How AI Startups May Be Reinvigorating San Francisco

San Francisco has been a city of boom and bust since it began to grow during the Gold Rush of 1849. 

AI now appears to be the latest source of its economic expansion based on funding, hiring and new real estate leases signed. JL 

Danielle Abril reports in the Washington Post:

The recent boom in AI - led by generative AI - is not only re-energizing this city’s tech community, but it is triggering a movement of people to the city and office-space rentals by companies. Whereas tech giants including Facebook, Salesforce and LinkedIn reduced their presence in the city during the pandemic, buzzy start-ups are moving in. Chat GPT-developer OpenAI, the AI safety start-up Anthropic and a number of emerging AI companies are expanding in size and office presence, raising billions of dollars, enticing tech workers to the city. AI firms will lease 3 million feet of space in San Francisco by the end of the year. Commercial tenants typically lease 1 million square feet o a year

Parts of San Francisco are still shells of their original glory three years after the onset of the coronavirus pandemic. After the loss of foot traffic, restaurants and cafes closed, some retailers left and many companies downsized or relinquished their office leases because of hybrid or remote-work policies.

But on sporadic weeknights, hundreds of AI enthusiasts crowd into a downtown office, lured by nothing more than pizza, beer and the main draw: a conversation about artificial intelligence.

“You can’t pay for that kind of inbound traffic,” said Dev Rishi, the host of the meetups and a founder and the chief executive of the AI start-up Predibase. “There is palpable excitement and energy in this space.”

The recent boom in AI — led by advances in generative AI — is not only re-energizing this city’s tech community, but it is also triggering a movement of people to the city and office-space rentals by companies. Whereas tech giants including Facebook, Salesforce and LinkedIn reduced their presence in the city during the pandemic, buzzy start-ups are moving in. Chat GPT-developer OpenAI, the AI safety research start-up Anthropic and a growing number of emerging AI companies are expanding in size and office presence, raising billions of dollars, enticing tech workers to the city and forming tightknit communities.

With the backdrop of the city’s often publicized problems including crime, homelessness and drug use, AI is emerging as a bright spot that some hope will be a catalyst for the city’s next chapter. Entrepreneurs, real estate firms, economic development officials and investors hope to capitalize on the excitement.

“I want to confront the brutal reality of the dark sides of San Francisco,” said Angela Hoover, a founder and the CEO of the AI start-up Andi, which relocated from the pandemic technology hot spot of Miami to San Francisco in July. But Hoover also recognized that “this is where all the building in AI is happening, and we needed to be a part of it.”

The flow of venture capital dollars into AI and machine learning companies in San Francisco hit new highs this year, with start-ups raising $18.5 billion in the first quarter — about 82 percent of U.S. investments in the segment, according to data from PitchBook. That is $6 billion more than all the AI companies in San Francisco raised in 2022. Although the quarterly amount invested has moderated, investor interest in AI is expected to be strong in 2024 as companies continue to recognize AI’s value, PitchBook said. Quarterly totals easily can spike with just a couple of large investment deals.

The investments aren’t benefiting just generative AI start-ups. Those that have been in the industry for years are feeling the boost, too.

Viz.ai, a San Francisco-based AI health-care company founded in 2016, raised $100 million last year. Since the pandemic, its staff grew to 400 employees from 150.

“There’s rightfully a lot of excitement in the investment of the community,” said Chris Mansi, CEO of Viz.ai. “This [tech] allows companies like ours … to accelerate pretty significantly.”

In San Francisco, it seems that everyone is talking about AI, start-up leaders say. Some compare it to the early internet era of the late 1990s and early 2000s. Others call it a revolutionary moment akin to the invention of the smartphone.

“I’ve been in San Francisco for 23 years and … I’ve never seen anything like this,” said Vijay Karunamurthy, the field chief technology officer at Scale AI, which employs about 750 people. “You can just meet customers on the street walking from BART [trains] to the office or while getting coffee or run into someone investing.”

Areas of the city are hot pockets for the AI community. Hayes Valley, just west of downtown, has become known as Cerebral Valley because of its density of AI talent and hacker houses. And some have identified another area as the Arena, which includes parts downtown and nearby neighborhoods.

