Why Silicon Valley is shifting its heart to S.F.

For decades, Silicon Valley startups have benefited from an address synonymous with innovation. That edge may be eroding — to San Francisco’s benefit.

Why? “Shift happens,” says Thomas Ciccolella, PricewaterhouseCoopers’ lead U.S. partner for venture capital.

In recent years, San Francisco companies have started to bring in more venture capital dollars than those in Silicon Valley, according to PricewaterhouseCoopers’ most recent MoneyTree report. The consulting firm divides the two parts of the region at Highway 92, and since 2010, the northern region has taken the lead in dollars raised by startups.

In the second quarter, San Francisco’s top deal was Lyft, which raised $600 million in a round led by Fidelity. Silicon Valley’s top deal was Palo Alto’s Robinhood, which raised $363 million.

Companies that got started in San Francisco around four or five years ago are “all of a sudden becoming sizable,” according to Ciccolella.

“What happens over time is that (San Francisco) becomes a micro version of Silicon Valley, where entrepreneurs were enticed to come here, came here and now want to stay local,” Ciccolella said.

According to the report, San Francisco companies received $5.6 billion in funding in the second quarter, a 33 percent increase from the same quarter a year ago. Silicon Valley companies received $3.9 billion in funding, a drop of 7 percent from the same quarter a year ago.

Entrepreneurs favor San Francisco for a variety of reasons, Ciccolella said, including the benefit of being near similar companies.

Another factor in the overall increase in venture capital is a reticence by startups to go public.

“First-time entrepreneurs are setting up shop here, and they’re staying private here longer too, which means bigger checks,” said Ciccolella. “It’s kind of a perfect storm, and is what makes (San Francisco) an outlier in getting more funding, in relation to other regions.” Fuzzy, a veterinary service that raised $4.5 million from investors last year, says it located in San Francisco over Silicon Valley because of the city’s infrastructure.

“There’s a cultural shift,” said Eric Palm, a Fuzzy co-founder. “People now want to be in most big cities, and Silicon Valley is not a city.”

Venture capitalists, who largely decamped to the Peninsula in the 1970s, have started moving back north, too.

The “center of gravity” of venture capital is now San Francisco’s South Park, according to Venky Ganesan, a partner at Menlo Ventures.

Ganesan says the shift may be happening because venture capitalists are more attracted to mobile and software companies, and San Francisco has plenty of those.

“The valley just has more back-end talent — it’s the guts of the infrastructure — but it’s not the front-facing technology,” he said.

Despite the name, Menlo has offices on both Silicon Valley’s famed Sand Hill Road and Bryant Street off South Park in San Francisco.