By Krystal Hu

SAN FRANCISCO Venture capital firm Headline used to be in one of San Francisco's most eye-catching skyscrapers: the pyramidal Transamerica building that has defined the skyline for decades. Employees enjoyed the views from the 43rd floor and the convenience of being downtown.

Then came the pandemic.

As the tech industry shifted to work-from-home or downsized, a city center that was already struggling with drugs and homelessness slipped further into urban decay. Businesses closed and visitors were scared off, creating a vicious cycle that coincided with changes already happening in the city's real estate market.

With Headline's lease ending, the company decided to look elsewhere. The executives considered building an office on a boat or moving to a residential house. Eventually, they took their operation managing $4 billion to the bucolic - and secure - Presidio, a former military base-turned-national park next to the landmark Golden Gate Bridge.

And they are not alone. Venture capital firms are increasingly joining retailers and other businesses in finding homes outside downtown San Francisco. Westfield, for example, said last month it was giving up its downtown shopping mall after 20 years, as foot traffic fell by 43% from 2019.

Where venture capital firms end up could have implications for the broader tech industry, as such companies usually help form a gravity center for startup founders and communities.

"Presidio really represented what we thought the future of work should be," said Mathias Schilling, Managing Partner at Headline, on a recent sunny afternoon. Nearby, a dozen employees were sitting at a long wooden communal table in the bright kitchen, eating lunch against a backdrop of lush greenery, palm trees and panoramic views of San Francisco Bay.

"It's a very calm and quiet space, something that I think instills creativity and stimulates people," said Schilling. "We take meetings outside and we walk around the big lawn here."

Other venture capitalists - including Felicis Ventures, which backed Shopify and Fitbit, as well as Forerunner Ventures and venture studio Atomic, have filled the directories in the Letterman Building, one of the biggest office complexes in the Presidio.

Converted from a former military base, the Presidio is located at the tip of San Francisco's peninsula, several miles west of the financial district. As a national park, it is patrolled by federal police.

"It 100% feels safer than downtown. There's no open drug use in the Presidio. There are no homeless encampments. There are very few homeless wandering around and that is because it's the federal land and the federal police is a big part of it," said Rex Salisbury, who runs VC firm Cambrian Venture and has been living and working from the Presidio since 2017.

SHIFTS IN TECH ECOSYSTEM

Venture capital firms play an integral part in the tech ecosystem in the San Francisco Bay Area, where startups captured about 35% of all U.S. venture capital funding in 2022.

Since the 1990s internet boom, the VCs have physically clustered in hotspots that are close to the startup founders - including Sand Hill Road in Silicon Valley and South Park in downtown San Francisco.

Now some firms say they feel less obligated to stay downtown because startup founders have become more scattered since the pandemic, while the Presidio is a convenient location for firm partners who live in the northern part of the city or Marin, the county across the Golden Gate Bridge from San Francisco.

"Presidio was too far, before COVID, for any founders to want to really come. Founders are not in downtown anymore, so we don't have to be there anymore. We felt like it wasn't going to be a burden for our founders to come here. They're actually really excited," said Eurie Kim, whose venture firm Forerunner left downtown for the Presidio in early 2022.

Although there are no statistics on the locations of VC firms by neighborhood, the Presidio vacancy rate is about 5%, compared to an overall commercial real estate vacancy rate in San Francisco of 35%, up from 4% pre-pandemic, according to real estate firm CBRE and the Presidio Trust, the federal agency that manages the area.

That is despite commercial real estate in the Presidio being on average 20% more expensive than downtown, according to CBRE data.

Lisa Petrie, a spokesperson at Presidio Trust, said there had been broad interest in moving from downtown since 2020. "They all cite the amenities and the beautiful surroundings of this urban national park as the number one reason for locating here," she added.

The Presidio has long attracted non-profit organizations and entertainment firms. Lucasfilm has had its headquarters here since 2005, and the Walt Disney Family Museum opened in the park in 2009.

Some VCs say they are still committed to downtown, however. When General Catalyst outgrew its office in South Park in San Francisco earlier this year, they moved to another downtown building a few blocks away.

"We found a convenient location that's close to public transportation, downtown hotels, and restaurants," said Jon Rehagen, chief technology officer at General Catalyst, adding that the firm was partnering with local restaurants and service providers. "Hopefully, that will help to revive the downtown tech corridor that is still recovering after the pandemic."

Employees in Presidio also hoped for downtown's recovery - but said for now they were happy they no longer needed to commute there.

"That part of town just hasn't evolved in so long," said Molly Martell, vice president of Brand at Headline. She said she hoped the attention being focused on its problems would be a catalyst for change. "It's just tragic to see what's happening," she added.

A spokesperson for the office of San Francisco Mayor London Breed said the government wanted to support businesses of all types in all neighborhoods in the city.

"Mayor Breed continues to implement strategic initiatives to help stabilize existing businesses and recruit new ones as part of her Roadmap to Downtown San Francisco's Future plan. We will continue to emphasize efforts to support the revitalization of Downtown, but we also welcome investments in all parts of our City," the spokesperson said in an email.

Colin Yasukochi, executive director of CBRE's Tech Insight, compared the Presidio to Sand Hill Road, the historic address for VCs in Silicon Valley.

"We do have this phenomenon that we call 'flight to quality' in real estate here," he said. "The Presidio has evolved as the Sand Hill Road of San Francisco."

(Reporting by Krystal Hu; editing by Peter Henderson and Rosalba O'Brien)