Let's Get Organized and Fix Housing Affordability in San Francisco

My recent thoughts on housing policy (Broken Promises: The Housing Market in San Francisco (And Ten Ideas to Fix It)) have gotten a big response — positive and negative — on Reddit, Hacker News, Twitter, and my email box.

This post comes from the frequent question: "what can be done, if anything?"

The political situation can be changed. Below I outlined how I believe there is a political majority for change, the three policies necessary to actually move the affordability needle, what to do in the next few months — vote in the June 7th primary for pro-housing candidates! — and what I think needs to be done to build a more permanent, structural change. That change likely starts with an in-person organizing meeting, sign up here or at the bottom this post to get more info in the future. 

The Unorganized Majority Wants To Address Affordability Through More Housing

Some have criticized me for being disconnected from the politics of San Francisco. I do not agree. Though you would be forgiven for disbelief after watching the Trump circus these many months, there are still some of us that believe politics should be about real policy. That isn’t to discount messaging, media, and all of that, but the fight is supposed to be about ideas.

There are many San Franciscans who want to solve the housing affordability problem, and create a more fair and functioning city. This problem has known, quantifiable solutions. I didn’t invent the solutions — they are composed of common sense approaches that have worked in other big cities. Some people, those that have been sucked into the San Francisco political dynamic as it exists today, consider these solutions politically unfeasible.[0]

I believe these people are wrong. This is a classic story in politics: of an entrenched, vocal, well-organized, and self-interested minority defeating an unorganized majority. Who is opposing this housing? Many activists opposing new housing are the very landowners that benefit from the resulting scarcity. These "housing activists" oppose housing, because they focus on affordability and neighborhood character so much that they curtail supply. It is difficult to overstate this. There is also an entire cadre of land use attorneys that specialize in opposition to housing projects of all shapes and sizes, dating back 20-30 years and even penetrating the ranks of the San Francisco Board of Supervisors. Rich homeowners are making San Francisco a gated community, some intentionally and some accidentally. The majority needs to take back San Francisco and make it affordable again.

And it is an unorganized majority: I’ve seen polling that 60% of adults in San Francisco would agree with a “Manhattanization” of the city if it meant solving the affordability crisis. The problem is that we aren’t voting: the number drops to the 40s amongst voters in the most recent election. The solution is simple: let’s get organized, let’s get out the vote, and let’s take San Francisco back from those that would continue down the road of an unequal and unjust city.

The Three Policies To Create Housing Affordability

There needs to be a concerted effort to pass at least three housing policies and those ideas need to be presented as a single, holistic package that is big and bold enough to solve the affordability problem. Of the ten ideas from my last post, these three get the most bang for the buck. 

One of the things I learned when working with city governments early in my career was that sometimes bigger policy ideas are easier to get done than smaller ones. It's just easier to sell the bigger dream that’s right than the smaller, incremental one. This fact is because big ideas can plausibly solve big problems.[1] So, I try think about the truly desired world and figure out how to fight for that.

The three easy-to-explain ideas that together are significant enough to largely end the housing affordability problem[2]:

  1. As-of-right zoning. We've spent dozens of years and millions of dollars formulating community zoning plans throughout the city, with intense outreach and engagement efforts, only to have those very plans challenged and re-opened when finally approved and/or enacted. Let’s end that process and allow people to build when it complies with the zoning already in effect.

  2. Build a taller city by upzoning for more height.

  3. Allow for the creation of more units by lowering or eliminating density limits. This is not about unlimited expansion of the building envelope but rather about encouraging more smaller units. (Sometimes called form-based zoning).

Near Term: Vote For Housing June 6th

When I talk to my friends, who live across the ethnic and socio-demographic profile of the City, they are disengaged and discouraged. “Things are screwed up” they say, or “politics is broken”. These people actually do care, want a diverse and affordable city, but don’t know what to do.

I want to change that.

Let’s start by voting in this June's SF election. Click here to see who to vote for. Tell a friend who agrees with you to vote.

Also, there are many organizations investing and fighting for big and small policy changes in housing — SPUR, SFHAC, SFYIMBY, GrowSF and SFBARF are amazing. I’d suggest joining at least one of them. 

Long Term: Creating Structural Change

A repeated, proactive, planned narrative, will animate voters clearly. It would be a single campaign with a clear message: make housing affordable.

