8 ms·

The Rising Costs of Scaling a Startup in San Francisco

63 points by paulsutter 12y ago

courtson5 12y ago
The market has also drove San Francisco based startup valuations to ridiculously high levels - you have to take the bad with the good. All else being equal, a Silicon Valley/San Francisco based startup is able to achieve a much higher valuation than an equivalent startup outside San Francisco. However, this Silicon Valley/San Francisco based startup has to deal with higher real estate and salary costs.
- peteretep 12y ago
  > All else being equal, a Silicon Valley/San Francisco > based startup is able to achieve a much higher > valuation than an equivalent startup outside San > Francisco. How sure are you that that's true, and if you are, why do you think that is? Is it really so hard for a founder in - say - Vegas - to get on a plane to SF frequently enough to neutralise any location advantage? If so, sounds like a massive opportunity for a VC to get some really cheap deals (and hence my skepticism).
  - walshemj 12y ago
    No because its the deals that get by bumping into some one at a bar or socially. flying in for a few 9-5 days a month is not the same.
peteretep 12y ago
Staffing costs and salaries are why I'd think long and hard about starting up in San Fran with my CTO hat on. I am a long-term open-source and commercial dev, former serial CTO, with an additional specialization in recruitment software, but I also work as a recruiter. Recruitment in SF sounds like a nightmare for everyone involved. Agency fees are relatively low (10%ish, compared with 15-20% in the UK), but the service the candidate gets (incessant LinkedIn spam for inappropriate roles) is poor, the service the employer gets (scatter-gun approach, loads of shitty CVs, very little value-add from the recruiter, other than they'll spam LinkedIn for you) ... I'm guessing it's a combination of the generally slightly immature state of the US agency recruitment market (compared to Europe; not meant as a judgement, just a fact), insane competition for candidates, very small take-up of and limited competition in job-boards/channels, and the big competition with corporate recruiters against FB, Google, and so on. Every so often I wonder about trying to break in to the SF market (rather than London, which is where I put 90% of my time), but I wonder if the effort would be worth it, given what feels like the dire state of the market. All the recruitment startups I can see are trying to build a better ATS to remove the agency recruiter (Lever.co, Greenhouse.io, SmartRecruiters.com, TheResumator.com, and even ZipRecruiter (an ATS disguised as a multi-poster)), yet no-one seems to be trying to fix agency recruitment. Sorry for the slightly rambling post - happy to give free advice to anyone trying to recruit (see my profile), but it sounds like a real uphill battle in the Bay Area...
- joshAg 12y ago
  The other side, though, is that it might be much easier to raise the necessary capital (taking into account changing costs due to location) in san francisco or the bay area in general than other places. It might also be easier to find qualified people in the bay area. Certainly they'll cost more than just about any other place, but how important is it to you to find say 5 people within the next month or two instead of the next say 6 to 24 months? I've never needed to actually do either of those two things, so I might just not know what I'm talking about, but for a startup that isn't bootstrapped I'd think that getting a long runway (for wherever you are) and advisers/investors who are knowledgable about your company's market are more important than the raw monthly expense figure, and that quickly getting qualified people working on the product might be more important than saving, say, $75,000 in salary per employee per year.
  - peteretep 12y ago
    > but how important is it to you to find say 5 people > within the next month or two instead of the next say 6 > to 24 months. YMMV but generally: really important. If you are at the point where you are looking for five heads, you likely have competition and investor pressure. If you're bootstrapped or have a significant moat, maybe less so, but when I've been in charge of tech at companies, ability to grow my team quickly has been a major KPI, and a reasonable one. While I am led to believe that the easiest money is in SF, and there are some awesome investment partners, don't assume the best advisers are necessarily there; it's not been true for any of the three industries I've worked in, namely high-end fashion, recruitment software, and news/PR analysis. Digging specifically in to recruitment, the fact that every recruitment startup appears to be another ATS (Applicant Tracking System) - by far the most competitive space, also the one where the established players will be some of your hardest to displace (the reasons are dull but real (ATSs have long tendrils in to all sorts of business processes)) - seems testament to my hunch that "fixing hiring" companies are being guided by advisers with little in the way of recruitment experience. Possibly I'm wrong, and disruption needs to happen from outside, but the prevailing view that the expertise in tech in SF translates to expertise in every thing seems suspect to me.
franklinho 12y ago
Key point to take away from this is: Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs. The market has driven up salaries ridiculously high.
- littletimmy 12y ago
  That's one way of looking at it. The other way of looking at it is that the tech sector is one of the most profitable sectors in the US economy that rakes in millions per developer. The salaries are high because they should be: the companies are raking in record profits, why shouldn't the employees see some action?
  - x0x0 12y ago
    Not to mention that, now that decent 1 bedrooms in commute friendly areas of the city cost $3500, the first $70k [1] of salary is a straight passthrough to the landlord. [1] at a 40% tax rate, 3.5k/0.6 * 12 = 70k
  - peteretep 12y ago
    If that was true, salaries would be high everywhere. They're high in SF because of competition for workers, and because of the high cost of living. Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
    - frostmatthew 12y ago
      Unfortunately not many companies are willing to consider that - even Slack[1] isn't interested in remote workers. [1] https://twitter.com/mrmrs_/status/567832899854065664 https://twitter.com/mrmrs_/status/567832899854065664
