Vexed in the city: San Francisco strife spurs tech defectors elsewhere

As clashes mar tech's epicenter, entrepreneurs find that fleeing San Francisco for up-and-coming startup hubs can offer unique advantages.

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The view outside the Valley isn't so bad: The office of Automated Insights, a 30-employee startup based in North Carolina, overlooks the baseball stadium for the Durham Bulls. The company lists free Bulls games from the "porch" as a job perk when hiring, as well as free lunches and take-it-when-you-need-it vacation. Brandon Sewell/Automated Insights

This story is part of a CNET special report that examines the controversy gripping San Francisco as a massive influx of techies feeds an unprecedented economic boom -- and backlash.

The heat was turning up on San Francisco-based startup SocialProof.

But it wasn't competitive pressure or the fight to gain attention that got SocialProof's co-founder Nathan Labenz down. It was the simple cost of operating in the city's trendy SoMa neighborhood back in 2012.

After two years toiling in the center of the tech universe, he realized that whatever money his company collected wouldn't last long there. "It just seemed crazy," Labenz said. "A million dollars or a million and a half, or whatever it was going to be, should go farther."

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Vexed in the city: CNET looks at how San Francisco is dealing with its tech boom. James Martin/CNET

So, as throngs of entrepreneurs flocked west to the tech mecca of San Francisco, SocialProof packed up and returned east to the founders' hometown of Detroit.

While the venture capital funding pool shrinks to a puddle outside Silicon Valley, Labenz said he's been able to raise money in the Motor City. Also, Detroit offered his digital marketing company a friendly and supportive community -- the fact that an Internet company was willing to move to the city only raised SocialProof's profile. "There's something special about it," he said.

Companies such as SocialProof, who defect from the primary US tech hubs in Silicon Valley and San Francisco, and to a lesser extent New York and Boston, are more the exception than the rule. But as tensions in San Francisco between the tech haves and the resident have-nots erupt in public disputes, entrepreneurs are realizing a lean startup can grow anywhere.

So while Silicon Valley may boast a free flow of money -- VC funding around San Francisco and San Jose last year accounted for 41 percent of the nation's total -- and a flourishing culture of technology and innovation, cities such as Detroit; Austin, Texas; and Raleigh/Durham, North Carolina, offer a place where you're the biggest fish in a smaller pond, where you can afford to buy a house, and where the city greets you with open arms rather than protests.

Mark McCaffrey, global software industry leader for PricewaterhouseCoopers, predicted that investment in such places will continue to rise, as urbanization brings more young people into more cities. That should provide the talent needed for companies around the country to expand.

"I don't think innovation and disruption is really limited by geographic boundaries anymore," McCaffrey said. "The ability to create disruptive technology can really almost come out of any region within the US or around the world."

Abundant talent

Ready access to rich pools of talent and lower overhead are reasons why entrepreneurs are willing to put stakes down outside of the top tech metropolises.

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SocialProof's co-founders Jay Gierak, left, and Nathan Labenz, who built up their digital marketing firm in Detroit. SocialProof

In Detroit, Labenz -- whose company helps businesses market themselves using their own customers' testimonials -- lamented how while in the Valley his company had to fight tooth and nail against both tech titans and other startups for nearly every hire. In comparison, there are plenty of qualified candidates in Detroit, and the competition and cost for that talent is significantly lower.

"It has indeed been easier to recruit talented people. It has indeed been easier to retain talented people," Labenz said. "The capital that we raised has gone farther because, basically, everything is cheaper."

In the nearly two years since taking root, the firm has grown to 22 employees and now is on the path to hitting $1 million in annual revenue.

It's not just the Motor City. Main Street Hub, an online marketing company focused on serving small retail shops, moved from San Francisco to Austin in 2011 because it provided them with access to the right blend of engineering, creative, and sales talent. The diversity was there thanks to the city's mix of tech and consulting companies, such as Dell and Accenture.

In the three years since the move, Main Street Hub has grown from about 20 people to 325. It's expanded from a 4,000-square-foot office space on the second floor above a noisy blues bar to taking up nearly 50,000-square-feet locally, according to co-CEOs Andrew Allison and Matt Stuart.

Austin also benefited from Google and AT&T's effort to bring in local customers by offering 1 gigabit-per-second Internet, and the city garnered notice for hosting the South by Southwest film and technology conference. "It kind of feels like all this stuff is bubbling up," said Michele Skelding, who is focused on technology and innovation at the Austin Chamber of Commerce.

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In four year, American Underground, an incubator in Durham, North Carolina, has expanded from 35 startups to 150 in three locations as a tech scene blooms in the city and neighboring Raleigh. Hal Goodtree/American Tobacco

Like Austin, Raleigh/Durham has a pool of educated talent, with Duke University, University of North Carolina, and North Carolina State University bringing together 50,000 undergraduate students within 25 miles. All those students are potential employees for startups. The area's Research Triangle Park, the largest science research park in the country with more than 40,000 full-time employees at giant corporations like IBM and Cisco, churns out employees already polished in business management.