The BMR debate, the density bonus, inclusionary targets, etc, none of it means anything to a normal person and none of it is going to move the affordability needle. Worse still, pro-housing advocates always seems to be responding rather than pushing policies forward.

We need to integrate the short-term, small stuff into a larger singular movement toward a big change. Above there are three big (simple) ideas that can actually solve the massive housing problems facing San Francisco. We need to start fighting for the big things we believe in rather than playing defense against anti-housing, anti-affordability forces. 

I’ve begun some of these conversations and am starting to clearly see the political and campaign path forward.[3] I’d like your help in putting together a plan, organizing around one narrative, one campaign, one moment, one set of things to remember that we believe is big enough to solve the affordability problem — that’s the only way to make others people believe it too.

So let’s get organized. Let's raise money. Let's knock on doors. Let's change things for the better in San Francisco. 

Who’s in?

I’m serious, shoot me an email or sign-up here.


[0] The political machine makes them unfeasible. The real, underlying story here, is that the "Moderate" forces in the city are shockingly unorganized. Self-admittedly so. The "Progressives" really do meet in dark rooms, conspire, get organized, make plans, and stay on collective message. The "Progressives" are a real machine, corrupted toward their own goals over the needs or desires of the city-at-large and they even have the villainous Boss Peskin, and his well-known intimidation tactics.  

[1] We need a lot of housing. Even if Mayor Lee's policies got us his 30,000 (wait, some of that is refurbished, right?), that's a big number, but it is not big enough. Mayor Lee's efforts, although admirable, always seem to have a shoulder shrugging: “it's as big as we can get. It will help. But this is beyond anyone’s capacity to solve (politically).”

[2] There are a range of other problems and ideas too. There is everything I wrote about in my last post and more. Some ideas apply to just San Francisco, my current focus, other apply to the entire Bay Area or to all of California. For example, local and state regs (CEQA and others) that actually enable virtually endless challenges and expansive definitions of "environmental impact", affecting privately and publicly funded projects. There is prop 13, as some commentary on HN pointed out. But, despite the multitude of problems and potential solutions, I believe these three policies would get us very far in San Francisco.

[3] Perhaps for obvious reasons, I don’t think sharing all the details publicly is wise. It requires people and money, though, so I could use your help. 

Building a Fair and Functioning San Francisco Together

Almost everyone who visits San Francisco falls in love with it. People love the character of the city. To me, that spirit isn’t contained in the way the buildings look or even the beauty of the Bay. The city’s greatness comes from its diversity and its attitude. It’s the combination of the collection of people here and the space provided to be weird, to be different, and to be experimental.

When I talk to my friends and acquaintances throughout the community, though, people feel like something is off these days. My recent blog post on housing policy seemed to hit a nerve for many. I was surprised about the people who reached out to me who didn’t care much about the specifics of the housing policies. They were more interested in chatting about the first few sections, where I talk about the type of city I want: multicultural and economically diverse. I believe in Cities for Everyone and fighting for the policies that make that possible.

We all want a fair and functioning city. We don’t have one now. Between housing costs, school quality, and underperforming public services, it is starting to feel like the city is slipping away.

What I have the hardest trouble understanding, though, is the folks in San Francisco who seems more interested in dividing people into factions. Some people want to make it tech vs. the rest. Others want to divide us into the business community vs. the incompetent who don’t get it.  We have a chattering political class that talks about problems and points fingers, rather than bringing us together to solve very real problems. They seem to confuse activity with accomplishment.

I believe the tech founder and the teacher, the doorman and the designer, and most every San Franciscan believe in the same things: an affordable city, a diverse set of jobs and an education system that makes it possible to attain them, and the wise use of public funds.

I know what’s it’s like for many in the City, my single Dad and I struggled to make ends meet when I was growing up, even with the help of things like free school lunch and other programs. He was on-and-off unemployment until recently. I got lucky, I tested into a great public high school, and went on to a great university. But you shouldn’t have to get lucky. I’ve spent my career trying to address the problems I’ve seen: human trafficking in Rhode Island, improving public services in New York City and Newark, NJ, and taking on the financial system at Standard Treasury.