      - peteretep 12y ago
        Something that works really well in London, and might work well in big urban areas, is partial WFH. If someone can work at home 50% of the time, they can live 5 hours away and just come in on a Tues morning, leave on Thurs eve, or are willing to put up with a 2 hour commute as they only do it half the time. I managed a mid-sized tech team at a company that did this, and it gave us access to many many candidates who didn't want to live in London, but lived as far away as Edinburgh...
skuhn 12y ago
I think that if you dig a bit deeper, real estate really is a major driver of the cost of doing business in San Francisco. Particularly now that companies and employees are more resistant to the process of migrating elsewhere after the startup phase. A startup's office space is just one way that venture capital is getting funneled directly into a landlord's pocket. And office rents are rising like crazy, while pushing lots of other types of businesses out (particularly in SOMA). If a landlord thinks they can come out ahead by evicting a long time tenant and refurbishing a mechanic's garage into office space, then you're clearly paying a much higher rent than that space used to command. Salaries are still a larger overall expense for just about every startup, but consider how much of that employee salary goes straight to rent. 30% in pre-tax dollars is completely normal at this point, and I expect for some people it's even more. Ownership is out of the question for anyone who hasn't had a stock windfall at a previous company (or who lived here 20 years ago). When a 1 bedroom in a shitty neighborhood is over $3000/mo, there's a minimum to the salary you can accept -- even doing the normal salary-for-equity trade with a startup. Just to hit 30% of pre-tax dollars, you need to make $120,000/yr for that 1 bedroom. There's no reason for landlords to stop until they've milked the tech economy dry. In most cases they're entirely within their rights to charge whatever the market will bear, and there is currently no shortage of people willing to pay more for less. In the long term this will hurt San Francisco and the tech industry. The money won't last forever, and eventually the city will be so expensive that the benefits of locating here become irrelevant. SF landlords can't levy a tax on the innovation of the entire tech industry forever.
- ilyanep 12y ago
  The people who are to blame are not the landlords that are merely reacting to market conditions, but the NIMBYs who refuse to let any development occur in the city or anywhere on the peninsula.
  - skuhn 12y ago
    I'm not blaming them, as I mention the majority is likely acting within their rights. I agree that part of the solution is to create more housing -- but it's also too late for that solution to work before there is a downturn in the startup economy. If there's a next time, it might help then. Even at San Francisco's current relatively frenzied building pace, there will only be another 4000 units or so this year. That will not make even a slight dent in rent for a city of 700,000+ people. The other problem with building more units is that a lot of the available space sucks. There are whole huge swaths of the city that may as well be on the moon for how accessible they are to locations with offices (SOMA, Financial District, etc.). You can build condos in Candlestick Point, but how are people going to get to work? The infrastructure of public and private transit in the city (and the larger region) is woefully inadequate for even half the number of people that currently live here, let alone if the population significantly increases. And these kinds of projects work on 10-20 year timetables. So again, it's way too late for this to be fixed in this economic cycle. Maybe next time.
cbryan 12y ago
Where is this person getting their salary data from?
- lexap 12y ago
  I love how this is the most important comment on hacker news and gets the least upvotes. This guy also has these ridiculously generic datasets and the geekerati goes nuts because he's a vc.
lexap 12y ago
Ummmm, salary data source???
bradleybuda 12y ago
From the article: "The cost savings startups achieve from cloud computing infrastructure or other technology cost reductions are dwarfed by the steady cost increases of labor in particular." I don't have hard data, but my intuition is that this is not the case. The raw price of storage / compute has only declined a little bit since 2009, but the number and variety of development tasks you can outsource to (broadly speaking) "cloud services" has dramatically increased. In 2009, Heroku was still a relatively primitive platform with only Ruby support - today, it can save you the cost of a sysadmin or two. Mailgun didn't exist and SendGrid was just coming out of TechStars - if you wanted email in your app, you needed a dev to build it. Twilio couldn't do text messages yet, and we didn't have Stripe for payments or Mixpanel for analytics - both were glimmers in their founders' eyes. The sheer amount of grunt work you need to do to get you app up and running has plunged since 2009 - now you can buy these core services for 1-2% of what you had to pay to develop them. These wins are most pronounced for seed- and A-stage companies, but they substantially cut your development and operations costs throughout your scaling lifecycle. I'm willing to bet that if you plot the median number of employees it takes to reach a seed, A, B, or even C round, you'd find that the leverage gained from this ecosystem of services more than makes up for increasing personnel costs. Of course, startups everywhere benefit from these cost reductions - this has nothing to do with San Francisco - but it certainly makes the increase in salaries and real estate expenses an easier pill to swallow.
- pinaceae 12y ago
  "don't have hard data, but my intuition..." and everything beyond this sentence is just blabla. the author has a well laid out case, researched and backed. you come in with feelings.
gumby 12y ago
This is very interesting but it really is San Francisco data. Silicon Valley is a lot cheaper and faster on several dimensions than SF (only a small amount cheaper on salary, though that salary goes a lot farther). And while SF is a nicer place to live than most of the valley, who has time for that nicer life while you're busy building a business?

