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Article from Silicon Valley Business Journal.

Institutional Venture Partners’ Steve Harrick sees a lot of opportunity in the enterprise and B2B startup space and has a $1 billion fund that was raised last year to work with.

His Menlo Park firm focuses on later-stage venture and growth equity investments, so it’s not the small fry they have their eyes on.

IVP is looking for startups that already have $20 million to $30 million in revenue and the potential to grow that by tenfold or more.

The firm had several big exits last year, including the $223 million IPO of CafePress and the $745 million sale of Buddy Media to Salesforce.

Harrick took some time to speak to me this week about the startups that are exciting him today and why IVP often remains an investor long after a startup has gone public.

Here are excerpts from that conversation:

There has been a lot said about a shift away from social and consumer-focused startups since Facebook’s IPO last year. What does that mean at Instiutional Venture Partners?

IVP has always invested in enterprise companies and we’ve been investing since 1980. We’re on our 14th fund, IVP-14. It’s a billion-dollar fund and we’re just beginning to invest that.

But enterprise has always been a mainstay of our investment effort. It ebbs and flows with budgets and where we see growth. But right now we’re seeing a lot of good activity in the enterprise space, a lot of innovation being brought to bear and the opportunity for new high-growth companies. So we’re actively investing there.

Can you tell me a little bit about the companies that are exciting to you right now from your portfolio?

There are a number of them. The most recent investment was AppDynamics. AppDynamics does application performance management. It’s really a very exciting area. The company allows anybody that’s creating an application to bug test it, to test it for security, to see if it can support high volume loads, all while they are designing the application.

The reason that this is such an interesting space is that every enterprise has applications that reach out to customers that they use internally and that they connect to partners with. It’s a real competitive edge for companies that do it correctly.

All the old stuff doesn’t support mobile. It doesn’t support the latest programming techniques. It’s long in the tooth. The market has been desperate for a more modern solution and AppDynamics really delivers that. We were really impressed with the growth the company has shown and just the massive demand for the product offering.

A lot of our portfolio companies were already using AppDynamics. That’s how we found out about the company and it’s a space that right now is at about $ 2 billion market size. It’s growing and it’s a very good management team. So we’re excited to be part of it.

Another one I understand you invested in last year is Aerohive.

Oh, yeah. David Flynn is the CEO over there. It’s a great company to watch in Sunnyvale. It’s a next generation Wi-Fi company. What Aerohive did very early on is it realized that a controller can be costly and also is a choke point for an enterprise deployment. If your controller goes down, you can’t change configurations. A lot of the old vendors had built a lot of cost around the controllers, which increased the cost of deployment for a customer.

Aerohive took that controller and put it in the cloud. You can manage your Wi-Fi deployments remotely from any computer. It doesn’t go down and their Wi-Fi deployments are enormously successful at scale. They’ve got a lot of enterprise and education and government customers. It’s a business that more than doubled last year and really one to watch going forward.

Are you finding a lot more company these days looking at the enterprise and B2B space than there were a couple of years ago?

Enterprise budgets have come back. People are recognizing that they have to refresh their technologies. They’ve got a lot of new demands in terms of supporting new trends in the enterprise.

Take another one of our companies for example, MobileIron. It is a software company that solves the bring-your-own-device problem for businesses. People are bringing iPhones and Android phones into the enterprise and they’re viewing enterprise information. They’re putting things in a Dropbox account and they’re leaving with it.

IT can’t control that and that is a big problem, particularly when you want to maintain rights and provisioning and state-of-the-art security and be able to track confidential information.

So MobileIron’s products allow you to do all that. It allows you to push out patches, security, rules and provisioning. It allows you to take control of a mobile environment in the enterprise.

Five, six, seven years ago, this wasn’t a problem. It just wasn’t happening. Now, it is and it is being driven by consumer behavior that has flown over to the enterprise.

So people are saying, I have a budget for this. I have to spend. We have to be on top of these issues or it’s going to be a big problem for us.

You know those kinds of trends are really unstoppable.

Are there other trends you are watching?

Another is Wi-Fi, which is being kind of taken for granted, how to be able to connect if I’m visiting your company or I’m in your auditorium or I’m having lunch in your corporate cafeteria. These are all things you need to have infrastructure for. You need to do it cost effectively. So these fund-smart entrepreneurs are seeing an opportunity and people are spending for it.

