While there has long been plenty of high-tech ferment 30 miles to the south in Silicon Valley, San Francisco itself has traditionally been the region's finance and cultural center rather than a tech magnet. Now, the city is seeing growth from start-ups such as micro-blogging service Twitter Inc. and social-gaming company Zynga Game Network Inc.
Late last month, Zynga announced a seven-year lease for a 270,000-square-foot space in the South of Market neighborhood, one of San Francisco's biggest commercial-rental deals in years.
At the same time, the city's design talent, cheaper office rents and mix of amenities are drawing an influx of smaller tech firms, such as social-gaming start-up Booyah Inc. and help-desk software start-up Zendesk Inc.
"San Francisco is absolutely becoming ground zero for mobile and Web start-ups," said John Hering, chief executive officer of Lookout Mobile Security, a 35-person company that arrived from Los Angeles in January.
It isn't clear how sustainable San Francisco's tech boom is, though, especially since start-ups are by definition unproven. Many of the Web-based ones aren't yet generating revenue, much less profit. And most rely largely on the same cadres of venture capitalists, so if funding dried up, the impact would be widely felt.
During the previous dot-com boom, when San Francisco was sprouting Internet firms such as Pets.com Inc., the ferment spawned tech-filled enclaves before a tech bust in 2000 and 2001 wiped out many of the companies. While the sector has shown fits and starts of revival since then, city officials and entrepreneurs said the current level of tech activity is among the most sustained in San Francisco in a decade.
"After the dot-com implosion, everyone had an alternative" for where to locate, said San Francisco Mayor Gavin Newsom. "Now, jobs are chasing people."
Mr. Newsom said Zynga's new lease is the first in a series of office-space deals with Web companies that he expects to be announced in coming weeks. Overall, there are now some 500 tech companies in San Francisco, according to the city's Office of Economic and Workforce Development, which began tracking the number of local tech firms last year.
The activity is crucial for San Francisco, which is projecting a budget shortfall of around $450 million for the 2011-12 fiscal year.
And with the city's unemployment rate at 9.7% in August, tech companies have fueled pockets of job growth, with a 50% increase in the number of software jobs and more than a 20% jump in Internet publisher jobs for the 18 months ended in late 2009, according to Ted Egan, chief economist in San Francisco's Controller's Office.
The influx is also buoying commercial real estate. Tech companies are seeking 1.3 million square feet of space—either to expand or set up shop here— and make up 30% of the current demand for office space, according to Colliers International. Investors are pouring money into the city's start-ups, with venture capitalists putting $528 million into San Francisco companies in the second quarter, more than triple the $164 million in the same period a year earlier, according to research firm VentureSource.
San Francisco now rivals Silicon Valley for hot start-ups, some investors say. "The growth rate of exciting companies is happening more in San Francisco than elsewhere," said George Zachary, a venture capitalist at Charles River Ventures in Menlo Park, Calif. Of the 16 companies he has recently given "seed" financing to, Mr. Zachary said, about 10 are located in the city.
The activity doesn't span all areas of tech; computer-hardware makers still gravitate to Silicon Valley, which has no equal for engineering talent, and start-ups that move north aren't as close to potential partners such as Facebook Inc. in Palo Alto.
San Francisco's tech scene is instead concentrated in a younger generation of smaller, Web-centric companies, especially those in social games and mobile software. Many of these companies require designers, who executives say are more likely to live in San Francisco than in Silicon Valley, especially with the city's mix of advertising, artistic and publishing scenes.
In addition, office rents in San Francisco are cheaper than in Silicon Valley towns such as Palo Alto. Office asking rents were recently $51.48 per square foot a year for full service in Palo Alto versus $32.50 in San Francisco, according to Cornish & Carey Commercial Newmark Knight Frank.
John Ham, CEO of live video start-up Ustream Inc., said he relocated his company to San Francisco from Silicon Valley in May after he was quoted rents in the city that were less than half those in Palo Alto. Armed with $75 million in new funding, Mr. Ham found a 22,000-square-foot office for Ustream to expand in San Francisco and has since beefed up his work force to 200 people from less than 30 earlier this year.
"Entrepreneurs have limited capital and we're getting a real good deal here," Mr. Ham said.
Still, companies such as CloudKick Inc. said they are attracted to San Francisco's amenities, such as better restaurants and public transportation. Alex Polvi, CEO of the 12-person Web start-up, was one of several employees who sold their cars after relocating to San Francisco's Mission District last year from San Jose.
"All up-and-coming start-ups I know are up in the city," he said.
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