63 points by paulsutter 12y ago

The market has also drove San Francisco based startup valuations to ridiculously high levels - you have to take the bad with the good. All else being equal, a Silicon Valley/San Francisco based startup is able to achieve a much higher valuation than an equivalent startup outside San Francisco. However, this Silicon Valley/San Francisco based startup has to deal with higher real estate and salary costs.

peteretep 12y ago
> All else being equal, a Silicon Valley/San Francisco > based startup is able to achieve a much higher > valuation than an equivalent startup outside San > Francisco. How sure are you that that's true, and if you are, why do you think that is? Is it really so hard for a founder in - say - Vegas - to get on a plane to SF frequently enough to neutralise any location advantage? If so, sounds like a massive opportunity for a VC to get some really cheap deals (and hence my skepticism).
- walshemj 12y ago
  No because its the deals that get by bumping into some one at a bar or socially. flying in for a few 9-5 days a month is not the same.

peteretep 12y ago

Staffing costs and salaries are why I'd think long and hard about starting up in San Fran with my CTO hat on. I am a long-term open-source and commercial dev, former serial CTO, with an additional specialization in recruitment software, but I also work as a recruiter. Recruitment in SF sounds like a nightmare for everyone involved. Agency fees are relatively low (10%ish, compared with 15-20% in the UK), but the service the candidate gets (incessant LinkedIn spam for inappropriate roles) is poor, the service the employer gets (scatter-gun approach, loads of shitty CVs, very little value-add from the recruiter, other than they'll spam LinkedIn for you) ... I'm guessing it's a combination of the generally slightly immature state of the US agency recruitment market (compared to Europe; not meant as a judgement, just a fact), insane competition for candidates, very small take-up of and limited competition in job-boards/channels, and the big competition with corporate recruiters against FB, Google, and so on. Every so often I wonder about trying to break in to the SF market (rather than London, which is where I put 90% of my time), but I wonder if the effort would be worth it, given what feels like the dire state of the market. All the recruitment startups I can see are trying to build a better ATS to remove the agency recruiter (Lever.co, Greenhouse.io, SmartRecruiters.com, TheResumator.com, and even ZipRecruiter (an ATS disguised as a multi-poster)), yet no-one seems to be trying to fix agency recruitment. Sorry for the slightly rambling post - happy to give free advice to anyone trying to recruit (see my profile), but it sounds like a real uphill battle in the Bay Area...

