‘Miami is dead. Austin is dead. San Francisco is back!’ Can AI really save this city?

Read: San Francisco’s push to turn office buildings into homes hinges on this simple idea.

At first glance, it isn’t obvious that a new tech revolution is afoot across the city. But it is starting small, in residential neighborhoods, where turn-of-the 20th century mansions and houses have been transformed into communities where entrepreneurs code and help each other in houses set up exclusively for hackers. And some tech workers who fled the Bay Area — and offices in SoMa and downtown — for peaceful rural locations or vibrant beach towns are coming back. Dubbed “boomerangs,” these returning workers sense that another gold rush is coming.

“San Francisco is reclaiming its throne and the white-hot center of gravity,” said C.C. Gong, an entrepreneur and evangelist of the city’s growing startup community. “Miami is dead and Austin is dead. San Francisco is back!” she exclaimed at an event sponsored by Reinvent Futures last month at Shack15, a co-working space for entrepreneurs in the Ferry Building, overlooking the San Francisco Bay. The gathering of close to 200 techies, academics, government officials and others focused on a wide-ranging discussion on the dangers of AI.

Move over, Silicon Valley

Gong is a co-founder of Cerebral Valley AI, which sponsors and promotes hackathons (a social code fest), discussions, networking events and parties in San Francisco and Silicon Valley. She is also co-founder of an AI video-content startup called Montage, which now has 13 employees.

“Cerebral Valley” is a new nickname for Hayes Valley, the hip neighborhood adjacent to the city’s Civic Center. Hayes Valley is home to at least one hacker house, where developers live and code their new ideas; a social club called The Commons that often hosts AI salons; an AI videogame startup called Volley, and a nearby office of early-stage venture-capital firm NFX Ventures. But Cerebral Valley seems to be morphing into a reference to all of San Francisco’s AI startup activity.

“This is such a unique place,” said Autumn Adamme, founder and creative director of Dark Garden Corsetry, while chatting with MarketWatch in Patricia’s Green, the central green space of the neighborhood, made possible after damaged freeway on-ramps were torn down after the 1989 earthquake. Adamme pointed out the activity around the park, which faces PROXY, a two-block lot, now filled with shipping containers transformed into small businesses and a workout space. People now “can meet outside, go to restaurants,” she said.

Adamme’s custom corsetry shop has been in Hayes Valley since 1985, and she is also vice president of the Hayes Valley Merchants Council. She noted that Blue Bottle Coffee opened its first brick-and-mortar location on Linden Street, a quieter block off the beaten path and next door to Dark Garden. Linden Labs, the creator of Second Life, the first virtual world, was founded in the space now occupied by one of the city’s oldest optometry shops, Optical Underground.

Electric-truck maker Rivian Automotive
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plans to open a showroom, around the corner on Fell Street, where it will take over two brick-faced, graffiti-covered garages that were previously an auto repair and an auto body shop. A spokesperson for Rivian said that area represents a “dynamic hub of shopping, culture and dining, positioning us in a high foot traffic, high-visibility area, and allowing us to join a community we want to be a part of.”

Hayes Valley may be a social/cultural center, but not many startups are based there. “We have some room to grow here, but very large offices are indeed hard to find in Hayes Valley, sadly,” said Max Child, co-founder of Volley, in an email. Volley, which makes AI voice games for Amazon.com’s
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Alexa and other devices, is probably the largest tech startup in the area, with 75 employees, on Ivy Street, another smaller thoroughfare. Crunchbase estimates Volley has raised about $1.3 million since its founding by Child and James Wilsterman in 2016 in their apartment on Hayes Street. Child said he hopes to keep the company in Hayes Valley. “Our team loves the office location,” he said. “It’s good for attracting talent to be in a lively, fun, safe area.”

A ‘monastery for hackers.’

A few blocks west of Hayes Valley, on Alamo Square, famous for its postcard view of a row of four ornate Victorian houses called the “Painted Ladies,” is a large mansion in the Second Empire style that was built originally in 1904 for the Catholic archbishop of San Francisco. It is now home to a hacker house called HFO, where entrepreneurs apply for a 12-week residency, described by co-founder Dave Fontenot as a “monastery for hackers.”

Last year, HFO houses were hosted in Miami and Brooklyn. In October, Fontenot, a hackathon leader, was about to launch an HFO house in New York, but on a trip to San Francisco, he realized people were way ahead in the development of AI. Friends told him GitHub’s Copilot was writing half their code.

