San Francisco – A Tale of Two Cities

Commentators have long been writing obituaries for San Francisco’s tech scene. But while parts of the city are seriously struggling, an AI boom is offering the Bay Area a lifeline.

“San Francisco only has one drawback,” lamented the Nobel Prize winning author and poet, Rudyard Kipling. “Tis hard to leave.” 

Not so it would seem for many tech companies that moved to the Bay in recent years. Highly successful start-ups are failing – Zume, a Bay Area pizza delivery start-up raised $445 million but recently shut down. Fuzzy Pet Health, which had raised $80 million since 2016, unexpectedly closed in June following payroll issues caused by Silicon Valley Bank’s collapse. And as well as a good number of businesses relocating elsewhere, there’s a steady drip of reports of rising investment in other tech hubs.

More broadly, Silicon Valley has experienced a major slowdown in series A and B funding since its monthly peak in August 2021, according to the 2023 Global Start-up Ecosystem Report (GSER).

Meanwhile, in San Francisco, office vacancy rates are on the increase, climbing to nearly 32% in the second quarter according to preliminary figures from CBRE Group Inc – in 2019, before the pandemic, CBRE reported San Francisco’s vacancy rate was less than 4%. 

Average weekday office usage is less than half its pre-pandemic levels, with staff continuing to work remotely. This reduction in daytime workers has seen the closure of stores and restaurants that depended on their business, meaning empty office space and empty retail space. Combine this with rising safety concerns, drug misuse and homelessness and the result is significantly falling property prices. The knock on effect has been tangible, with investors behind a major shopping mall abandoning their plans, and the owner of two large hotels in the city announcing plans to eventually remove those assets from its portfolio. 

But a slew of headlines referring to San Francisco’s as a failing city locked in a doom loop only tell half the story. 

In complete contrast, there are positive ripples starting to be felt in the form of Artificial Intelligence (AI). Of the 35 start-ups listed on The Information’s Generative AI Database, 17 of them have established their home in San Francisco, collectively raising more than $13 billion. 

Meanwhile, the recent SF Tech Week seemed to defy the painful economic, political and social backdrop that is hurting the city, seemingly reigniting the tech flame San Francisco has become renowned for. 

So what’s the truth behind San Francisco? Is there still hope for it to regain its status as a global leading tech hub, or is it a city caught in a death spiral?

AI acting as a catalyst for rebirth

While San Francisco is facing a myriad of challenges, the emergence and growth of generative AI is reportedly at the heart of its potential rebirth. And investors are backing it, with $10.7 billion in funding for generative AI start-ups within the first quarter of 2023, a thirteenfold increase year on year according to PitchBook. 

Already home to some of the world’s most prominent AI firms, such as ChatGPT developer OpenAI Inc., San Francisco, and in particular, Hayes Valley Neighborhood, also known as ‘Cerebral Valley’, is widely acknowledged to be the center of the AI scene, where ‘hacker houses’ see the birth of AI start-ups on an almost nightly basis. 

In March 2023, a networking event organized by the CEO of AI start-up Hugging Face, attracted more than 5,000 people to the city’s Exploratorium Museum, where it gained its ‘Woodstock of AI’ nickname. 

This inspiring community of investors, entrepreneurs and talent is continuing to attract an influx of AI businesses, who are poised to spark the rebirth of the city at a time when it’s facing an existential crisis.

Accelerating climate tech, reducing the risk

While the global economic downturn has slowed funding down, there is still an appetite for investment, especially in lower risk categories and sectors. And for climate startups, the US Senate’s new Inflation Reduction Act will provide the level of risk mitigation that should appeal to potential investors.

Allocating $369 billion over the next decade, the Inflation Reduction Act aims to reduce carbon emissions in the US by approximately one billion metric tons by 2030, while providing investors and entrepreneurs the safety net to take risks in the development and acceleration of climate technology. 

In such an uncertain economic landscape, this legislation will support and incubate the innovation needed to deliver on decarbonisation and the energy transition while creating sustainable, long-term and financially stable businesses. 

Just as it has become popular amongst AI start-ups, for San Francisco, climate tech presents a great opportunity to re-establish itself as a tech and innovation epicenter and capitalize on another major sector evolution.

Implications for the BPO industry

With studies previously showing that around one in six jobs in San Francisco are outsourced, the ramifications of a start-up slowdown will undoubtedly be felt in the BPO industry. A number of major San Francisco companies such as Github and Slack openly admit to having built their success on outsourcing. San Francisco’s success has a big role to play in the global growth of outsourcing and both start-ups and BPOs have become mutually dependent.

Journey back to the top

While San Francisco is facing major macroeconomic challenges, the growth of AI in the city is really starting to take hold. Despite the negative headlines of recent months, and the growth of global competition in the tech startup space, according to StartupBlink’s 2023 Global Startup Ecosystem Index, San Francisco remains the dominant leader in the global startup ecosystem for another year, suggesting its relative power at the top of the global ecosystem has stabilized. 

With a softening real estate market making office space much more affordable; a conscious effort from city leaders to encourage retailers, startups and small businesses into The Bay; an abundance of highly skilled workers; and a population renowned for being early adopters, arguably, there has never been a better time to consider choosing San Francisco as your tech startup home.

Of course, there will always be challenges in the global tech start-up ecosystem, and San Francisco has felt the impact of this. However, the key is to rally and overcome. And while there remains significant obstacles for the city to navigate, both within the tech sector and elsewhere, it’s clear that what San Francisco has on its side is community; a thriving tech scene that continues to innovate and where talent has either stayed or is on a boomerang journey back to the hustle and bustle only The Bay seems able to offer.