Wanyway globally Economic transformation is happening, but a single city is usually driving it forward. Ghent, in modern-day Belgium, was at the heart of the burgeoning global wool trade in the 13th century. The first IPO took place in Amsterdam in 1602. London was the financial center of the first wave of globalization in the 19th century. And today the city is San Francisco.
California’s commercial capital has no serious rival in the field of generative artificial intelligence (AI), a breakthrough technology that has sparked a bull market in U.S. stocks and will, many economists hope, fuel a global increase in productivity. Almost all large AI startups are based in the Bay Area, which includes the city of San Francisco and Silicon Valley (largely based in Santa Clara County, in the south). OpenAI is there of course; this also applies to Anthropic, Databricks and Scale AI. Tech giants, including Meta and Microsoft, are also spending a lot of money AI in the city. According to think tank Brookings Metro, San Francisco accounted for nearly a tenth of the generative economies last year.AI vacancies in America, more than anywhere else. New York, with four times as many residents, was in second place.
This has changed the atmosphere of San Francisco. If you live in the city, you can feel AI in the air. Drive to the airport and on every second billboard you will see the different ways your business can improve by adopting this technology AI. Go to a party and every second guest says they work on the technology or in an industry it’s transforming. Hardly a day goes by without some nerdy event to satisfy your curiosity about the most vibrant intellectual field in the world, from lectures on the philosophy of artificial general intelligence to MLHops, a meeting for AI people who like beer.
How can this happen somewhere that is supposedly falling apart? Even before the Covid-19 pandemic, there was a sense that the best days of San Francisco and the wider Bay Area were over. In the late 2010s, concerns about crime and rising taxes led other cities, including Austin, Los Angeles and Miami, to be hyped as the “next Silicon Valley.” According to data collected by PitchBook, a financial database, companies in the Bay Area attracted four times more venture capital in early 2014 than New York, the second-largest metropolitan area. At the end of 2020, they attracted only 2.5 times as much.
Covid has not improved the situation. San Francisco went into early, hard, and prolonged lockdown, crushing service sector employment. The city’s tech elite realized they could work from home, emptying the downtown core. After the murder of George Floyd in 2020, many in the city government turned against the police. Officers felt like the city no longer had their back. From 2019 to 2022, their numbers fell by 14%. In 2021, Elon Musk headed to Texas, the richest of the many who left San Francisco that year.
Action in startup land also moved elsewhere. The most popular companies were foreign ones, such as Ant Group, a Chinese “super app,” at least until it was forced to abandon plans to go public, and Grab, a Singapore-based ride-hailer, which had a market value of $50. billion. Venture dealmaking in San Francisco inflated along with a broader market bubble. But when interest rates rose in 2022, the entire sector shut down. Valuations of venture-backed companies halved between the end of 2021 and the end of 2022.
Around the world, “San Francisco” is now shorthand for a failed city. Drug overdoses and homelessness have skyrocketed; The city’s population fell by 8% between April 2020 and July 2022. Only 52% of Americans polled by Gallup last year considered San Francisco a safe place to live, down 18 percentage points from 2006. Conservatives in particular consider the city a safe place to live. an example of what happens when you let social justice warriors run wild. Nowadays, if you want, you can drive through red lights at high speed with impunity; the police have almost completely stopped issuing traffic fines, as they prioritize other crimes. More than 30% of the offices are empty. Market Street, the town’s main thoroughfare, has an astonishing number of vacant shops.
There are now signs that local quality of life is beginning to improve: overdose rates are beginning to decline; in the last months of 2023, the number of car burglaries halved. Yet the beginning of the ah tree predated these changes. Despite headlines about an exodus of the wealthy, San Francisco’s tech elites have largely weathered the storm; in fact, the population decline was mainly caused by the departure of poorer people. As a result, residents are now better paid and better trained than before Covid. According to official data, the total pre-tax income of the average working person in San Francisco is about $220,000 a year, compared to $130,000 nationwide. Even as poor residents have left, income inequality has soared.
Many of the people with the skills to work on the AI golf were already in San Francisco or nearby. Most of today’s tech giants were founded in the Valley’s suburbs. Today they, and other big tech companies, have huge campuses thirty to fifty miles south of San Francisco, but their young employees rent small apartments in the city. Much of the funding for the AI Boom comes from these tech giants. In 2022 and 2023, companies like Meta completed more venture capital investments in the Bay Area than ever before, largely focused on AI.
