What's behind San Francisco's $4 toast?

I got back to London today following another trip to San Francisco and the bay area, and as before I wanted to blog about some of the things I learnt and people I met.

Talking to a number of entrepreneurs I was again struck by the cost of people and property, and heard again and again how even some engineers were being priced out of the City. Jolie O'Dell wrote yesterday "why the tech industry is ruining San Francisco" and drew a 6 step process around tech entrepreneurs becoming wealthy through success and going on to create aspirational products around a "pretension of superior taste". Ultimately, the argument is that entrepreneurial success is creating this inflation.

I don't think success as such is such an important part of it: this is about investment, whether it succeeds or fails, and the dynamic is even simpler. There is a lot of capital ready for draw-down by Silicon Valley investors, and they would like to apply as much of it as possible. By investing as much as they can in startups they give them the opportunity to compete for staff with increasingly lavish salaries, benefits and office environments.

When some startups spend a couple of million of their investment on a serious office and six figure salaries all round, they create an environment whereby other startups need to spend big on their office to be taken seriously. By doing this, they put entrepreneurs in a position whereby these niceties are considered to be necessities, and thus increase the pressure on all entrepreneurs give away some of their equity and let investors apply their capital.

This is a virtuous cycle for 2 & 20 investors as more founders have to give away parts of their company. Great for some service providers, not bad for tech employees, and a mixed bag for founders. But for people with pensions in those investment funds, and for everyone else in San Francisco, it's just $4 toast.