Silicon Nation: Tech Firms, Chasing Millennial Workers, Look Beyond the West Coast

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Peter Thiel, the Silicon Valley mainstay who founded PayPal, Clarium Capital and big-data contractor Palantir Technologies, has never shied away from iconoclastic gestures.

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In 2016, Thiel bucked his fellow new-economy titans and offered an unqualified endorsement to Donald Trump; he promoted efforts to forge floating societies in international waters; he’s even advocated space colonization.

But one of the entrepreneur’s boldest heresies came earlier this year, when he launched a broadside at Silicon Valley itself. In February, Thiel announced that he would uproot his technology ventures from their Silicon Valley haunts for Los Angeles, arguing that the birthplace of the software industry had become too insular.

“There’s a point where network effects go very wrong,” Thiel told Fox Business Network in March. “Everyone knows what everyone’s thinking, so everyone [winds up] thinking the same thing. It sort of shifts over into the madness of crowds.”

Tim Ferriss, a prolific Silicon Valley author and investor, expressed a similar view last December on CNN, after an interviewer asked him why he’d decided to move to Austin, Texas.

“Having no real professional need to be there, I was growing fatigued by what I perceived to be a suffocating smugness that is very prevalent in Silicon Valley, but furthermore, within the mono-conversation and echo chamber of tech,” Ferriss explained.

The pair’s dissatisfaction raises questions that resonate across the national geography of commercial real estate for the tech industry. Why has a sector whose fruits have promised decentralization remained concentrated in one place?

Will Silverman, a managing director who oversees investment sales at Hodges Ward Elliott, believes, contra Thiel, that the networking benefits of concentration will long persist as a defining feature of tech-friendly business districts.

“The most important question is, ‘Is this is a place where a smart, educated person would move without a specific employment plan? Is it a place that a person who is intellectually and creatively engaged would elect to live?’ “ Silverman said.

Does such a place have to necessarily be in California’s Bay Area?

Major debt providers and finance brokers are beginning to ask that question too.

Mark Fluent, who heads real estate lending in the western U.S. for Deutsche Bank, went so far as to name the technology sector’s rise as the defining economic characteristic of the current business cycle—one that could dominate any short-term turbulence from interest rates or inflation.

“I think we’re still in early innings for the macro shift in the economy,” Fluent remarked. “The jobs that are coming into the areas [of the country] that I oversee are really great STEM jobs and seem to be sustainable for the foreseeable future.”

That trend has had Deutsche Bank following tech firms across a map of the Western United States, Fluent said—and increasingly, it’s taken his team away from Silicon Valley, to cities like Los Angeles and Austin. The bank’s recent Los Angeles-area loans have funded properties in tech-forward L.A. submarkets such as Culver City and Playa, on new-economy projects including the headquarters for Beats by Dre, as well as Amazon’s move into Culver Studios, where it will produce original films.

The Texas state capital, too, has caught Fluent’s attention. “Seeing companies like Oracle and Apple have been getting into Austin: these are really the new market economy,” Fluent noted approvingly.

A handful of other like-minded cities, including Denver; Raleigh, N.C.; and Portland, Ore. have developed a similar appeal to lenders hoping to stay ahead of the economy’s curve, according to Jeff Donnelly, a finance broker at Colliers.

“When we speak about these cities, [lenders see them as] very appealing lifestyle markets in addition to job markets that have experienced tremendous growth since the last cycle,” Donnelly said. “Austin in particular has the advantage of having no sales tax and a good quality of life.”

That said, not all lenders share the same level of enthusiasm for unproven markets that are just emerging on the national radar.

“If you’re asking me, are lenders more comfortable or less comfortable with these rapid-growth markets, the answer is ‘yes,’ ” Donnelly joked. “I would even say that most lenders love that side of things. [But others] don’t think it’s very sustainable when they see a lot of cranes in the air…and that’s particularly the case for Austin and Denver.”

To answer why those cities have gained such clout so quickly, look no further than the rapidly spiraling cost of doing business in Silicon Valley, which covers just less than 200 square miles along the western shore of the San Francisco Bay. Home prices have increased nearly 200 percent in the last decade, according to Redfin.

“Two of my favorite local Chinese restaurants closed in the last year, because they could make more money renting out their space as offices,” said John McLaughlin, president of the Silicon Valley Historical Association. “Today, if you’re looking for a job and you’re right out of graduate school, you’re not going to have a place to live here.”

That reality has forced entry-level tech workers, as well as entrepreneurs and their early-stage startup companies, to look elsewhere for cities to plant their first flag. But even in an industry that thrives on digital connectivity tech, founders are finding that choosing the right location remains crucial.

“We still have a human need to relate to other human beings,” Silverman said. “That’s not going to change until we finally all plug ourselves into the matrix.”

On that front, a key dynamic has reversed over the last thirty decades or so, according to Silverman. Until about the 1990s, companies that were big employers served as magnets for young career-starters, and workers eagerly moved for opportunities. Wannabe programmers inevitably packed up for Silicon Valley, just as factory workers moved to Detroit a hundred years ago.