As a venture capitalist, we look for those tailwinds in terms of budget because that allows you to grow. It accelerates the sale cycle. It becomes less of a missionary sale and that’s how you have rapid growth in businesses. It is different from five or six years ago. There are a lot of people paying attention to it.

There is a lot said about the consumerization of IT, the trend where shifts in consumer technology is requiring IT departments and enterprises to change how they do things.

It’s a massive change in behavior. Enterprises are organizations that are comprised of employees that have jobs to do. Their behaviors change and the enterprises have to change with them.

There is also a lot of talks about what is being described as Network 2.0, involving things like software-controlled networking and flash storage. Are you guys involved in that at all?

On the network side, a lot of that is cloud computing and services around the data center. We are involved in that.

We invest in a company called Eucalyptus Systems, which is the leader in hybrid cloud deployment. They allow you to manage and test software on your own premises and switch seamlessly back and forth between Eucalyptus and the Amazon Cloud.

Cloud computing is still an area where people are trying to figure out exactly what their needs and specs are. It’s still early in the market. But there have been some large successes that have kind of changed behavior.

Salesforce is one of those. Salesforce is widely deployed. It really took customer relationship management and managing your sales force to the cloud. They’ve offered additional cloud applications and people have gotten used to paying by subscription.

That’s also a change from seven or eight years ago, when everything was license dominated. The old world was you paid for licensing and maintenance, 80-20. That was what you paid.

Those are perpetual licenses and they were often expensive. Sometimes, they were underutilized or never deployed and the world gradually shifted to paying on subscription.

Customers like it because they say, hey, if I’m not using it, I can turn it off. I don’t have to renew.

The vendors like it because it’s a more predictable revenue stream. You’re no longer biting your nails at the end of each quarter to figure out if you’re going to get those two or three deals that are going to make or break your quarter.

You get a lot of smaller deals that recognize revenue monthly and that provide a more predictable business and that have been a reward in the public markets. Networking and application functionality is being delivered that way now. The economics have changed and I think that is a very exciting trend. I think it leads to more sane management for software businesses.

How about the security? Are you into that at all?

We are. We were investors in ArcSight, which Hewlett-Packard bought. That was an example of a dashboard for enterprise security.

We’ve been involved with a number of other security companies. I think two to watch are Palo Alto Networks and FireEye. We aren’t investors in either of those, but they’re both very good companies. We’re looking at a lot of security companies currently.

The challenge with security is that it can often be a point solution and a small market. To be a standalone security company, you really have to have a differentiated broad horizontal functionality that could stand on its own.

You can’t have customers saying, I want that, but it’s a feature and should be delivered with a bunch of other things. A lot of small companies fall into that trap in security.

So we’re on the lookout for the broader security places that you know really can get the $50 million, $75 million or $100 million revenue.

Have there been any companies that you passed on that you wished maybe in retrospect you hadn’t? The ones that got away?

Yeah, you know, there always are. That would be the anti-portfolio. You run into those things and you try to see what you learn from it. Sometimes, they’re very hard to anticipate.

We passed on Fusion-io, the Salt Lake, Utah, flash drive memory company. They have done well, but I think they have fallen off recently in the public markets. That one would be in the anti-portfolio.

We also looked at Meraki. Cisco bought them for $1.2 billion, more than 10 times revenue. It’s hard to predict when somebody’s going to buy a company at that kind of multiple. We believe Aerohive is the superior company. That’s why we invested in Aerohive instead of Meraki. You can’t really invest in both. They’re competitors.

Then there was Yammer, which was acquired for $1.2 billion. That was also a company we were familiar with, good technology acquired for huge multiple of sales and it was hard to predict that happening, too. So I wish all those guys well. Sometimes you miss on big returns like thoses, but we like the investments that we have made.

What is it that you’re looking for at the top of your list when you’re considering a company that you might invest in?

Well, you know, the old adages in venture capital have some merit in them. But things change and you can’t rely too much on just pattern recognition. There’s always seismic shifts in technology where old assumptions have been disproven. You have to adapt to those.

But the adages that do hold are quality of management. We really look for companies and management teams that can take a company to $50 million to $500 million in revenue.

That’s a very mature skill set. They have to show the ability to hire, the ability to supplement the businesses, to attract great board members and to build a company that can be public.

