This year, the partners at Founders Fund — a prominent San Francisco venture capital firm that has backed Airbnb, Palantir Technologies and other leading companies — took an informal internal poll: If the fund could open a major new office outside the Bay Area, where would it go?
It’s a question many venture capitalists and startups have considered this year in some form or another, spurred into action by the coronavirus pandemic that has so many people working from home anyway. Tech workers are leaving California in droves, sending San Francisco rents tumbling by as much as 35%. Large companies have made the leap, too Oracle Corp. announced plans on Friday to leave the Bay Area for Austin, Texas, e-cigarette maker Juul said it would move to Washington, D.C., and cybersecurity firm Tanium is moving to a suburb of Seattle. Even Elon Musk has said he’s now a Texan.
But the venture capital industry could prove particularly difficult to dislodge from Silicon Valley. Data from PitchBook shows that year after year, the Bay Area accounts for easily the largest proportion of venture investments in the U.S. — around one-fifth of all deals. Measured by funding amount, the Bay’s dominance looks even more formidable. Last year, 38% of all venture dollars deployed went to startups in Silicon Valley. So far this year, despite the pandemic, that number ticked up to 40%. And according to startup accelerator Y Combinator, the percentage of founders listing their addresses as within the Bay Area has held steady this year.
The numbers underscore the fundamental conundrum: Although many places around the U.S. are attracting more startups, no clear rival is emerging to Silicon Valley. So where can a venture firm go that would provide a decent alternative?
“If it were obvious, you would have seen more of an exodus to a single place,” said Lauren Gross, Founders Fund partner and chief operating officer.
Founders Fund, the firm that conducted the internal poll, is currently housed in a low-slung brick complex in San Francisco fronted by Yoda from Star Wars and known for housing George Lucas’s film production company. This year, the firm spent months considering locations for a major new office. The question of where else Founders Fund could build a presence had come up before — its backer, Peter Thiel, left San Francisco years ago — but the idea took on new urgency during the pandemic.
Partners passed around a spreadsheet where they could nominate and vote on cities, according to people familiar with the discussions, who asked not to be identified discussing private deliberations. In weekly Zoom meetings, dozens of names came up. The firm seriously considered about a half-dozen cities, among them Los Angeles, Miami and Denver, which is now home to portfolio company Palantir.
The Founders Fund team also listed all the cities outside the Bay Area where it had invested in startups or had close ties to founders. It factored in tax rates, local regulations and proximity to a major hub airport, the people said. New Orleans, the pick of Michael Solana, a Founders Fund vice president, got eliminated due to what some considered a subpar flight schedule. Ditto Nashville.
In the end, no city could foster enough momentum among the Founders Fund staff. The firm will mostly stay put, and has scrapped plans to pursue a major new office for the time being. Instead, it will open a smaller office in Miami.
But even though the firm isn’t going anywhere, several individual partners at Founder Fund have moved out of town. In addition to Thiel, a vocal San Francisco critic who has lived in Los Angeles for years, partner Keith Rabois recently said he would move to Miami. And partner Scott Nolan splits his time between Los Angeles and San Francisco.
The news of more tech industry departures comes as the Bay Area grapples with unpleasant realities. Many VCs complain that given its large city budget, $13.6 billion for the 2020 to 2021 fiscal year, San Francisco seems unable to effectively solve problems such as homelessness.
The region also faces high rents and intense competition for hiring, along with what some regard as overreaching state regulation. One example: a measure signed into law in September aimed at increasing minority representation on boards. Opponents objected to what they saw as political meddling in business.
Venture capitalist Joe Lonsdale, another investor in Thiel’s circle, said earlier this year he was moving his firm, 8VC, to Austin from San Francisco. Lonsdale cited San Francisco’s checkered record on public safety, the area’s strained electricity grid and municipal government dysfunction among the reasons for his move. In an opinion piece in The Wall Street Journal titled “California, Love It and Leave It,” he also criticized the state’s “intolerant far left.” In a similar conversation with Fortune, Rabois called San Francisco “massively improperly run.” And he brought up another factor that often goes unmentioned in such articles: California’s high state income tax.
Many investors fleeing Silicon Valley are moving to states that don’t tax personal income, including Florida, Texas and Washington. Taxes may provide some VCs with a new, urgent reason to leave California, particularly if they’re due for big potential gains from a record year of initial public offerings, including the stock market listings of Airbnb and DoorDash. California has the highest top marginal income tax rate for individuals in the country, at 13.3%, which some lawmakers tried unsuccessfully to raise still higher this year.
Counterintuitively, some of the Bay Area’s biggest businesses may be more likely to relocate than their nimbler startup counterparts. Charles Schwab Corp. and McKesson Corp. have left San Francisco for Texas, and Hewlett Packard Enterprise Co. said this month that it would also make the move. Large players typically already run substantial offices in other cities, and have more to gain from lower tax rates and less regulation. “It’ll not be difficult for these companies to move,” said Michael Marks, a founding managing partner at venture firm WRVI Capital and former chief executive officer of construction startup Katerra.
Startups, however, may have more trouble uprooting. Marks said several of his portfolio companies considered moving and then rejected the idea as too challenging. That’s largely because they tend to be small, and have the entirety of their operations based in the Bay Area.
Many VCs are likely to follow their startups’ lead. The rise of work-from-home culture and Zoom pitch decks has made it easier for individual investors to do their jobs from exotic locales, but the heavily networked nature of the industry could wind up keeping most venture offices bound to the Bay Area. “VC is not a contactless sport,” said Brandy Aven, a professor of entrepreneurship at Carnegie Mellon University’s business school. “The growth in venture investments in other regions has been due to spillover, and there is little reason to think that these other regions will supplant Silicon Valley.”
Despite the rolling power outages, snarling traffic and persistently high housing costs, for most VCs, living in California’s Marin County still looks a lot easier than flying in from Nashville.