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Groundfloor's Brian Dally, who launched the micro-lending company in Raleigh. Groundfloor
Brian Dally, who was building the team for his micro-lending startup Groundfloor, tapped workers he knew from his last company based in Raleigh/Durham, the Republic Wireless arm of Bandwidth.com. "I could get the band back together," he said.

When Robbie Allen was ready to launch his own company, the Cisco "distinguished engineer" felt the pull back to the Valley, where he had worked in Cisco's global headquarters, as well as to Boston, where he'd earned two advanced engineering degrees at MIT. But he opted to stay put to launch Automated Insights, a tech company that automatically generates stories for outlets like the Associated Press and Yahoo, in Durham.

The added incentive for nabbing talent outside the main tech hubs: Companies can get top smarts on the cheap. And lower salaries mean lower overhead, which eases the pressure to raise money.

"We can pay them half to a third as much as you have to pay in New York," Allen said.

Quality of life

Lower costs aren't limited to the work force. For Allen, a house hunt in Silicon Valley, a region between San Francisco and San Jose, changed his thinking about California. He arranged his own transfer from Cisco's San Jose headquarters to its North Carolina hub before launching Automated Insights.

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Robbie Allen, CEO of Automated Insights, founded the company in Durham after spending parts of his career in the Valley and Boston. Automated Insights
He and his wife searched online for Silicon Valley homes with six-figure asking prices -- what the couple thought of as expensive -- and then piled in the car to see firsthand what their money could buy. "We kept driving and driving, and the neighborhood became seedier and seedier. It was a million-dollar home and we wouldn't get out of that car," he said. "That did it. With that kind of money in North Carolina, you can live in style."

Average home values in San Francisco -- $689,000 -- and San Jose -- $804,000 -- as of July are among the highest in the nation and have risen more than 10 percent in a year, according to real estate website Zillow. Meanwhile, average home values can run anywhere from a 70 percent to 85 percent discount to that elsewhere: In Austin, the average is $217,000, Raleigh $191,000, and Detroit $111,000.

The annual average salary in the San Francisco area is higher, but at $63,630 as of last May, it's only one-third more than those other three cities, according to the US Bureau of Labor Statistics.

In Austin, Main Street Hub's Allison, originally from Scarsdale, New York, and Stuart, from San Diego, Calif., said it's easy to attract new employees to the area, thanks to the city's hip reputation and warm climate. "There really is a Texas friendliness and that really helps us," said the Austin Chamber's Skelding.

Adam Klein, chief strategist for American Underground, an incubator that has expanded from 35 startups to 150 in three locations in Durham and Raleigh in four years, rattled off a list of quality-of-life perks that have kept him in the area. "I can live downtown at half the cost. I cut my commute down to five minutes, and I'm still a direct flight to Boston, New York, or San Francisco. It's a progressive community, well educated, with lots of people from other countries," he said, also noting a burgeoning restaurant and craft beer scene. "And the weather doesn't hurt."

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Incubator American Underground started with one location in the American Tobacco Historic District, a once-blighted site dominated by a former cigarette factory redeveloped into a trendy neighborhood of Durham. Nick Pironio/American Underground

Even Detroit, the poster child of Rust Belt deterioration, holds some sway. The city has built up a fledgling startup community and stabilized its downtown thanks in no small part to Dan Gilbert, billionaire founder of online home lender Quicken Loans, who injected millions of dollars in investment into the city.

And the Detroit tech scene has brought in offices from California-based streaming-music service Pandora and search-engine giant Google, which have sought to develop their vehicle-related products alongside the city's major car manufacturers.

Money or home comfort?

Despite the benefits, moving out of Silicon Valley seems fraught with risk from a pure funding perspective. The San Francisco Bay Area generated $12.2 billion in venture-capital funding in 2013, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. That's nearly four times the funding in the New York metro area, which is the next closest region.

In comparison, Detroit's venture-capital investments last year were just under $40 million. Austin's level of investment was $435 million and Raleigh/Durham brought in $235 million in 2013.

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Matt Stuart, left, and Andrew Allison, the co-CEOs of Austin-based startup Main Street Hub. Main Street Hub

And different regions come with their own regional challenges. Detroit, for example, is winding through the largest municipal bankruptcy in US history and faces greater structural problems like blight, a high crime rate, and a failing school system. Its geographic size and lack of public transportation make it difficult to create networks within the city. Though Austin and Raleigh/Durham have economic anchors in huge, top-class universities, local firms still need to look outside for money, which makes both regions vulnerable to losing businesses to tech communities in California and New York.

Despite the challenges, for SocialProof's Labenz coming home meant getting a chance to see his family and old friends more often and taking a small part in building up the young tech community there.

For some, like Groudfloor's Dally, who spent years rising through tech communities in Boston, the Valley, and London only to return to his hometown in North Carolina's Triangle, there was one overriding incentive: having family nearby

"I love Silicon Valley, but I don't need to be there to build my company," Dally said. "In a world where you can build your startup anywhere, why wouldn't you build it where you're from?"

 

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