joshAg 12y ago
The other side, though, is that it might be much easier to raise the necessary capital (taking into account changing costs due to location) in san francisco or the bay area in general than other places. It might also be easier to find qualified people in the bay area. Certainly they'll cost more than just about any other place, but how important is it to you to find say 5 people within the next month or two instead of the next say 6 to 24 months? I've never needed to actually do either of those two things, so I might just not know what I'm talking about, but for a startup that isn't bootstrapped I'd think that getting a long runway (for wherever you are) and advisers/investors who are knowledgable about your company's market are more important than the raw monthly expense figure, and that quickly getting qualified people working on the product might be more important than saving, say, $75,000 in salary per employee per year.
- peteretep 12y ago
  > but how important is it to you to find say 5 people > within the next month or two instead of the next say 6 > to 24 months. YMMV but generally: really important. If you are at the point where you are looking for five heads, you likely have competition and investor pressure. If you're bootstrapped or have a significant moat, maybe less so, but when I've been in charge of tech at companies, ability to grow my team quickly has been a major KPI, and a reasonable one. While I am led to believe that the easiest money is in SF, and there are some awesome investment partners, don't assume the best advisers are necessarily there; it's not been true for any of the three industries I've worked in, namely high-end fashion, recruitment software, and news/PR analysis. Digging specifically in to recruitment, the fact that every recruitment startup appears to be another ATS (Applicant Tracking System) - by far the most competitive space, also the one where the established players will be some of your hardest to displace (the reasons are dull but real (ATSs have long tendrils in to all sorts of business processes)) - seems testament to my hunch that "fixing hiring" companies are being guided by advisers with little in the way of recruitment experience. Possibly I'm wrong, and disruption needs to happen from outside, but the prevailing view that the expertise in tech in SF translates to expertise in every thing seems suspect to me.

franklinho 12y ago

Key point to take away from this is: Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs. The market has driven up salaries ridiculously high.

littletimmy 12y ago
That's one way of looking at it. The other way of looking at it is that the tech sector is one of the most profitable sectors in the US economy that rakes in millions per developer. The salaries are high because they should be: the companies are raking in record profits, why shouldn't the employees see some action?
- x0x0 12y ago
  Not to mention that, now that decent 1 bedrooms in commute friendly areas of the city cost $3500, the first $70k [1] of salary is a straight passthrough to the landlord. [1] at a 40% tax rate, 3.5k/0.6 * 12 = 70k
- peteretep 12y ago
  If that was true, salaries would be high everywhere. They're high in SF because of competition for workers, and because of the high cost of living. Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
  - frostmatthew 12y ago
    Unfortunately not many companies are willing to consider that - even Slack[1] isn't interested in remote workers. [1] https://twitter.com/mrmrs_/status/567832899854065664 https://twitter.com/mrmrs_/status/567832899854065664
    - peteretep 12y ago
      Something that works really well in London, and might work well in big urban areas, is partial WFH. If someone can work at home 50% of the time, they can live 5 hours away and just come in on a Tues morning, leave on Thurs eve, or are willing to put up with a 2 hour commute as they only do it half the time. I managed a mid-sized tech team at a company that did this, and it gave us access to many many candidates who didn't want to live in London, but lived as far away as Edinburgh...