I’ve always been the squeaky wheel, the argumentative one, the one whose elementary school teachers told me I should be a lawyer, even when no one in my neighborhood knew any. And I have found some measure of success built on my personal mission to combine a passion for the serving the public and that fight in myself.

I built and sold a company targeting the rot I saw in the financial system, and I hope to continue to focus (at least my writing and my free time) on targeting the problems I see in San Francisco, building community, togetherness, and a shared focus on fixing problems and not just talking about them.

Got a problem? Come tell me. Maybe we can figure out how to make the city fix it. I am the first to admit that I have a lot to learn. If you’re reading this post, and care about what I’m talking about, I’d love to meet with you to chat. Coffee or tea is on me. Shoot me an email by taking the first letter of my first name (z) adding it to my last name (townsend) at Gmail.

Broken Promises: The Housing Market in San Francisco (And Ten Ideas to Fix It)

(Also see my follow-up post on getting organized, and sign up to my tiny letter to get contacted about fixing housing affordability in SF). 

San Francisco’s housing system is broken. The only way to fix it is through a radical change in our housing policy: a change that encourages (a lot of) building.

Failed public policy and political leadership has resulted in a massive imbalance between how much the city’s population has grown this century versus how much housing has been built. The last thirteen years worth of new housing units built is approximately equal to the population growth of the last two years.[0]

Last Wednesday I moderated a panel where two housing experts made arguments that were surprising in two ways: first in how disconnected they were from the causes of the housing crisis and second in how distant they both were from genuine solutions. This post is my response to their arguments.[1][2]

Simply put, the laws of supply and demand do apply to our housing market and I conclude this post by proposing 10 policy solutions that might actually increase the supply of housing in San Francisco in the face of an unprecedented and largely ignored demand. Some of the ideas are large shifts in public policy, but we’ve waited too long for anything less than bold action to work.

(0) San Francisco is moving toward a dystopian future

If we do not change our current housing strategy, the natural result will be a type of cultural destruction. It's easy to point to individual cases of displacement that pull on the heart-strings — a tech family is throwing out grandma to convert a duplex into a mansion (which is genuinely sad and should be prevented!) — but the real displacement is happening at a macro level. We are on a self-imposed path leading to only one place: a city that is entirely rich and, more or less, entirely white. That isn't the fault of any one person on either side, but it is the fault of those that refuse to allow any rational policy response to people's desire to live here.

In time, housing and everything else will become so expensive that we will price every working- and middle-class person out of the city. The gentrification wave will keep rolling. A bubble might burst here or there, but ultimately San Francisco is so self-destructively finite that all the regular people will be pushed to the East Bay, to Pacifica, to Daly City, etc.

Housing demand will only increase with time. Younger folks, like me, want to live in urban centers, and many don't want cars. Companies are moving back to cities as their workers do. In the technology sector, startups and investors will continue to migrate up to the city, as an ecosystem built around proximity and the sharing of ideas (the things that have always made "Silicon Valley" so successful) is even more compelling with urban density.

(1) My goal for San Francisco is a diverse city

In my first job out of college in 2009 I earned $45,000 a year, more than either of my parents had ever made at the time. To many that would seem like a lot of money for a single guy, but by no means was I affluent. I loved the Brooklyn neighborhood I lived in before moving to San Francisco, on the edge of a few different neighborhoods, right where Windsor Terrace becomes Kensington below Prospect Park.

One of the things, if not the thing, that I loved most about that neighborhood was that it felt like what a diverse urban landscape could and should feel like. Within blocks of my building and inside it, there were Russians, Ukrainians, Poles, yuppie white folks like me, Hasidic Jews, African-American and West African blacks (nearby Flatbush is one of the largest black neighborhoods in New York City), Ecuadorians, West Indians, Puerto Ricans, Dominicans, Pakistanis, and more, with wonderful, family-owned restaurants and shops to match these many micro-communities.

I want to live in a beautiful, multiethnic, socioeconomically mixed community. A city where people of low, moderate, and high incomes live together, and people of different ethnicities interact. That's my dream. That's why I love cities: people mixing together, cross-pollinating perspectives and experiences.

That's not San Francisco right now. It might have been in the past, but it certainly won't be in the future — unless we get over ourselves and start building much more housing. Everywhere. Immediately.

(More public transit, too, but that's another post).

