and Google-powered phones and by changes that Facebook made to its platform. While Zynga’s games business looks to be endangered, these local giants are still enjoying the fruits of the mobile gaming revolution—and in the process, they’ve managed to kill off competitors from afar, including beleaguered Nintendo.

There’s only one thing standing in the way of the Bay Area becoming a permanent capital of the next global economy: us. If we see ourselves as caught in just another boom—a boom whose bust is on the way—we have a ready excuse to ignore long-term planning. Compared to the ambitions of the tech émigrés filling San Francisco’s streets and jamming its limited housing, much of the city’s response to the industry’s recent expansion has been hopelessly small-minded, myopic, and reflexively antagonistic.

Yes, the burgeoning tech sector will alter the Bay Area. It will draw a stream of new people—some of them sleeping in their cars—and in a decade or two, the place won’t look or feel like it does now. But why should we assume that it will be worse instead of better, that we’ll lose the arts, the cultural diversity, the tolerance, the neighborhoods, and everything else that we love about living here? If that parade of horribles does come to pass, it will only be because we let it happen—because instead of coming up with ways to integrate the demands and possibilities of the tech economy into the Bay Area’s way of life, we chose to kvetch, agonize, and wish away our good fortune.

If you want to understand the depth and complexity of the latest tech revival, no economic stat tells the story better than the rising paychecks of workers in San Mateo County. At the end of 2011, according to the Bureau of Labor Statistics, people in the county just south of San Francisco earned about $81,000 a year on average. That’s a respectable fi gure—despite being a small, mainly suburban area, San Mateo had workers who were among the best paid in the nation. Then something extraordinary happened: Over the course of a single year, the county’s average pay shot up 107 percent. In the last quarter of 2012, San Mateo wage earners averaged about $168,480 a year. That made San Mateo by far the top-earning county in the nation, with paychecks more than 50 percent greater than those of the second county on the list—New York County, also known as Manhattan.

How did San Mateo workers get so rich so quickly? A little digging reveals that their rising fortunes were almost entirely attributable to a single event—Facebook’s IPO. In the spring of 2012, Mark Zuckerberg’s billion-user social network fl oated its stock on the NASDAQ. The IPO didn’t go well for retail investors—the share price languished in negative territory until August of this year—but the fi rm’s founders, investors, and employees cleaned up. Because the government’s calculation of average wages includes income from bonuses and stock compensation, the IPO windfall enjoyed by a few thousand workers at Facebook’s Menlo Park headquarters showed up in national statistics as a blessing bestowed upon the entire population of San Mateo.

In this single stat, then, lies the question at the heart of the Bay Area’s increasingly uneasy relationship with the tech industry: When workers at companies like Facebook and Google get rich, how widely are those gains shared across the local economy? In San Mateo, at least, the answer is clear. In part due to successes like Facebook, the county’s unemployment rate has hovered around 5 percent for much of the summer, and the size of the civilian labor force is close to a peak not seen since the late ’90s. The county’s coffers are flush—its new budget allocates hundreds of millions of dollars for improvements, including a new fire station, a new jail, new housing shelters, an overhaul of the county’s information technology systems, and a paydown of its pension liabilities.

Critics of the industry’s hold on the region argue that such civic gains aren’t enough. Even if techies may help the economy, the cliché holds that they live apart from—and, really, above—us peons who populate the rest of the Bay Area. Evidence of their loftiness abounds: all-cash home buyers crowding every open house; $10 million weddings in every redwood grove; $100,000 Teslas in every driveway. It’s not just that the techies flaunt their wealth—there’s also the suspicion that they don’t deserve it, that their riches are built upon companies whose innovations are superficial or superfluous. Citing the short-term apartment-rental site Airbnb and the digital taxi service Uber, George Packer wrote recently in the New Yorker, “The hottest tech startups are solving all the problems of being 20 years old with cash on hand, because that’s who thinks them up.”

The critics aren’t completely wrong: It’s inarguable that the youngsters who populate the tech business enjoy levels of pampering that would make Kate Middleton blush. Packer’s jibe, though, is way off. Airbnb isn’t just for flush twenty-somethings—it’s a friend to price conscious vacationers across the globe. While Uber’s town car service is certainly a high-class way to get around, those who use its less upscale offerings benefit from the same app-enabled, taxi-destroying convenience. To the extent that Uber is allowing people to forgo owning cars, it could be a clear win for every value that San Francisco holds dear—it makes the city more livable, cheaper, and greener.

And then there’s the world-changing proposition: Google recently invested nearly $260 million in Uber, and while the search company hasn’t explained its rationale, several observers argue that it wants to use the taxi company as a test bed for its self-driving cars. Yes, robot taxis sound like sci-fi, but consider for a minute how consequential they could be. As Matt Yglesias argues in Slate, ubiquitous, self-driving taxis would make getting a ride so cheap that car ownership could become virtually obsolete. In a place like San Francisco, where public transportation is subpar and car ownership is an expensive hassle, cheap taxis could reshape people’s relationship with the city—making more parts of it livable, freeing streets of parking spaces, and lowering the city’s carbon footprint to boot. Will all this happen? Nobody knows. But it’s both possible and plausible—and it would only occur because wealthy techies took a gamble on an app best known for helping rich youngsters get a ride to the club.

