Are Founders Still Starting Companies in San Francisco Bay Area?

For at least two decades, the high cost of living in the San Francisco Bay Area, and other quality of life issues, have led many observers to predict the end of the San Francisco Bay Area being the most attractive place to start a venture back-able company. With the pandemic forced acceptance of work-from-anywhere, perhaps now will see the long-anticipated end of the dominance of the San Francisco Bay Area as the place to launch a startup. It’s been long enough since the onset of the pandemic that we now have meaningful amounts of data to look at to see if founder choices on location are showing up empirically.

It is difficult to pin down the “Founding Date” for a startup, since they often start as vaguely defined projects that can follow chaotic paths on their way to being a company. For this reason, I’ve used “first financing of $100K or more” as the definition of startup formation date. This hurdle also eliminates the very large number of companies that get entered in the Crunchbase dataset, but never actually raise any money. Lowering this hurdle to $50k wouldn’t change the analysis much; but, raising it to $1m would eliminate a large number of companies that raise six figures but fail before a next round of funding, and would introduce more of a time lag in the analysis.

The graphs below present the counts for companies headquartered in the San Francisco Bay Area and the Rest of the USA (ie, all of the US except the San Francisco Bay Area) for first reported Seed financings of $100K or more. It has been reported elsewhere that the fraction of remote workers has climbed markedly since the pandemic, so perhaps “headquarters” doesn’t mean quite as much as it used to. Also, I have not made an attempt confirm the categorization of the modest number of purely virtual startups. The handful of virtual startups I checked resolved to specific cities known for startups. And, some companies skip straight to raising a Series A, or raise non-equity capital (eg, grants, debt), but there doesn’t seem to be any reason to expect the ratio to change over the range of dates of this study, nor to be different in the geographies considered, so ignoring these cases seems reasonable.

I attempted to evaluate other startup hubs (New York, Austin, Miami, Seattle, etc.) but the startup formation rates were markedly smaller in each of them, relative to the San Francisco Bay Area, and therefore yielded much noisier data that bounced around from quarter to quarter.

New Startup formation rate doesn’t appear to be much affected by the pandemic — starting at about the fifth bar. All data from Crunchbase.

Ratio is directly derived from data presented in graph above. Ratio = Green Portion / Blue Portion of the bars above. Orange bars are the four quarters before the pandemic; blue bars are the eight quarters after the onset of the pandemic. Pandemic has had no impact on ratio of startups being formed in the San Francisco Bay Area.

For the four quarters before the pandemic, the ratio of San Francisco Bay Area to Rest of USA initial startup formation was 23.5%; for the eight quarters (any seasonality effects should be the same in the two groups) was also 23.5%. Empirically, the pandemic has had no observable impact on the relative rate of startup formation in the San Francisco Bay Area versus the Rest of the United States. At least from the perspective of where startup founders elect to start their companies, the pandemic doesn’t seem to have affected the relative attractiveness of the San Francisco Bay Area.

Taking a similar ratio based on total populations yields 2.4% — so, per capita startup formation rate is about 10x higher in the San Francisco Bay Area than in the Rest of the United States, both before and after the onset of the pandemic.