There are a lot of demands on being public today. The industry is still dominated by mergers and acquisitions, as it always has been, for exits. Probably about 80 percent of the exits happen from M&A.

But we really look to exceptional management teams that we can be in business with for many, many years.

How does being a later stage investor change what you are looking for?

We have a long-time horizon for investment. We often hold after a company goes public and even invest in the company after it’s gone public. That’s in our charter.

So we really look for these management teams that are really exceptional and deep.

As a late stage investor, you can’t really invest in small market opportunities. The early stage can do that, and they can exit nicely. You know they can invest $10 million valuation, the company sells for $60 million and they do great.

When you’re investing at a later stage, you know looking for companies that have $20 million or $30 million of revenue so the valuation is higher and you have to get these companies to a higher exit value to get a great return.

So you have to able to identify large market opportunities and AppDynamics, Aerohive, MobileIron, Spiceworks, all have really large market opportunities. That’s why we’re excited about them.

Interviewer: Tell me a little bit more about the philosophy of holding on to companies after they’ve gone public.

Our perspective is that going public is a financing event. It’s also a branding event for a company. It raises awareness. It creates liquidity in the stock.

But valuations fluctuate with market conditions. We say this is just the beginning of growth. That valuation that it’s at now may not be the right place to exit .

If you look back historically, venture capitalism left a lot of money on the table by exiting companies prematurely. You know if you exited when Microsoft or Apple or Cisco went public, you probably left a 10X, 20X, or 50X return on the table by doing so.

Obviously, that requires a lot of judgment. Not every company is going to be an Apple or a Cisco.

So that’s a judgment call and when we make the judgment that there’s a lot of growth ahead and the current valuation doesn’t reflect that, we’re happy holders. We establish price targets for exit and when it reaches that price target, we make a new assessment.

We do have to exit eventually, but we raise 10-year funds and our holding period is typically 3 to 5 years and then oftentimes its 5, 7, 8 years.

Is there a specific example to illustrate this from your portfolio?

Sure. One would be HomeAway. HomeAway is a remarkable business. People list homes on the website. If you’re traveling with your two kids, you get a home for 800 bucks for the week and you would’ve paid 500 bucks a night for a hotel. It’s a great service. It’s public. We invested, my gosh, about five years ago and we’re still holding that stock.

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Bunchball, gamificationArticle from GigaOm.

Gamification is thought of as a hyped buzzword by skeptics, but it’s increasingly being used by corporations to incentivize consumers and motivate employees. As enterprise adoption of gamification grows, that could make gamification startups the next hot acquisition target in the coming years.

Social enterprise acquisitions have been the all the rage in the last year. But if you want to find the next big acquisition target, consider gamification startups.

Bunchball founder and Chief Product Officer Rajat Paharia told me he expects it won’t be long before gamification companies will be buyout targets soon by the SAPs, Oracles, Microsofts and Salesforces of the world. Obviously, he has a vested interest in this, but there are some compelling reasons for why this theory may come true in the near future.

Badgeville, gamificationGamification, with its reliance on points, badges, leaderboards and rewards, appeals to some basic human desires for fun, competition, interaction and achievement. The concept has been around for year and has been traditionally used to incentivize consumer behavior; think of frequent flyer programs and other loyalty systems. But corporations are increasingly seeing this as an effective way to get more productivity out of workers. As more work moves online and goes virtual, firms are looking for new tools to encourage their employees and push them toward their goals.

“Gamification is a core offering for the enterprise,” said Gabe Zichermann, the chairman of the Gamification Summit. “Today it’s a tactic but over the the next couple of years it’s going to be a core feature set for enterprises driven by the consumerization of IT.”

Zichermann doesn’t think there will be a lot of immediate acquisitions of gamification startups this year. But in the next 12-24 months, he believes big enterprise companies will start to make moves in this space as their top executives realize the strategic benefits of gamification.

Bunchball, gamificationFor many big software companies, adding gamification can complement social collaboration tools such as Yammer and Chatter and can work alongside existing HR performance software and customer relationship management programs. It can become part of a complete suite of services that software companies offer their clients, who want to engage both consumers and their own workers. Many of the big players are already making investments in this area.  Salesforce last year bought Rypple, a social performance management platform that employs game mechanics. IBM has been working on its own product called Innov8, which has been effective in generating leads and traffic to its website.