But you don’t need to consult sci-fi to see how tech might improve the Bay Area. In 2012, angel investor (and constant target for tech agonists) Ron Conway founded sf.citi, a group best known for lobbying for tech-friendly initiatives, including a controversial proposal to overhaul the city’s payroll tax. But sf.citi also connects city agencies with experts at dozens of local tech companies in order to improve city infrastructure. Last year it provided $100,000 to Smartmuni, a group of engineers who came up (during a hackathon) with an iPad app for tracking Muni’s fleet. The sf.citi funds allowed the group to conduct a pilot test during which a number of Muni managers ran their lines with software instead of walkie-talkies and clipboards. The trial worked so efficiently that the city is looking for ways to implement the app throughout Muni. To provide San Francisco’sparks with Wi-Fi Internet access, Google donated $600,000 (having already provided a similar system to Mountain View, as well as superfast gigabit Internet lines to some of Stanford’s residential buildings). Many of San Francisco’s other recent tech advances—electronic parking meters, for instance—were funded in part by the industry.

There’s even more direct proof that tech gains are being felt across the Bay Area. Since 2010, the unemployment rate in San Francisco has slipped from 10 percent to just under 6 percent. That’s as close to an economist’s definition of full employment as you’re likely to find anywhere in the country, and, while the resurgence has been led by the tech sector, it hasn’t been limited to it. Every other local economic indicator—including per-capita income and employment in sectors outside the tech industry, as well as the aforementioned rental and real estate prices—is at or approaching an all-time high.

Page three: Is it really tech vs. culture?

The critics’ larger error is their contention that tech companies and tech workers are in some way opposed to—and even actively seek to crush—the cultural values that characterize the Bay Area. In fact, just the opposite is true. Far from trying to exist apart from the cities that harbor them, Google, Facebook, Apple, and other local giants see their proximity to the local culture as their greatest employee perk. They’ve all absorbed the idea—first advocated by the urban theorist Richard Florida—that tech workers are part of a modern day creative class that is attracted to and thrives in bohemian, urban cultures like San Francisco’s. That attitude explains Yahoo’s recent big expansion into the San Francisco Chronicle building in SoMa and Google’s plan to build out its huge San Francisco office.

But an even clearer sign that the tech industry depends on the vitality of the city is the fact that startups keep setting up shop here. The Atlantic Cities recently analyzed the distribution of venture capital investments across the Bay Area’s zip codes and found that the San Francisco metro area now receives nearly 70 percent more funding than the Peninsula. Rather than turning San Francisco into a mere bedroom community for the South Bay, the new tech economy is actually dispensing with corporate shuttles and putting down roots in the city itself, where its workers really want to live. These are not barbarians at our gates—these are people whose values largely mirror those of the city dwellers who arrived before them.

In August, in response to increased police reports of people sleeping in their cars (both temporary campers like Allred and the involuntarily, chronically homeless), the Palo Alto city council voted to ban vehicle habitation. The move typified the small mindedness that characterizes much of our civic response to the rising tech economy. A more far-reaching approach might have involved the creation of community centers and low-cost housing units aimed at both poor residents and “bootstrapping” entrepreneurs; or the encouragement of coworking spaces that allowed for sleeping in; or some other plan that recognized that we can’t—and shouldn’t want to—keep passionate entrepreneurs like Austen Allred away from our towns and cities. But bubble-fearing myopia pervades the political and development process across the Bay Area. Because we believe that the boom will end soon, we make few provisions for the possibility that its effects will be with us indefinitely.

Nowhere is this more apparent than in the battles over housing in San Francisco. In 2011, only 269 new housing units were built in the city, a historic low. Since then there has been a remarkable upswing, with construction of more than 4,200 new units beginning in 2012, and the approval of 1,200 more units in 2013. But even if building reaches new peaks, few experts believe that we will be able to construct enough housing to satisfy demand. Over the last 20 years, San Francisco has added an average of 1,500 new housing units per year— to keep up with demand, we should have built two or three times that many. The inevitable result is a matter of high school economics: With too few apartments and too many people, prices keep going up.

“That didn’t have to happen,” says Enrico Moretti, a UC Berkeley professor whose book, The New Geography of Jobs, argues that restrictive zoning and land-use policies are a prime reason for San Francisco’s housing affordability crisis. He likes to cite a study by economists at the University of Pennsylvania’s Wharton School of Business, which found that of nearly 2,500 municipal areas across the country, San Francisco is the most restrictive large city of all. That’s no surprise to anyone who follows local politics, where every new development is subject to endless lawsuits, petitions, and NIMBY-funded opposition.