Thanks to a mix of government support and creative counterculture, Stanford University and the University of California, Berkeley have long been centers of AI excellence specifically. In 2017, eight people published a paper, ‘Attention is all you need’, which recently became known outside the world AI circles as the pioneering contribution to the current wave of technological advancement. Almost all of them were located in or near the city. San Francisco and nearby San Jose accounted for a quarter of conference papers on the topic in 2021, according to Brookings Metro’s analysis.
Academic excellence has fueled innovation in the private sector, with many researchers moving between the two domains. Nine were hired to build OpenAI. Initially, they worked in the apartment of Greg Brockman, one of the co-founders, in the Mission District. Data from LinkedIn, a job search platform, shows that one in five OpenAIAmerica’s technical staff in America studied at Berkeley or Stanford. Now San Francisco AI the concentration has reached a critical mass, and success leads to even more success. London and Paris perhaps AI rivals, but they are far behind.
So investors are once again spending a lot of money in the Bay Area. Venture funding to San Francisco-based startups halved between 2021 and 2022, but recovered to two-thirds of its peak in 2023. By contrast, in Miami, only a quarter as much money went to startups in 2023 as in 2021. Those working in Silicon Valley are moving to the city to be closer to the action. Y Combinator, which helps startups get off the ground, recently set up shop. Venture capital firms from General Catalyst to Pear VC have opened new offices.
Competition for rental properties is fierce in desirable neighborhoods as the city’s population continues to grow. The arrival of many high-paying tech types has driven up housing prices. Although they are down more than 12% from their pandemic highs, they have risen since the start of 2023. The city has fewer restaurants than in 2019, but about the same number with two or three Michelin stars. North of the city, in wine country, there is no shortage of new, expensive hotels where venture capitalists and founders can relax.
Some elites see San Francisco’s AI success as a precursor to a broader transformation of the city. Locals are tired of having to call 911 because someone is overdosing in front of their children. In 2022, they ousted Chesa Boudin, a progressive district attorney, and three school board members who were more concerned with renaming schools than reopening them. On March 5, they will vote on measures championed by moderate Democrats, including one that will try to get homeless people with mental illnesses off the streets. In November, they will elect a slew of local officials and perhaps give the mayor more power.
London Breed, the current office holder, sounds sincere when she speaks about the need to improve public safety and reduce red tape: “Instead of being a city that constantly says ‘no,’” she explains, we “the ‘yes’ by eliminating bureaucracy.” She is being pressured by political groups that emerged as tech types took a greater interest in local politics, including GrowSF and TogetherSFthe latter co-founded by Michael Moritz, a famous venture capitalist.
Defending the indefensible
These attempts are met with fierce resistance. Aaron Peskin, chairman of the City Council’s Board of Supervisors, is the de facto leader of San Francisco’s progressives. He argues that Mr Moritz and his fellow campaigners are “amateurs” dressing up their own elite interests in the language of reform. “In general, I think people believe their own nonsense,” he says. (Unsurprisingly, Mr. Moritz disagrees: “It would be easy for us to pick up roots and… go to a low-tax state or to Europe.”) Even today the Every day, much of the city government’s time is wasted on pointless projects such as deciding whether or not to call for a ceasefire in Gaza. The local NIMBY movement is extremely powerful. And cartoonish corruption remains a problem: In 2022, the former public works director was sentenced to seven years in prison for taking huge bribes.
Still, it might not matter much to the AI boom if San Francisco remains chaotic. If you want good schools, public transportation, or public safety, San Francisco is not the place for you. If you don’t need these things, or you can find your way around them, the city remains a great place to innovate. Covid tested the “network effects” that people in Silicon Valley believed were crucial to its success. As it turned out, they were just as powerful as ever. That founders, companies, money and employees are returning to San Francisco suggests that remote work has not negated their importance. The city is still the place to be if you happen to want to meet a co-founder at a party.
Can the AI-driven excitement last? For now, it’s drawing people to the city; over time, this could reduce the workforce needed by startups. “Of AI You may not need fifty developers to start a company – you may only need five,” speculates Auren Hoffman, a founder who moved from San Francisco to Washington. DC, a few years ago. Another risk is that the AI The boom will be less than the bulls hope, perhaps because fewer companies than expected are actually adopting this technology AI tools. But as real as these concerns are, they are also problems that almost any other city would like to deal with. When it comes to governance, San Francisco breaks all the rules. At the same time, it is the richest place on earth, and it is getting richer. ■