(2) A little self awareness about my my role and position in San Francisco

I am perceived to be part of the problem. I'm aware of that fact. I'm a white, male, Ivy League-educated, startup founder who sold his company to a bank (even if my goal was infrastructure for financial empowerment). My office is in SOMA, and I live in a rent-controlled apartment near Dolores Park in the Mission. I eat at expensive restaurants on Valencia Street and buy my groceries at Bi-Rite or Whole Foods because the marginal cost of food doesn't matter much to me.

But I am also the son of a waitress and a (intermittently unemployed) former postal employee, I participated in the free-lunch program at my public schools, and I grew up in a working-class neighborhood. My interest in public policy stems from a deeply-rooted belief that society is often pretty screwed up, the market often fails, privileges (class, race, gender, and more) alter people’s lives and are not just punch lines, and justice is something to be sought.

I don't want the wonderful city of San Francisco to only house the rich. It doesn't sit right with me. It’s unfair. That’s not the type of city I want to live in.

(3) The cause of our housing problem is huge demand in the face of limited supply

People love living in San Francisco. People want to live here. People like it here. They flock here. They also like to have second homes here. People from all over the world still move to San Francisco for the same good reasons that they have since the city's founding in June 1776: location and industry. The benefits of living in San Francisco are easy to see: fascinating culture and wonderful cultural institutions, a diverse dining scene, a robust economy, immense natural beauty, good weather, and a rich history.

How do we respond to this demand? So far, by putting our heads in the sand. By saying: "No, no, no, no, no. The city should not change. The city cannot change.”

News flash: the city is changing and only for the worse. The city is forcing people out. Only the rich can live here because of the policies created by so-called progressives and so-called housing advocates.

"Preserving neighborhood character" might as well be code for "don't build any affordable housing in the city" and, more bluntly, "don't build any housing that doesn't look like mine or has people living in it who don't look like me". Or, more cynically, “don’t build anything that could possible make my house less valuable.” This city is full of folks who are millionaires by virtue of a house they bought, but they feel middle-class. Amazingly, at the same time, they feel entitled to hold the view that the city needs to be more diverse and inclusionary AND it's everyone's fault but their own.

People like to wrap themselves in the flag of keeping things as they are, but that's the attitude that, when combined with people's desire to live here, is screwing over regular people. To only blame a subsection of the people who want to live here — whether they work in tech or whatever — is to blind oneself to the reality that that is only half the story. The other half of the story is how many people refuse to let anything get built.

Yes, to appropriately respond to demand, many blocks in this city need a high-rise building. We're going to have to deal with that fact if we want to solve the problem, rather than just talk about it.

(4) Incorrect claim 1: There are so many empty units out there that we don’t need to build anything

Some folks claim that we do not have to build a single additional unit of housing to solve the affordability crisis.[3] They say that we could solve the problem only with existing units that are currently vacant (for example, full-time Airbnbs or would-be landlords holding out for higher prices).

Let's pause for a moment and consider how absurd that notion is when subjected to any rational examination. The size of the housing crisis and the degree of excess demand is nearly unfathomably large and, in the face of that, some city residents think nothing has to change in the physical development of the city? That's illogical.

I’ve heard estimates, including from a city planning commissioner, that there are over 10,000 empty units, but I’ve never seen any hard data or firm citations to support this. There are actually more units than that vacant right now. In 2014, the Census Bureau estimated 31,686 vacant units. Roughly 3% of rental units and 0.9% of owned units were empty then, fractions of the national average of 6.9% of rental units (4.6% in California) and 2.1% of owned units nationally (1.6 in California).

Why are these units empty? Because units are sometimes empty! Renters move out, others move in, people do renovations, people are showing the house for sale, etc. We have far fewer vacant units than the national average and a similar amount to other booming tech cities like Austin and Seattle. These units can’t be miracled into the housing supply because they already have been, which is why our vacancy rates are so low.

The people who cite the number of vacant units are often unwilling to accept any increase in density or, it seems, even the notion that building matters. I don't know how to deal with that level of denial: by all objective standards, we don’t have that many vacant units and unit owners have few rational reasons to keep their units empty when prices are so high.

