Entrepreneurs are hardly fleeing Silicon Valley. By most measures, entrepreneurship in Northern California continues to thrive. YUVAL HELLMAN ALAMO
In late 2020, the tech industry began fleeing California. In one short span, Palantir Technologies left Palo Alto for Denver, and Oracle and Hewlett Packard Enterprise shifted their home base to Texas. Tesla followed them to the Lone Star State in 2021. It triggered fears in Silicon Valley that its multi decade dominance of the technology sector was fading.
No question, Silicon Valley has assets few other places can match—a deep talent pool, easy access to venture capital, top-tier business and engineering schools, and simply spectacular weather and scenery. But California tech companies also face daunting, persistent challenges. The cost of living is sky-high, there isn’t enough housing, traffic remains terrible, and mass transit is anemic. There’s a constant threat of earthquakes and wildfires, a multiyear drought, and a heartbreaking homeless problem. And businesses must cope with a progressive governor and an activist state legislature intent on strictly regulating the tech sector.
In short, the trade-offs for operating in California are considerable. And as the pandemic drove people to work from home, the possibility emerged that technology itself—making it easier to work remotely—could trigger an unwinding of Silicon Valley’s tech-sector domination.
That isn’t what happened.
The truth is, scary 2020 headlines to the contrary, there hasn’t been any mass exit of tech companies or the talent they rely on. For one thing, most of the rules the state has imposed affect all companies that do business here, no matter where they are based. Indeed, Oracle (ticker: ORAL), HP Enterprise (HPE), and Palantir (PLTR) all still maintain a substantial presence in the Bay Area. And Tesla (TSLA) still builds most of its cars in Fremont, just across the Bay from Palo Alto, home of Stanford Universe California Is Pushing a Major Progressive Agenda. Will It Work?
For almost a decade now, AOL founder Steve Case has been repeating the message that there is tremendous innovation happening outside the Bay Area. In his new book, The Rise of the Rest, Case asserts that over the next decade, more than half of all venture-capital dollars will go to companies outside Northern California.
But entrepreneurs are hardly fleeing Silicon Valley. By most measures, entrepreneurship in Northern California continues to thrive.
According to venture-capital research firm CB Insights, of the world’s 1,191 global unicorns—pre-initial-public-offering companies with a valuation above $1 billion—171 are based in San Francisco, far more than any other city. Of the 55 deacons on that list—venture-backed firms with valuations above $10 billion—25 are based in California, all but a handful of them in the City by the Bay.
This is despite a stream of new state rules and regulations intended to rein in the tech giants. While Congress and the Biden administration have largely failed in their quest for new tech rules, deep-blue California has filled the breach.
“California has becoming the de facto regulator, stepping into the void that Washington has created on competition and consumer protection in the tech space,” says Paul Gallant, a tech policy analyst with the Cowen Washington Research Group.
The Biden administration and Congress have made little progress on tech regulation, and prospects would further dim if the Democrats lose control of the House or Senate in the midterm elections. But there is no divided government in California, and the state keeps crafting wide-reaching rules to rein in tech.
In 2018, then-Gov. Jerry Brown signed the California Consumer Privacy Act, or CCPA. It gives consumers broad rights to know what personal information websites are collecting, to delete information collected about them, and to opt out of the sale of personal information.
In 2020, California voters approved Proposition 24, the California Privacy Rights Act, a measure that further extends the rights laid out in CCPA. Among other things, it establishes new restrictions on collecting and sharing sensitive personal information, such as biometric data, geolocation, ethnicity, and religion. Prop 24, which included creation of the California Privacy Protection Agency, a new regulatory body, goes into effect in 2023.
In recent months, the pace of new rules has quickened. Gov. Gavin Newsom last month signed two pieces of legislation with ramifications for the social-media sector. One requires social-media companies to provide annual disclosures on their policies on policing online racism, disinformation, extremism, and harassment, and to disclose metrics on the enforcement of those policies. Another bars websites likely to be accessed by children and teens from collecting personal information, location data, or other profiling data. Newsom also signed a measure that bars California tech companies from cooperating with subpoenas tied to enforcement of antiabortion laws in other states.
Meanwhile, tech companies have been finding ways to use California’s ballot proposition system to their advantage. In 2021, voters approved a measure sponsored by ride-sharing companies Uber (UBER) and Lyft (LYFT) that exempted them from a state law that would have required food-delivery and ride-sharing companies to classify their drivers as employees rather than contractors. A state court later struck down the ballot proposition as unconstitutional, and the matter remains the subject of judicial review.
Next month, California voters will consider Proposition 30, a measure sponsored primarily by Lyft that would levy a new tax on the state’s highest earners—1.75% on income over $2 million—to help subsidize the purchase of electric vehicles and construction of new charging stations. Lyft devised the proposition in response to a California Air Resources Board rule that will require ride-share companies to use zero-emission cars for at least 90% of their rides by 2030. One recent poll shows the measure headed for a win, which would trigger a big transfer of cash from taxpayers to EV companies.
Maybe Tesla should think about coming home.
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