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Can the Silicon Valley be saved from ever growing cost of living?

Silicon Valley is a magical place. It's the only place in the world where visionaries and extremely talented people live within an hour drive from one another. People are hungry for innovation, hungry for creation, and hungry for intellectual stimulation.

Nowhere in the world can compete with the magnitude of excitement that's created in Silicon Valley. It's a pity this place is now constantly under pressure of rising property prices. Is it bad, is it good, will it eventually ruin the ecosystem? Let me tell you a story, we'll see what you think.

A few months ago I got to stay with a friend at a place that he rents downtown San Francisco, and it blew me away! My friend lives in a hostel, it's the best way I can describe this housing project.

The building was bought by a couple of guys who sold their startup for a little bit of money, much like in the Silicon Valley show. They bought a building in the middle of the Tenderloin district of San Francisco, right on the corner with all the crack-heads. If you walk unknowingly in the area, you would not suspect that a couple dozen really smart and talented people live inside. In fact, if you haven't been to the area, you probably won't even step your foot into the neighborhood as you'd be scared for your life, at least after hours.

Inside, the building has 4 or 5 floors, with a dozen rooms on each floor. Each room is about 200 sqft and has enough space for a bunk bed and just enough room to put some clothes into a corner. Each floor is equipped with a couple toilet-shower arrangements. The main floor has a kitchen and a common room to hang out at. The conditions of the building are somewhere between tolerable and unhealthy.

The place isn't bad, if you think of it as a hostel that one might stay while traveling around the country, but for a place where people live day in and day out, it's certainly the bare minimum living, but at a whooping cost of $1,000/person/month !

TechCrunch has done a fabulous job explaining in great details as to how the real-estate troubles came to be and why no single person can reverse the trend of constantly rising rent and housing prices. But, the reasons aren't my immediate problem, it's the way SF is.

I suppose it's not uncommon for a housing situation like this to exists anywhere in the world, but somehow US and hostel-living for smart and talented people, that just doesn't seem right. I am probably spoiled, but still, it doesn't.

San Francisco residents keep pointing to startups, saying that startups are polluting the environment in the city, and at the same time, you have people who work for extremely well-funded startups, living in a hostel in the worst neighborhood in the city. That doesn't seem to be right.

The saddest part, long-term economics don't even work out well for the people. Say one joins a startup fairly early on and gets a 0.5% share. A few rounds later, if a company is sold for $100mm, that share is probably more like 0.025% , and once all the taxes are paid, that's only a few hundred thousand in one's pocket. Divide that by at least five years that it's taken to sell a company, and the money is nothing more than a nice annual bonus.

Of course, engineers, designers, marketers, sales people and founders, and everyone else working in a startup, we don't come to the Valley for a pay check. An upside of winning a lottery ticket is nice, but the odds are so low, that's not the main driver.

The people, the rush, the potential, all the intelligent humans living together on a small pot of land - that's the real excitement of the Silicon Valley. But, can it be sustained with the ever-growing prices or is there an alternative to growing the ecosystem?

I sure hope the prices subside, but if not, perhaps decentralization of the Valley is the way to go? Sure, it's not quite as good in Seattle, LA, or New York, but if the founders and employees are being pushed out of the Valley, if living there is simply unsustainable, then maybe one way to solve the problem is to move away. The move won't happen overnight, but once a critical mass of companies move, the ecosystem will follow.

p.s. Danny Crichton wrote a very good post on TechCrunch about the problem with Silicon Valley and employee compensation, definitely check it out.

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