“Something had shifted,” Fontenot wrote in a Medium post. “The AI renaissance had already started in San Francisco.”

Sofiia Shvets, who moved to San Francisco from Ukraine, lived in an earlier hacker house called Dobrydom near Alamo Square. It’s for entrepreneurs from Eastern Europe, formed by a Russian named Andrey Doronichev, who was previously a product manager at Alphabet’s
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Google and founder of Optic, which uses AI to authenticate content and non-fungible tokens (NFTs) and protect original work.

Shvets stayed at the house for more than a year, beginning in early 2020. “It was an amazing and in some ways, a life-changing experience,” she said. “I was surrounded by founders, it helped to get my first network in S.F., focus on a product and growth, and, after all, gain a group of close friends.” Shvets, who co-founded an AI image-fixing company called Let’s Enhance, worked on a new product called Claid.ai. Let’s Enhance now has about 40 employees and is based in a small office South of Market.

“The frenzy of startups is fantastic,” said James Currier, a partner at NFX Ventures, whose San Francisco office is a five-minute walk from the center of Hayes Valley. “We moved from a world where we had ideas we want to build and we were waiting for the technology to allow us to create those ideas. Now the technology is waiting for us to come up with ideas, and that feels very different.” He said every week someone texts to say they are moving back to San Francisco. “A bunch of people are coming back, who moved to wherever.”

Rocky Yu is an entrepreneur who earlier this year took over an 18,000-square-foot mansion in the tony town of Hillsborough, about 20 miles south of San Francisco, that he dubbed the AGI House. “Everyone has their own vision,” he said, when asked about different hacker houses. AGI “used to be a party house. We don’t do parties anymore. We are all very serious.” The home’s swimming pool isn’t being used much “because everyone has their heads down working,” Yu said. The AGI House recently hosted a large hackathon weekend and also hosts events, such as dinners to discuss big topics like technology regulation. Yu said his mission is to attract the best founders, who rent space, but he does not take stakes in companies and sees AGI as a gathering place for people in AI.

The current excitement over AI is mixed with trepidation for many of us about what is being unleashed. Within San Francisco, there is already a debate about the problems being caused in the city by the current testing of driverless cars. During the discussion at Shack15, panelists cited fears about AI that included its effect on copyrights, the arts, the spreading of misinformation, potential for cyberattacks and threats, and algorithmic bias. The biggest fear, which was somewhat debunked, is that the machines will take over the world. So far, AI seems mostly poised to help companies automate and save money, while dehumanizing many experiences for consumers.

“Generative AI has the lunatic fringe all fired up about the singularity, the idea that they will exponentially improve and transcend us, and they will decide they don’t need us,” said Jerry Kaplan, a long-time Silicon Valley entrepreneur, at the Reinvent Futures gathering. “I have a perfect answer to that: Let’s not do that….These systems have no desires, they have no intentions of their own.”

Now a lecturer at Stanford University, Kaplan co-founded an early AI company in the 1980s, Teknowledge Inc., one of the first to commercialize expert systems, before moving on to work at Lotus Development and then co-founding an early tablet maker. He has written two books about AI and believes we are heading into a new Renaissance, as in the 14th century when there was a shift of focus from God to man.

“We are shifting focus from humankind to machines,” Kaplan said. AI “might be the most important human invention ever. We have created a tool that can use tools; that is a very fundamental difference.”

Witnessing another major tech boom

Several executives and venture capitalists I spoke with feel they are witnessing another major technological shift, one that will be as disruptive as the internet boom of the mid-1990s and the mobile era ushered in by Apple’s
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iPhone.

“It’s a Cambrian explosion when it comes to ideas,” said Preeti Rathi, a general partner at Icon Ventures, which has invested in several AI startups. “There has always been excitement about ideas and tech, but this is a technology that can be applied to every different sector. You pick a sector and it can be applied to it.”

Recent data from CB Insights counts about 335 startups working in generative AI, with $12 billion invested in the first half of 2023. About half of these startups are in the San Francisco Bay Area, where AI has been a bright spot in a depressed venture environment. Even so, AI could not stop the decline in venture funding, with IPOs mostly stalled. Overall global VC funding fell 49% in the second quarter.