(5) Incorrect claim 2: Investment capital will never build affordable housing

Many in the city spend time railing against the apolitical nature of investment capital and how it doesn't care about people: only the highest possible returns.[4] Focusing on capital easily misrepresents the problems we face in the city, and is an easier punching bag in an era where people are outraged about anything that sounds like finance.[5]

Capital is generally impersonal and seeking returns, no doubt, but capital is actually complicated, multi-faceted and diverse. Capital does not necessarily seek out the highest returns but rather the highest risk-adjusted returns. There are many different capital sources out there, all of whom are seeking different risk and return profiles. There are people who would build lower return, lower risk housing in San Francisco if anything could be built at all.

Capital would invest in San Francisco if we had better housing policies: not necessarily higher returns. Big investors in long-term real estate projects nationally include patient capital, like pensions funds, including CalPERs and CalSTRS, who actually want low-risk, consistent returns. They invest in affordable housing elsewhere. But those types of investments are hard to make in San Francisco because the risks aren’t low and the consistency isn’t there: any investor would be scared by a city currently considering whether to retroactively applying new affordable housing laws.

It’s claimed that the fact that projects that had entitlements in 2008-10 and weren’t built was because capital couldn't get the return they wanted. That's inaccurate. Nothing got built in 2009/10 not because there was no demand or returns in San Francisco it didn't get built because the world was falling apart. It was ultimately a liquidity crisis not a lack of returns.[6] People weren't squabbling about market rent vs. below-market rent, they were worried about whether they were going to be in business the next day.

Further, if we had a process that didn't take so many years, some of the entitled housing in 2008/9 could have gotten built before the financial collapse of the national housing market. Instead, whenever we get to a point in the cycle where there is boom, there is no responsiveness because the process takes so goddamn long. Worse still is when we can harness the market to build, that’s the time when some housing activists stop all building because ... they don't like the profile of the people who want to live in this city.

The reason that only expensive housing gets built is because that's the only housing it makes sense to build in a city where the costs of building are so high and the process is so drawn out (which creates additional and unnecessary financial risk for investors). There is no willingness to grapple with the fact that if costs — personal, political, and literal — were lower, it would make more sense to build a diversity of housing. Low- and middle-income housing gets built in other places, which suggests that we should compare San Francisco’s policies to those municipalities’ rather than claim that we're a unique snowflake dealing with unprecedented problems. The only thing unprecedented about our problems is our unwillingness to rationally respond to them.

(6) Incorrect claim 3: This is all the demand side’s fault

Many claim that tech is evil, foreign investors are evil, pieds-a-terre are evil, and Airbnbs are evil. It's all too simplistic. The forces behind those aren't singular movements or collectively one movement alone. They're the practical results of individuals making decisions that make sense to them. By making them singular it creates a simple enemy, but even if Ron Conway dropped dead, we'd still have a housing crisis. Even if Airbnb stopped operating, we'd still have a housing crisis.

(By the way, AirBnB was invented in 2007, and there was definitely a housing cost problem then too. That’s why it was founded. Airbnb can’t explain trends that old. Either way, most Airbnb hosts are not landlords systematically renting apartments on their platform — I've never seen that although I'm sure it exists — but rather individuals who cannot afford to live here without renting a bedroom out. I have friends who are an older couple who live in Eureka Valley, and the only way they are able to afford to retire is to rent out a bedroom that used to be occupied by one of their now-grown children.)

There is a direct relationship between the amount of building and the cost of housing. The following graph from Trulia perfectly illuminates that fact:

Here is the accompanying commentary:

San Francisco’s high home prices are extreme – but so is the lack of construction. Since 1990, there have been just 117 new housing units permitted per 1,000 housing units that existed in 1990 in San Francisco. That’s the lowest of the 10 tech hubs and among the lowest of all the 100 largest metros (see table 3), even with the recent San Francisco construction boom. Relative to San Francisco, Raleigh and Austin have ten and eight times as much construction, respectively. Geography limits construction in the Bay Area – it’s hard to build in the ocean, in the bay, or on steep hills – but regulations and development costs hurt, too.

(7) Incorrect policy solution: limit job growth

I have heard several folks say that we need to stop creating new jobs in San Francisco. The arrogant privilege required to say that we need to constrain job growth is startling. They should go to the Rust Belt and say that out loud and see what the reaction is to the sentiment. But that idea takes our revealed policy preferences to their logical conclusion. Every one hundred new jobs at Bay Area startups or technology companies are attracting more people here, which in turn raises prices, strains our public transit system, and displaces people. If the Bay Area is unwilling, as a matter of policy, to grow the housing stock and the transit capacity, do we have an ethical obligation to begin, as a matter of policy, slowing job and economic growth?