Today, Americans have grown much more reluctant to contemplate moves like that, Silverman said.

“People will not move solely to work for a particular employer “unless you’re somebody really special,” he averred. “Most people in American business, if they could interact with Warren Buffett, they’d probably move to Omaha. Barring that, Omaha tends to be a tougher sell.”

Instead, a younger generation of technology workers is setting the agenda, migrating en masse to cities like Austin and demanding that employers follow them there. The Texas capital’s population grew by more than 55,000 last year, according to the Austin Business Journal.

“There’s probably a hundred or more places around the world that have thrown money and education together with a few business ideas, to say, let’s recreate Silicon Valley,” McLaughlin said. “But if you don’t have the supportive culture, it never gets the traction.”

McLaughlin recalled a conversation he’d had with Lewis Wolff, the St. Louis-born real estate developer who has owned the Oakland A’s and the San Jose Earthquakes, a professional soccer team.

“When you start a business in the Midwest, everyone wants to know where it’s been done before and they’re not interested unless they’ve heard it’s been done somewhere else,” McLaughlin remembered Wolff telling him. In Silicon Valley, on the other hand, “it’s been normal to talk to people about starting a business that’s totally new.”

Holly Tachovsky, a native Austinite who co-founded a real estate database company, BuildFax there in 2008, said that Austin’s culture does indeed foster just such a supportive climate.

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Holly Tachovsky. Photo: BuildFax

“I believe that the citizenry of Austin, and especially the city’s leadership, have this idea that the pie can get bigger. We don’t feel that we have to steal each other’s pieces of the pie,” Tachovsky said. “When I’ve gone to leaders in the community, even [competitors], I’ve been met with, ‘What can I do for you?’ And I do the same. [I ask], ‘Hey, is there a partnership we can do?’ ”

That attitude can come out in charitable business-to-business gestures that sound unthinkable in more established commercial markets.

“We had some unused space in the back of our office, and an early-stage data startup asked if they could lease it. We just gave it to them for free,” Tachovsky said.

Something akin to “growth with soul” first put Austin on Silverman’s radar, too, when he was initially alerted to its eccentric independent streak by, among other things, the films of Richard Linklater, who directed Slacker and Dazed and Confused, in which the city’s environs figure prominently. South by Southwest, the film, music and media conference, also helped place the city on young people’s maps, he said.

On the other hand, the city’s path to prominence indicates that sometimes a long gestation period must come before explosive growth. Though the 30-year-old South by Southwest was successful from the start, Austin’s cachet for the business community has only been recognized within the last decade or so, according to Paul O’Brien, a Silicon Valley emigre who serves as CEO of MediaTech Ventures, an Austin group that invests in media and technology.

“Nine years ago, Austin was not the destination it is today,” O’Brien said. “It wasn’t considered as anything in the technology world except being known for the manufacture of semiconductors.”

Now, the city’s horizons have broadened significantly, especially in the technology sector. Dell, the personal computing bastion with over 100,000 global employees, has been based in nearby Round Rock, Texas since the 1980s, but newcomers are flooding in. This year, Oracle, the cloud-computing giant headquartered in Silicon Valley, set up shop, opening a 400-acre Austin campus in March, where it plans to run a sales innovation group. Facebook and Amazon added a combined 750 employees in the city in 2017, and Indeed, the jobs-posting website, hired 300 people there last year as well.

When tech firms come to the neighborhood, they can have transformative effects far beyond the office space they lease. That, at least, is the perspective of Ari Hirt, a managing director who works on both debt and equity deals at Mission Capital.

“What Google did to Chelsea [in Manhattan] made that neighborhood much hotter than it was. The same phenomenon has occurred in the West Loop of Chicago,” Hirt said. Given that companies like Google and Pinterest have hung out their shingles there, “now, everyone wants to be in the West Loop,” he said.

That brand of magnetism is good news for the tax base—but it’s already adding competitive pressures to area startups, according to Tachovsky. For one thing, the supply side of commercial real estate is having a hard time keeping up.

“We’ve built a lot,” Tachovksy said. “But when it comes to commercial office space and residential affordability, we’re still way more affordable than Denver or Silicon Valley. But, compared to our hippie roots, woof! It’s gotten really expensive.”

There’s also more competition than ever for skilled workers. Employers have now found themselves trailing millennials wherever they move. A co-founder of BuildFax lives in Asheville, N.C., and the company has staffed up an office there as well comprising entirely local hires. Among a smaller pool of software companies in that city of about 90,000, snagging good candidates can be even easier there, Tachovsky said, because she must compete with fewer other companies to win the brightest applicants.

Retention, on the other hand, is a different matter. Tachovsky considers it the most critical personnel challenge at her firm and said that the sheen of an appealing Austin location goes a long way towards keeping employees committed.

“The most important piece is keeping the right people,” Tachovsky said. “It goes back to that ‘growth with soul’ concept,” an attribute that she thinks BuildFax shares with Austin itself.