Gartner has predicted that by 2014, more than 70 percent of Global 2000 organizations will have at least one “gamified” application and half of organizations that manage innovation processes will gamify those processes by 2015. While some companies are already dabbling with their own in-house gamification efforts, many other enterprise companies are turning to startups like Bunchball, Badgeville, BigDoor, Gigya and others to implement game mechanics into their processes.

Paharia, who founded Bunchball in 2007 before the term “gamification” took hold, said his company now has more than 200 customers including names such as Warner Brothers, Comcast, Hasbro, Mattel and others. About 90 percent of the business through the end of last year was selling to corporate customers, who used gamification to engage consumers. But now, about 35 percent of Bunchball’s deployments are for companies using game mechanics to motivate enterprise workers.

badgevilleHe said enterprise software companies and their customers are realizing that gamification can be an effective tool in addressing the constant struggle over getting workers to use software.

“They’re all making software but whoever figures out how to get their software used regularly will win. It’s a problem of motivation,” he said.

A year ago, Bunchball introduced a product called Nitro for Salesforce’s AppExchange, giving Salesforce customers an easy way to add on gamification tools. Bunchball has also teamed with Jive to integrate its game mechanics into Jive’s social business platform. Rival Badgeville has partnered with Yammer to improve employee performance and launched its own program to integrate with enterprise software applications from Jive, Omniture and Salesforce.com.

The big question is will the big enterprise software players be content to partner with gamification startups or will they seek to buy the technology or try to build it themselves. If these companies can develop the gamification knowhow in-house, that could keep them from looking to acquire any of the dedicated gamification startups.

Gamification still faces plenty of hurdles. It will need to prove it can produce consistent, tangible results. And it will also need to overcome the skepticism of critics, who see a lot of hype and buzz in the concept. Many still see gamification as a passing fad or old methods dressed up in new terminology.

But if this crop of gamification startups continue to win over corporate customers and prove their worth in the enterprise, don’t be surprised if we see them get snatched up in the next couple years.

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Article from GigaOm.

Microsoft announced Monday that the company has officially acquired social software startup Yammer for $1.2 billion in cash. The purchase was widely reported more than a week ago, but Microsoft confirmed the deal Monday in a press release.

As we noted earlier this month, the purchase could give Microsoft a social dimension to its popular corporate software products. Yammer creates a Facebook-like experience for business clients.

Yammer will join the Microsoft Office division after the acquisition, but CEO David Sacks will continue to lead the group, Microsoft said in the release. Kurt DelBene, president of the Microsoft Office group, offered some thoughts on how Yammer might fit into the Microsoft world in a blog post that accompanied the formal press release:

The combination of Yammer, SharePoint and Office 365 will provide the most comprehensive and flexible solutions for enterprise social networking. Over time, I see opportunity for exciting new scenarios by adding Yammer’s stand-alone service alongside and integrated into our collaboration offerings with SharePoint, Office 365, Dynamics and Skype. I picture people being able to use Yammer to manage and expand their professional relationships, share and collaborate on Office documents, stay informed about content updates, and to seamlessly move from status updates and feeds into voice and video conversations.

Yammer most recently raised $85 million in a February funding round, which brought it to $142 million in total funding. The company currently has more than 5 million corporate users, including customers at 85 percent of Fortune 500 companies, Microsoft and Yammer announced along with the acquisition today.

“We think that Microsoft is a great partner for us,” Sacks said in a conference call Monday with DelBene and Microsoft CEO Steve Ballmer. “I think it’s really the best possible partner in terms of its reach and resources, and its ability to help us scale.”

Ballmer said Yammer’s emphasis on cloud computing fits perfectly with Microsoft’s expansion into that area, and Yammer’s popularity with corporate clients makes it a natural partner:

“What we love about Yammer is that it was built on the notion that things can grow virally,” Ballmer said.

They noted that Yammer will remain in the San Francisco area even after the acquisition with Microsoft, which is headquartered near Seattle.

“When most people thought social networking was for kids, we had a vision for how it could change the way we work,” Sacks wrote in a blog post Monday. “Four years ago, we started paddling out to catch the wave that we’re riding today.”

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Here is an article from WSJ´s Venture Dispatch.