An open-source list managed by NFX Ventures lists close to 600 AI startups, but it appears to focus on software. It does not include later-stage chip or hardware companies such as Cerebras of Sunnyvale, Calif. or SambaNova Systems in Palo Alto, Calif., which are much more capital intensive and have raised $715 million and $1.1 billion, respectively, according to Crunchbase.

So while San Francisco looks to become the capital of AI, as it tries to recover from the damage remote work has inflicted on the financial district, there will likely be some rivalry with Silicon Valley over the title.

Companies in Silicon Valley will inevitably like to say they have “proximity to more deep technology” as Brian Sathianathan, co-founder and chief technology officer at Iterate.ai, pointed out. Iterate.ai was founded 10 years ago in San Jose and no longer considers itself a startup, per se, with 102 employees and revenue in the double-digit millions. Sathianathan, a serial entrepreneur, received early funding and now is trying to avoid venture capital.

“We started focusing on AI very early, five or six years ago,” Sathianathan said. “AI was one of the critical technologies we said we wanted to focus on.”

Iterate.ai enables corporate customers to quickly build applications with AI tools. “We have a lot of folks from Apple and others who are Valley-based,” Sathianathan said, adding that Nvidia
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the maker of graphics chips targeted for AI applications, is one of his company’s partners, as is Google Cloud.

Muddu Sudhakar, co-founder and CEO of Aisera, a five-year-old company in Palo Alto that develops the enterprise equivalent of ChatGPT, likens the current AI activity to the year before Netscape went public. “I have not seen excitement like this since 1994,” Sudhakar said. “People are doing hackathons, people are working in garages.” He believes the net number of new jobs AI will ultimately create will be more than the Industrial Revolution and the internet.

Hype and a shakeout

Edward Suh, a venture capitalist and angel investor who last year started his own fund, Alpine Ventures, focuses on very early seed rounds. Nowadays he is inundated with pitches from young AI startups.

“There is a lot of noise out there. Part of the challenge is sifting through all these companies,” Suh said. “Broadly, many of them have a very similar approach and are doing roughly the same thing, which is building on top of an existing foundational model whether that is OpenAI or any of the other ones, and putting some light open UX [user interface] on top of that.” A lot of companies are just “piping information back and forth to OpenAI” which is reinforcing the strength of the ChatGPT creator.

“It’s hard to see a lot of these companies building really large sustainable business based on this model,” he said, in an echo of the dot-com bubble.

Bernstein Research recently wrote up a note comparing the current boomlet and hype to the dot-com bubble from the late 1990s to 2000. One that investors should pay attention to was the likening of Nvidia to the rise and fall of Sun Microsystems, which became the server of choice for dot-com companies. Analysts led by Stacy Rasgon and Toni Sacconaghi pointed out that that was “eerily similar to Nvidia today.”

Read: Will AI do to Nvidia what the dot-com boom did to Sun Microsystems? Analysts compare current hype to past ones.

For the city of San Francisco, it’s too early to say if any AI company will become big enough to become a major force or lease large amounts of office space. And as a center for another boom, the city will also surely see another bust.

OpenAI, one of the largest and best funded companies to date, with Microsoft
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as a big investor, currently has more than 600 employees. Late last year it moved its offices from the Pioneer Building in the Mission District to an undisclosed location close by. Anthropic, which hosted a hackathon for its Claude 2 chatbot last month, is located a few blocks from Jackson Square, has over 100 employees.

“I’m not sure about SoMa coming back to life completely, this is definitely happening to some extent,” said Shvets of Let’s Enhance, adding that most AI companies have fewer employees. “Expensive office spaces might stay empty for a some time (unless they will explore different sharing business models).”

“We have always been a boom-and-bust city,” said Colin Yasukochi, executive director of the Tech Insights Center at CBRE commercial real estate. “Maybe this will be the next boom. It’s hot right now but it’s not going to cure the problems in the office market; it will take some time.”

In the dot-com boom and bust, thousands of companies were formed and failed, and billions of dollars were made and lost in a roaring and then crashing market euphoria. Then, amid the rubble, a major technology emerged that changed our lives. While many say that AI’s automation of many of our tasks will improve our lives like the internet has, I am not convinced that this turn of technology is going to be as beneficial to humans. But perhaps the best and brightest minds in tech will heed the call for the ethical development of AI — and not let the worst happen.

More: This is what tech companies, from Amazon to Apple, just told investors about AI  

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