One thing Austin has got in spades is space to expand—a benefit that, O’Brien said, the city should use to its advantage.

“If you look at history, it’s proven that,” O’Brien said. “Los Angeles became Hollywood because the geography around there could be used to represent any scenery. New York was the epicenter of American business because of the immigration that the city attracted. A city’s resources help drive its specialization.”

That dynamic is certainly at play in Denver, another city jockeying for position as a new center for technology growth. Although the city’s overall population has held steady this year, the city’s technology labor force has grown by almost a quarter over the last five years. This year marked the city’s first on CBRE’s list of the country’s top ten tech hubs, replacing Dallas-Fort Worth.

Andrew Fischer, who spent most of his software-industry career in the Bay Area before decamping for Denver ten years ago, said he was drawn by the unique opportunities afforded by a big city that’s within ear’s length of the call of the great outdoors.

“There’s all the outdoors stuff, but almost ironically, too, Denver has a really vibrant urban core,” Fischer said. “Since I’ve moved to Denver, I’ve had probably the most urban lifestyle I’ve had to date. It’s a great mix of both worlds.”

After spending four years working from home in Denver for his previous Silicon Valley-based employer, Fischer set off on his own to found Choozle, a software startup that sells technology to help businesses manage their digital marketing efforts. As early as 2012, the city was already quickly accumulating the infrastructure necessary for Fischer to build his business. Echoing Silverman’s view, he said the key factor was Denver’s ability to attract talent.

“I would say about 10 percent to 15 percent of our workforce is native,” Fischer said. “We have a lot of people who move here for the opportunity to work here, but primarily for the opportunity to live here.”

Getting around is another key consideration. Though Silicon Valley’s transportation infrastructure—which includes a commuter rail line, a handful of local bus companies, two major freeways and two international airports—is now creaking under the weight of overuse, the system by all accounts acquitted itself quite adequately before the Valley’s most recent population boom. Denver has put in the dollars and man-hours to replicate that scheme.

Its Denver International Airport—the country’s fifth-busiest—opened in 1994, which makes it by far the newest among America’s 25 busiest facilities, and 2016 marked the first passenger service on the A Line, a commuter train that connects the airport and Downtown Denver across a distance of about 20 miles. Fischer noted with cheer that flights to pretty much anywhere in the U.S. take no more than four hours.

On the other hand, transportation is a factor that could serve to hold Austin back. At peak times, more than a fifth of Austin’s streets and highways are ensnared by gridlock—worse than New York City or Chicago, according traffic data provider INRIX. The issue is so universal that last month, the Austin Statesman published a column advising readers on “How to Make Sitting in Austin Traffic Your Happy Place.”

Financial matters are another crucial issue that informs where entrepreneurs lay their heads. Leaving behind Silicon Valley lessened Choozle’s expenses tremendously, Fischer said.

“The cost [savings] are the most tangible [benefit].” Fischer explained. “I would estimate that we had to raise a lot less capital than a competitor based in California [would have], so that allows us to be more competitive.”

But by the same token, it can be more difficult to connect with investors away from the coasts. Venture capital firms have long been concentrated not just in Silicon Valley, but along just one street there: Sand Hill Road, which connects the San Francisco-area cities of Palo Alto, Menlo Park and Woodside. By one count, the stretch is home to the offices of nearly 50 venture capital concerns. Private-equity investors, by contrast, have tended to build their nests in New York City or Los Angeles.

But Denver is making progress. Two conferences there this year, the Colorado Venture Summit and Growth Capital in the Rockies, drew an impressive set of coastal venture capital and private equity investors, Fischer reported.

Despite the cheaper rents on offer in growing markets like Austin and Denver, however, some entrepreneurs have found it isn’t yet worthwhile to tear themselves away from more mature economic centers. Dan Newton, the British-born founder of cloud-computing startup HiveIO, settled on a compromise when he chose to base the firm in Hoboken, N.J., just across the Hudson River from downtown Manhattan. Rents, while not cheap, are more affordable than in the Big Apple—but his firm can still draw from the region’s immense talent pool, he said.

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HiveIO’s offices in New Jersey. Photo: HiveIO

“Because we’re relatively young and growing rapidly, having the talent around us and being in a hub is really helpful,” Newton said. “And from an investment perspective, there’s many private equity firms just across the river.”

Not only is New Jersey—as Newton pointed out—America’s most densely populated state, its dynamic labor force is also among the nation’s most diverse. The Garden State places fourth on a diversity index compiled by consumer-data provider WalletHub: three places below California, the national leader, and two behind Texas, which came in second.

According to McLaughlin, the Silicon Valley historian, it’s no coincidence that thriving upstart tech-hubs tend to be—like Northern California—deeply cross-cultural.

“When I was growing up, it used to be all white guys here,” McLaughlin said of the Bay Area. “Today, it’s much more international. These entrepreneurs are attracted like magnets from all over the world, and when I talk to them, they say over and over, ‘I couldn’t have done it anywhere else.’ ”