News Flash: New SOMA Boom (WSJ)

News Flash: New SOMA Boom (WSJ)

In San Francisco,
Bust Becomes Boom
At 625 Second St.
Internet Start-Ups Return,
Dreaming of Ad Revenue;
Yoga, Beer and 'Borat'
By PUI-WING TAM
December 12, 2006; Page A1
SAN FRANCISCO -- In the late 1990s, the epicenter of Silicon Valley's dot-com boom was this city's South of Market neighborhood, where hundreds of Web firms set up shop. When the bubble burst, the neighborhood emptied out.
Now the gold rush is on again in the Soma neighborhood -- and particularly in the four-story office building at 625 Second St.
Since April, more than a dozen tiny technology start-ups have moved into the red-brick building, which had been nearly half empty. The 135,000-square-foot property now houses about 400 workers, up from 250 several years ago. Many work in start-ups selling online poker, online video, blogging software and other Web businesses that are bubbling up in the new Internet boom.

More than a dozen technology start-ups have moved into this office building, in San Francisco's Soma district, since April.
On a recent Friday, one new tenant on the open-plan third floor, online software firm BuzzLogic Inc., was meeting with a Silicon Valley venture capitalist. Nearby, Jill Gilbert, chief executive of a start-up that compiles online and printed retirement-home guides, held a yoga class with five employees. Another executive from a start-up that provides online luxury-goods guides joined in on the yoga action, stretching and twisting. "When we moved in, this place was empty," said Ms. Gilbert, as soothing music played. "But in a matter of weeks, it filled up with lots of energy and creative people."
One start-up, LicketyShip Inc., a same-day delivery service, has a punching bag by its cubicles and also a place for people to sleep overnight in the building if they're too busy to go home. On the same day as the yoga class, the LicketyShip people had a "Borat" party and invited many of the other start-ups to have beers on the third floor, then go to a screening of the movie.
The flurry of activity is a sign of the Internet's roaring comeback, even as it has echoes of the heady days before the last bust. Through September, investors had poured $455 million into newfangled Internet start-ups known as "Web 2.0" companies, a term coined to describe the new wave of Internet outfits such as social networking and online video firms. That's nearly double the money raised in the sector for all of 2005, according to research firm VentureOne. Just as in the dot-com days, most of the start-ups at 625 Second St. are related to the Internet. Many are unprofitable so far but say they expect to make money from online advertising, just as search giant Google Inc. has done.
Until the mid-1980s, the Soma district -- which is just south of downtown San Francisco -- was filled with warehouses and light industry. Then developers started snapping up buildings and transforming them into lofts and open-plan offices. In the late 1990s, Internet start-ups such as online pet store Pets.com Inc. moved into the area, pushing commercial vacancy rates down to just 0.68% in late 1999, according to CAC Group, a property-services firm.

After the dot-com bubble burst, more than 42% of the neighborhood's commercial buildings stood vacant in 2002, according to CAC. Several restaurants closed. Others struggled. "During the boom, we had people waiting out the door at 10 p.m.," says Nico Freccia, co-founder of local brew pub called 21st Amendment. "But in just a few months, our sales dropped 30%. We had to cut back on staff and streamline our menu."
Now new start-ups hoping to be the next YouTube or Facebook are back in droves. Restaurants are opening and are packed with young customers. Tres Agaves, a new Mexican joint part owned by former Van Halen frontman Sammy Hagar, sells an $18 margarita and says it is catering 12 corporate parties a week this month. Tech start-ups are opening bar tabs again at the 21st Amendment pub, says Mr. Freccia. The neighborhood's office-vacancy rates have fallen to around 16% and are still dropping.
On the third floor of 625 Second St., where most of the building's new start-ups are grouped within several feet of one another, online video editing and sharing outfit Cuts Inc. says the company will earn revenue from Internet advertising on its Web site. Cuts's neighbor, start-up SpotDJ, whose software lets consumers pretend to be DJs, also says it plans to make money from ads. Ditto the Helium Report, which provides online guides for luxury destinations and products.
These start-ups say this Web boom is different from the last one. "On this floor, companies have pretty sane business ideas," says Grant Goodale, a product architect at SpotDJ, a 10-month-old business with three employees. "Nobody has too much money. Everyone is cognizant of the rules."
The building at 625 Second St. has witnessed such dreams end badly before. Internet firm LookSmart Ltd., an online advertising and technology company and onetime highflier, took a 10-year lease on the four-story building in 1999 just as the dot-com boom heated up. As that frenzy hit a peak in early 2000, LookSmart's stock closed at nearly $350 a share. At the time, the company filled the building with around 500 workers, says Peter Black, LookSmart's director of facilities.
After the crash in 2001, LookSmart's stock plunged to less than $2 a share. (It's back to nearly $5 now.) Earlier this year, LookSmart chief financial officer John Simonelli redoubled efforts to sublease unused space in the building. In particular, LookSmart decided to find smaller companies to move into the parts of the third floor it didn't occupy. "I know it sounds bubble-ish, but we thought, why not have a space to help incubate new companies?" says Mr. Simonelli.
Rob Crumpler, CEO of BuzzLogic, the online software start-up, soon heard about the building from a LookSmart auditor. The then 12-person start-up needed expansion space, so Mr. Crumpler quickly visited the property, admiring the open-plan layout and the low rent. A month-to-month sublease at 625 Second St. now costs BuzzLogic $20 a square foot, compared with the $38 a square foot it was paying for an office closer to downtown San Francisco.
BuzzLogic moved into the building's third floor in June and soon spread the word about the space to Internet technology start-up Mashery Inc., which moved in that same month. Mashery then told online video start-up Cuts about the property. "It's like a pyramid scheme to get in here," says Cuts CEO Evan Krauss, who moved in in July and pays $550 a month to rent four cubicles. "You had to be invited by somebody."
By August, the building was full, and it has a waiting list of companies hoping to get in.
On the third floor, start-ups have cut deals to use each other's technologies, and they often socialize at morning bagel sessions and the occasional yoga class. Some are also sharing staff.
Kirsten Spoljaric, a human-resources specialist, joined Mashery early this year. But with just six employees at the company, Ms. Spoljaric had some time on her hands. When other nearby start-ups began asking her for advice on setting up their payroll, she took on extra work. She has since worked with two other third-floor companies on their recruiting efforts. "I feel like I've been approached by everyone here at one point or another," says the 29-year-old.
Mr. Simonelli, LookSmart's 43-year-old CFO, says the start-ups have given the building new energy -- but not him. "The other day, the LookSmart general counsel and I were talking on the third floor," he says. "A Silicon Valley venture capitalist popped by and wanted to know which start-up we were. I had to tell him that we were the old fuddy-duddy Internet company."
Write to Pui-Wing Tam at pui-wing.tam@wsj.com1

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Tuesday, December 12, 2006