“San Francisco is a very expensive place to live. The only way you’re going to make it affordable for newcomers is by building more units or by building smaller units,” argues Patrick Kennedy, the developer whose effort to build 225-square-foot micro-apartments in San Francisco provoked prolonged debates and protests this spring. He was shocked by the level of opposition to his plan. “You have to bear in mind,” he says, “that San Francisco has thousands of single-occupancy hotel [units] that are less than 100 square feet, and yet people were attacking ours as a threat.”

The arguments of the micro-apartment foes echoed those voiced by opponents of new developments in general. They were concerned that the units, at more than $1,600 a month, would bring gentrifying rich people to low-income areas and price out the locals. But Moretti points out that delaying development induces its own sort of gentrification. In the absence of a few hundred new high-end condos in the Mission, he says, wealthy newcomers will bid up rents on the existing stock of apartments in the area—again pricing out the locals. He points to a comparable city, Seattle, as an example of the salutary effects of adding housing. In the last five years, Seattle saw higher employment growth than San Francisco, but rents rose 31 percent less. That’s because, in response to rising demand, developers in Seattle built more places to live. “At any level of demand, adding more units will only help,” Moretti says.

For a contrary view, I call Peter Cohen, executive director of the San Francisco Council of Community Housing Organizations and one of the city’s most fervent opponents of new development. Cohen is a patient fellow, and he generously devotes more than an hour to walking me through his worldview. “What doesn’t work in San Francisco is this miraculous idea of increased supply somehow having an impact on pricing,” he says. The conviction that adding more units will significantly impact prices “is a belief system—it really is this ideological belief that has no basis in fact in San Francisco.” Supply-demand dynamics don’t work here, Cohen argues, primarily because demand for real estate in the city is simply too high to ever be satisfied. “It’s incredibly prized, and we’re incredibly land constrained,” he says, adding that if we tried to even approach the level of demand, we’d have to build so many units that we would fundamentally change the character of the city in ways that we would find intolerable.

As I said, we spend an hour talking. And yet, when I hang up, I still feel like an idiot because I just can’t understand the rationale behind Cohen’s approach. Even if building more units couldn’t satisfy all demand, it would satisfy some—so aren’t we better off trying? And why does it have to be true that even approaching the level of demand would be disastrous? Aren’t there places in the city that could accommodate taller, denser, more populous buildings? In San Francisco, 80 percent of new housing is being constructed in 20 percent of the city, mainly in SoMa and the southeastern neighborhoods. I understand the impulse to preserve the charms of every corner of San Francisco. But could it be true that there’s no place for big new buildings across four-fifths of a 47-square-mile area?

As a civic culture, we can do better than spend time on these irrational fights. If San Francisco were to truly embrace its destiny as a capital of the new economy, we would realize that we are woefully over matched by other world capitals in housing capacity, transportation infrastructure, and other civic assets. It’s not necessary to mimic New York or Hong Kong to work our way out of this problem—we don’t need to become a dense, subway packed, faceless urban metropolis. But we could make dramatic changes that would increase housing stock. For instance, allowing a significant increase in the number of tall, dense apartment buildings along mass transit lines—along Muni lines, or in parts of the Mission— would be a big change, but it wouldn’t turn San Francisco into an alien landscape. “I don’t understand why it’s not a hair-on-fire priority to do this,” says Tim Colen, executive director of the developer-friendly San Francisco Housing Action Coalition. “I don’t see anything that’s going to increase the production of middle-income and workforce housing. If we don’t do this, we’re destined to be a luxury resort—an urban version of Carmel.”

Can we avoid that fate? My wife and I are in our 30s, and we’ve lived in the Bay Area all our adult lives. Between us, we’ve crossed the region, spending time in the East Bay and San Francisco before settling in Palo Alto, my wife’s hometown, where we’re raising two kids. We both have jobs connected to the tech industry—I write about the business for the Wall Street Journal, and my wife, a doctor, works at a biotech firm. Together we make more money than we ever imagined, more money than most people in our professions make elsewhere in the country. Even so, we’re fairly sure that we don’t make enough to buy a house (the median sale price in our area is $1.7 million, and it’s racing up at a double digit annual percentage)—at least not anytime soon. After paying for rent, childcare, and other expenses, we hardly feel wealthy. More than once a month, I wonder if we’re insane to live here. I wonder why we don’t wise up and leave.

Then I talk to a 23-year-old who’s living in his car to get his foot in the door, and I realize that leaving this area would be the truly insane thing to do. Over the next decade, we’ll realize that the Bay Area has done something better than find the next great seam of gold in our hills. The problem with gold rushes is that the gold runs out. But in our complex network of innovation, we’ve found a way to turn a multitude of industries into gold. We’ve found alchemy. Now, we just have to make sure that we aren’t consumed by its fires.

Originally published in the October 2013 issue of San Francisco

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