“The technology start-up scene is rebounding strongly from the recession. That’s evident at 410 Townsend St. in San Francisco’s South of Market neighborhood.

The 75,000-square-foot office building was about 60% vacant in late 2008 when the financial crisis hit and one of the property’s major tenants moved out. Now the landlord, PMI Properties, says the building is 100% full with Internet start-ups such as microblogging service Yammer Inc., online ticket seller Eventbrite Inc., online gaming company Playdom Inc. (recently purchased by Walt Disney Co.) and help-desk software company Zendesk Inc.

All of the start-ups moved in within the last year. And many are now bursting at the seams as they grow more quickly than expected. “We’ve got a competition with Yammer to see who will outlast the other in this building and get the other’s space,” says Kevin Hartz, chief executive of Eventbrite, which has seen its staff grow from 25 last year to around 70 people now. “It’s a death match.”

The activity at 410 Townsend reflects Silicon Valley’s broader tech recovery. As demand for tech goods picks up, venture capital financing is ramping up and start-ups are recruiting new hires.

That has fueled the ferment in SoMA, a hip start-up neighborhood that is home to Twitter Inc. and others. The area’s office vacancy rate peaked in last year’s fourth quarter at 30.5% and has since eased to 28.2%, while average asking rents per square foot have risen to $28.57 from $27.69 late last year, according to real-estate firm Cornish & Carey Commercial.

Jeffrey Palmer, a partner at PMI Properties, says the firm deliberately sought tech tenants for 410 Townsend to cluster them together. Each of the 10,000-square-feet office suites in the four-story building have exposed brick walls, kitchens and state-of-the-art Internet connections.”

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Here is an article from SF Gate.

“Ning Inc., the social-networking site co-founded by venture capitalist Marc Andreessen, did what many young Web companies only dream of: It got customers weaned on free services to start paying.

Since telling users in April that it would stop offering the means to build and operate social networks for free, Ning’s paid user base tripled to 45,000, with memberships starting at $2.95 a month. The privately held Palo Alto company is adding paying subscribers at the rate of 5,000 a month, three times what it was before.

“A very large percentage of economic activity is shifting online, and it makes sense that there are more services that are going to charge,” said Andreessen, the co-founder of Netscape Communications Corp., who serves as Ning’s chairman. “It also means there are going to be more people willing to pay.”

Few are charging

Ning is one of the few social-media sites charging users, following a path cut by media and entertainment providers, which have experimented with fee-based services. Founded in 2004, the same year as Facebook Inc., Ning failed to turn a profit with its original strategy: offering most services for free and charging a monthly fee for extra features. Co-founder and Chief Executive Officer Gina Bianchini resigned in March, and 42 percent of the staff was laid off in April.

Social-networking tools on the Web are widely available for free. Facebook, which has more than 500 million users, is expected to generate at least $1.4 billion this year, mostly from the sale of ads, two people familiar with the matter said last month. Twitter, with more than 100 million users, began running ads on its site this year.

With a large population of Web users relying on Facebook for basic social services, like keeping track of close friends, there’s an opportunity for other sites to charge for more unique services, said Lou Kerner, a social-media analyst at Wedbush Securities Inc. in New York.

“Facebook has won the free social media race,” said Kerner. “What you’re seeing in the marketplace is folks who are trying to find out business models that are more niche-oriented.”

For Jive Software Inc., that niche is business. The startup, also based in Palo Alto, sells social-networking and online collaboration tools to corporations, including Nike Inc., Intel Corp. and Charles Schwab Corp. Jive’s services start at $100 per user per year, and many customers pay for at least 10,000 users to start.

“The use of social software in the consumer world has no doubt fueled the interest level” among business users, said Tony Zingale, Jive’s CEO. The company, which received a $30 million investment last month led by Kleiner Perkins Caufield & Byers, expects bookings of as much as $25 million in the last three months of the year, he said.

Paying subscribers are an attractive asset to venture capitalists, who are often asked for money from Internet startups planning to cash in on advertising.

“Ad-driven is a lazy model,” said Dave McClure, a startup adviser and venture capitalist in Silicon Valley. “If there is value, then there probably is a paid relationship that works there at some point,” he said.

Business networking site LinkedIn Corp. generates some revenue by selling professional services, like tools for finding and recruiting job candidates. Meetup Inc., a service for coordinating social events, charges organizers a fee.