skuhn 12y ago

I think that if you dig a bit deeper, real estate really is a major driver of the cost of doing business in San Francisco. Particularly now that companies and employees are more resistant to the process of migrating elsewhere after the startup phase. A startup's office space is just one way that venture capital is getting funneled directly into a landlord's pocket. And office rents are rising like crazy, while pushing lots of other types of businesses out (particularly in SOMA). If a landlord thinks they can come out ahead by evicting a long time tenant and refurbishing a mechanic's garage into office space, then you're clearly paying a much higher rent than that space used to command. Salaries are still a larger overall expense for just about every startup, but consider how much of that employee salary goes straight to rent. 30% in pre-tax dollars is completely normal at this point, and I expect for some people it's even more. Ownership is out of the question for anyone who hasn't had a stock windfall at a previous company (or who lived here 20 years ago). When a 1 bedroom in a shitty neighborhood is over $3000/mo, there's a minimum to the salary you can accept -- even doing the normal salary-for-equity trade with a startup. Just to hit 30% of pre-tax dollars, you need to make $120,000/yr for that 1 bedroom. There's no reason for landlords to stop until they've milked the tech economy dry. In most cases they're entirely within their rights to charge whatever the market will bear, and there is currently no shortage of people willing to pay more for less. In the long term this will hurt San Francisco and the tech industry. The money won't last forever, and eventually the city will be so expensive that the benefits of locating here become irrelevant. SF landlords can't levy a tax on the innovation of the entire tech industry forever.

ilyanep 12y ago
The people who are to blame are not the landlords that are merely reacting to market conditions, but the NIMBYs who refuse to let any development occur in the city or anywhere on the peninsula.
- skuhn 12y ago
  I'm not blaming them, as I mention the majority is likely acting within their rights. I agree that part of the solution is to create more housing -- but it's also too late for that solution to work before there is a downturn in the startup economy. If there's a next time, it might help then. Even at San Francisco's current relatively frenzied building pace, there will only be another 4000 units or so this year. That will not make even a slight dent in rent for a city of 700,000+ people. The other problem with building more units is that a lot of the available space sucks. There are whole huge swaths of the city that may as well be on the moon for how accessible they are to locations with offices (SOMA, Financial District, etc.). You can build condos in Candlestick Point, but how are people going to get to work? The infrastructure of public and private transit in the city (and the larger region) is woefully inadequate for even half the number of people that currently live here, let alone if the population significantly increases. And these kinds of projects work on 10-20 year timetables. So again, it's way too late for this to be fixed in this economic cycle. Maybe next time.

cbryan 12y ago

Where is this person getting their salary data from?

lexap 12y ago
I love how this is the most important comment on hacker news and gets the least upvotes. This guy also has these ridiculously generic datasets and the geekerati goes nuts because he's a vc.

lexap 12y ago

Ummmm, salary data source???

bradleybuda 12y ago

From the article: "The cost savings startups achieve from cloud computing infrastructure or other technology cost reductions are dwarfed by the steady cost increases of labor in particular." I don't have hard data, but my intuition is that this is not the case. The raw price of storage / compute has only declined a little bit since 2009, but the number and variety of development tasks you can outsource to (broadly speaking) "cloud services" has dramatically increased. In 2009, Heroku was still a relatively primitive platform with only Ruby support - today, it can save you the cost of a sysadmin or two. Mailgun didn't exist and SendGrid was just coming out of TechStars - if you wanted email in your app, you needed a dev to build it. Twilio couldn't do text messages yet, and we didn't have Stripe for payments or Mixpanel for analytics - both were glimmers in their founders' eyes. The sheer amount of grunt work you need to do to get you app up and running has plunged since 2009 - now you can buy these core services for 1-2% of what you had to pay to develop them. These wins are most pronounced for seed- and A-stage companies, but they substantially cut your development and operations costs throughout your scaling lifecycle. I'm willing to bet that if you plot the median number of employees it takes to reach a seed, A, B, or even C round, you'd find that the leverage gained from this ecosystem of services more than makes up for increasing personnel costs. Of course, startups everywhere benefit from these cost reductions - this has nothing to do with San Francisco - but it certainly makes the increase in salaries and real estate expenses an easier pill to swallow.

pinaceae 12y ago
"don't have hard data, but my intuition..." and everything beyond this sentence is just blabla. the author has a well laid out case, researched and backed. you come in with feelings.

gumby 12y ago

This is very interesting but it really is San Francisco data. Silicon Valley is a lot cheaper and faster on several dimensions than SF (only a small amount cheaper on salary, though that salary goes a lot farther). And while SF is a nicer place to live than most of the valley, who has time for that nicer life while you're busy building a business?