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When people think of San Francisco, they might think of the Golden Gate Bridge, cable cars, Chinatown, the 49ers or Giants. I’m a fan of all of those things, but what usually comes to mind when I think of San Francisco is Silicon Valley, the world’s premiere hub for innovation and entrepreneurialism. That makes it, I believe, one of the most attractive places in the world to invest.
Others clearly share this belief. One consulting firm, in fact, just named San Francisco as having the best long-term outlook in terms of innovation and business.
Since 2008, A.T. Kearney has annually ranked the world’s most innovative cities, and for the second straight year, the City by the Bay topped the group’s list of cities with the greatest outlook “to attract and retain global capital, people and ideas.” Decisive factors included not just innovation but also personal well-being, economics and governance.
Rounding out the top five cities were New York, Paris, London and Boston. But for my money, San Francisco, and indeed the broader Bay Area and Silicon Valley, offers the most attractive investment opportunities, for numerous reasons.
Patents and Venture Capital Galore
San Francisco—and its fellow Bay cities San Jose, Oakland, Mountain View and others—is ground zero for American innovation. Taken as a whole, the Bay Area has far and away the most patents than any other American city, after surpassing New York City in 1995. It grew from contributing only 4 percent of U.S. patents in 1976 to 16 percent by 2008.
A.T. Kearney’s report cites San Francisco’s strong start-up ecosystem, emphasis on technology and willingness to take risks as contributing factors to the city’s rapid increases in the number of U.S. patents.
The Bay Area also leads the nation in the amount of venture capital that pours in every year. A study conducted in 2012 by the Bay Area Council Economic Institute and Booz & Company found that the region, where most Silicon Valley companies are headquartered, attracted between 35 and 40 percent of all U.S. venture capital investment. Much of the investment focused on information technology, biotechnology, internet, digital entertainment and “cleantech” firms.
In 2016, San Francisco ranked 10th in the nation in terms of the number of Fortune 500 companies, or those with the highest gross revenue. With 11 such companies calling San Francisco home, the city is the only one in California, interestingly, that appears in the top 10.
Disruption HQ
Perhaps more so than any other region in the world, the Bay Area produces new companies that disrupt and redefine entire industries. Think Google (Alphabet), Intuit, Netflix, eBay, Tesla Motors, Cisco Systems and others—many of which we’ve owned at one point or another in our two domestic equity funds, the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX).
We can thank Stanford University for a lot of this innovative spirit. Founded in 1885 by railroad magnate and former California governor Leland Stanford, the school’s mission from the start was to teach not just traditional liberal arts but also technology and engineering.
Whole books have been devoted to what Stanford—which Reuters named as the world’s most innovative university in 2016—has contributed to our world, from antibody therapies to data analytics to DSL. In 1991, the first websites in North America went online at the school’s National Accelerator Laboratory, paving the way for the Internet Age we live in today.
One of Stanford’s most influential professors, Frederick Terman, was not only renowned for his research in electronics and radio engineering, but he also pushed his students to form their own companies. Known today as the “Father of Silicon Valley,” Terman personally invested in many of these companies, one of which was Hewlett-Packard, founded in Palo Alto in 1939.
The title “Father of Silicon Valley” is also sometimes shared by William Shockley, who came to Stanford in 1963 to teach electrical engineering. Earlier in his career, in 1947, he and his Bell Telephone Laboratories colleagues John Bardeen and Walter Brattain invented the transistor, an achievement that’s absolutely fundamental to modern electronics. The transistor can be found in nearly everything we use and enjoy today, from cars to jets to computers. For this creation, Shockley and his co-inventors were awarded the Nobel Prize in 1956.
That same year, Shockley and seven other scientists founded Shockley Semiconductor Laboratory, the “first silicon device and research manufacturing company in Silicon Valley,” as a plaque marking the spot in Mountain View reads today. The work conducted at the laboratory, which closed in 1968, is literally the reason why Silicon Valley is so named. (The building was later used as a furniture store, then a produce market. It was eventually torn down.)
It’s impossible to overemphasize the importance of Stanford’s economic contributions. A 2012 study estimated that the approximately 40,000 companies founded by Stanford alumni since the 1930s generate world revenues in the neighborhood of $2.7 trillion— every year. If they were their own independent nation, they would be the world’s 10th largest economy.
Manifest Destiny
As pleased as I am to see that San Francisco ranked first in the world for its “disruptive innovation,” as A.T. Kearney puts it, I’m not surprised. The city has long been an agent of change and a prime destination for those seeking fortune and glory.
When gold was discovered in California in 1848, San Francisco became an overnight mecca for miners from all corners of the world. Its population swelled from 1,000 in 1848 to 20,000 just two years later. The city grew so rapidly in size and importance, it was eventually selected as the westernmost stop along the first transcontinental railroad.
Today, innovative ideas are sought just as fervently as 49ers sought gold, and it’s precisely those ideas that we invest in. Both the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) have a 16 percent to 17 percent exposure to Silicon Valley-type tech firms—firms like Apple, NetApp, Qualcomm, eBay, Interdigital and others. I believe they’re well positioned to continue attracting and retaining capital and talent for many years to come.