While many companies cut back on office space, several AI companies are signing leases.

Anthropic is finalizing a 230,000-square-foot lease in a downtown space formerly occupied by Slack, people familiar with the real estate industry say. OpenAI is in talks to sublease 445,000 square feet of space at Uber’s headquarters, the San Francisco Chronicle reported. OpenAI declined to comment on its plans.

Earlier this year, Hive AI leased about 57,000 square feet near the Salesforce Tower, according to the commercial real estate data and analytics firm CoStar. And Hayden AI and Adept AI leased nearly 42,000 square feet and about 36,000 square feet, respectively.

Some smaller AI companies expect their offices to grow soon, too.

“We’re 25 folks now,” said Yashar Behzadi, the founder and CEO of Synthesis AI, which is headquartered in downtown San Francisco. “We have an office for about a dozen people and will double or triple that next year.”

AI firms are expected to have leased approximately 3 million square feet of space in San Francisco by the end of the year, the commercial real estate firm JLL estimates. By comparison, commercial occupants typically lease about 1 million square feet of space in a year’s time. “There is an absolute groundswell. These AI start-ups are flocking to San Francisco, ” Chris Roeder, the executive managing director and lead broker for JLL’s San Francisco office, said about AI office activity.

Start-ups say people who previously left the city or abandoned their entrepreneurial dreams have been reinspired by AI. As a result, recruiting to the city seems easier than in previous years.

“They want to work here,” said Michael Lam, a founder and the CEO of the AI tutoring start-up Studdy. “For the first time in a long time, there’s a thriving community of entrepreneurs who want to socialize, meet other people and go to events.”

San Francisco Travel, which handles marketing and sales for events at the Moscone Convention Center and other venues, has seen several AI conferences and events pop up and expects the trend to continue into next year. Cassandra Costello, an executive vice president and the chief policy and external affairs officer, says the organization aims to build on the momentum in AI to attract more such business to the city.

Michelle Fang, a start-up marketer in San Francisco, said the list of events in the city she publishes on social media has quadrupled since May, ranging in size from large gatherings to small living-room conversations.

“It feels much more organized by the community and boots on the ground,” she said. “People are coming here just to experience it.”

Attending events is what helped Hoover of Andi ultimately choose to relocate her company to San Francisco.

“The more access you have to events where you can learn, the better your chances,” she said, noting that AI advancements move fast.

Although San Francisco Mayor London Breed this year lauded the city as the “AI capital of the world,” the city’s Office of Economic and Workforce Development believes AI won’t be the silver bullet to economic recovery. Still, AI is important enough to be part of the strategy, especially for its role in reviving foot traffic.

“AI is in a great spot,” said Sarah Dennis Phillips, the executive director of the agency. “It prioritizes in-person work, and we want the people leasing our offices to be using them.”

Beyond the city’s civic challenges, the growth of the AI community also could be dampened by the technology’s potential harms. Regulators are increasingly concerned about the impact AI could have on society, including in the spread of misinformation. Some people worry about algorithmic biases, job loss and privacy.

Start-ups say the grave implications of what they are doing is not lost on them.

“The mission is really clear,” said Karunamurthy of Scale AI, which helps companies with their AI training data. “We’re building tech that will impact our children’s lives.

San Francisco will play a key role in the future of AI, Microsoft’s venture arm believes. The tech giant and OpenAI investor did not release numbers but said it is heavily investing in AI start-ups, a large number of which are in the city. It also opened an innovation lab in downtown last month to help AI companies collaborate and introduce prototypes of AI products.

“The cycle times [in which AI companies are formed] are off-the-charts fast,” said Christopher Young, the executive vice president for business development, strategy and ventures at Microsoft. “Being in the city and able to get together quickly is part of that.”

Y Combinator, a start-up accelerator that moved from the South Bay to San Francisco this year, said it is still seeing many AI applicants. Sixty-four percent of its most recent batch of companies were AI-focused, and nearly 60 percent of its overall AI portfolio is based in San Francisco.

Jared Friedman, a group partner at the accelerator, says this is reminiscent of the early 2000s web boom.

“If you weren’t here, it was hard to be on the bleeding edge,” he said. The AI playbook “is being written right now by the start-ups that are here doing it.”