The “freemium” model of charging a portion of users is nothing new. One of the earliest examples is PayPal Inc., founded in 1998, which made its payment service free to buyers of products and services so that many people would use it.

“You need free users to enhance the overall value for the product,” said David Sacks, one of the founders of PayPal, who now runs enterprise social-media startup Yammer.”

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Here is a SF gate story that talks about high-tech growth.

“The technology industry is playing the white knight of San Francisco’s struggling office market, as startups and growing companies ink deals and scour the market for space emptied out by the financial meltdown.

Many of the tenants are swelling homegrown businesses like Twitter, while others are relocating from Silicon Valley or outside the Bay Area. As of June 15, 83 technology companies were in the market, seeking 1.5 million square feet of space, up 51 percent since the financial crash in fall 2008, according to brokerage firm Jones Lang LaSalle, which regularly tracks the market.

To be sure, that demand alone won’t turn around a market facing more than 13 million square feet of total vacancy, according to a first-quarter research report from Cassidy Turley BT Commercial. But it’s a big step in the right direction for San Francisco’s office market and employment.

“The greatest areas of job growth in San Francisco and the drivers for economic activity across a whole host of related sectors will come from those innovative industries,” said Michael Cohen, director of the mayor’s office of economic development.

One of the largest potential deals in the market is Zynga, the maker of popular social-networking games like FarmVille and Mafia Wars. The company is looking for anywhere from 150,000 square feet to 300,000 square feet of space, according to various industry sources, who asked to remain anonymous because disclosure of such information could affect their business.

Zynga was on the verge of signing a lease for approximately 140,000 square feet last fall, but that deal fell apart.

“Zynga doesn’t have an update on our expansion plans right now,” a spokeswoman said in an e-mail response to a Chronicle inquiry.

Expansion

Twitter, the popular microblogging service, expanded its San Francisco space by nearly six times in the past year. It had been looking for still more space, as much as an additional 100,000 square feet, but that effort seems to have gone quiet, sources say.

An especially encouraging trend for San Francisco business boosters, who have long lamented the exodus of companies to surrounding regions, is the relocation of a handful of Silicon Valley firms to the city in recent months.

Industry blog TechCrunch and video-streaming site MetaCafe moved up from Palo Alto, while Webcasting service Ustream and tech-consulting firm Encover Inc. arrived from Mountain View. Mobile application company Booyah Inc., also of Palo Alto, recently signed a lease to shift its headquarters to San Francisco.

In addition, gaming companies like Playdom Inc. and Playfish opened satellite offices in San Francisco, and Yammer Inc. moved to the city from Los Angeles. Meanwhile, there are a handful of out-of-state, and even out-of-country, companies touring space in the market right now, sources say.

Real estate and technology observers believe San Francisco is becoming a more attractive place to start a company or move to for a variety of reasons, including: South of Market rents that are about half of Palo Alto’s right now, the desire to cluster near success stories like Zynga and Twitter and the broader shift to the Web 2.0 world.

As Internet companies become as focused on social media and entertainment as they are on underlying technology, they want to locate near a different set of partners, customers and talent pools, several executives said.

It’s all about layering

“Tech is still the core of what we do, but you’ve got to add layers on top of this,” said David Rice, chief operating officer of MetaCafe Inc.

The company’s new address, at 128 King St., with exposed brick and a view of AT&T Park that puts their previous business-park space to shame, made it easier to tap into marketing, media and advertising expertise in the city, he said.

Other companies’ leaders say they opted for San Francisco because that’s where today’s engineering talent wants to be as well.

When David Sacks, chief executive of Yammer, asked his developers whether they should relocate the microblogging service for businesses to Palo Alto or San Francisco, the latter won hands down. This represents a distinct shift from a decade earlier when he was chief operating officer of PayPal in Palo Alto.

“There’s a lot more engineering talent living in San Francisco now,” he said. “The balance of power may have shifted.”

Web 2.0 firms also don’t need the massive research and development facilities required by the computer manufacturers and chipmakers that gave rise to Silicon Valley.

“Companies like Twitter can have incredible reach with a relatively small workforce,” said Kelly Pretzer, director of new media for the mayor’s office of economic development. “San Francisco has been able to complement that development in the industry nicely.”

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