The first time I heard someone propose the idea, though, something switched in my head. I had been thinking about housing as a combination of social justice and of local economic implication: San Francisco and the Bay Area won't reach their highest moral or economic potential because of urban policy. But it's far bigger than that: the foolishness we exhibit locally means that California and the United States won't reach their economic potential — due to "Silicon Valley's" outsized role in state and federal economic growth and innovation.

We have been unwilling to deal with the consequences of our economic growth. Year-after-year, neighborhood-after-neighborhood, we are unwilling to invest in the housing, transportation, or infrastructure necessary to support the population growth that results from our positive economic growth. What’s more, we should be embracing and harnessing this job growth and influx of capital investment to create a housing policy that achieves the oft-stated goal of housing for all.

(8) NYC example: harnessing market force to increase the affordable housing supply

We need to build much more housing immediately. We need to do that so that we can have a diverse city: ethnically and socioeconomically. If we choose to kill new housing in the face of the demand, we choose to destroy neighborhoods rather than adapt them. We choose a certain Victorian aesthetic, one that is only owned by the rich homeowners, over a truly multifaceted city.

We need to understand the true forces in the market (and the true financial constraints therein) and harness the market to build a large amount of diverse housing.

San Francisco’s policies are out-of-line with building almost anywhere else. For example, nowhere in San Francisco do you get density bonuses for affordability (like in New York City) and nowhere in San Francisco can you build as of right (like in almost every other municipality). And, perhaps most importantly, no where else is there a belief that you can solve a housing affordability crisis without encouraging the building of more housing.

I believe in inclusionary housing. New York City's recent sweeping housing policy changes have been cited in many recent housing conversations I have been in. But the flip side of that inclusionary bargain everywhere else in the world, and especially NYC, is more units, more density, and more housing. The AP article on the NYC change last week starts the way: "Many of New York City's residential neighborhoods will feature denser and taller development as part of a sweeping housing plan that will mandate the construction of more affordable housing and rewrite the city's decades-old zoning to enable more residential development" (emphasis added).

New York City’s new inclusionary housing policies are amazingly progressive, and I understand the simple desire to look at them and say that we could institute similar mandatory requirements. But the program in NYC only applies when a development needs a land use action (some type of variance to existing zoning)[7]. In New York City, and most other jurisdictions, if your proposed projects meets the zoning requirements, the approval is an administrative process: the public policy has already been described, debated, and decided in the zoning process. That is, most development in New York City occurs as-of-right. Developers can still build without these mandatory requirements, and, either way “In exchange [for the affordable housing increases], developers can be allowed to build taller structures and obtain low-interest financing and tax advantages.”

A 20% inclusionary requirement, or whatever that number should be, of every new building should include a diverse set of affordable housing for low and moderate incomes (teachers, public servants, service sector workers, the list goes on). But, with this requirement, the only thing that matters is how much total housing gets built. If it's 33% inclusionary and that means projects are upside down on their economics, then nothing gets built. Or, zero affordable units.

We need to set the inclusionary requirement at a rate that makes economic sense and, again, focuses on the only thing that matters: the total number of units that needs to get built. For example, the controller's recent report around Prop C says that increasing the inclusionary percentage to 25% will cause a 13% decrease in overall production. That is a backwards policy.

Why do we need to harness the market? Because housing is expensive to create. Even if we suddenly agreed to build all the affordable housing we need in the city — which we won't because not enough neighborhoods would accept that new housing — we can't build it all from public money. That money just doesn't exist. But capital investment does.

(9) Ten policy ideas to increase the supply of housing in San Francisco

Generally, I would approach this problem by setting an aggressive target for new building and then design incentives or eliminate restrictions to reach that goal.[8]

Let me quickly mention ten ideas that would have an positive impact on housing in the city:

  1. Zone for more housing across the entire city. The city needs to upzone in terms of both density and heights in many parts of the city, particularly along transit corridors.[9] This upzoning should be targeted to specific blocks and lots within communities, but not just in underdeveloped (which is often code for poor and minorities) neighborhoods. There need to be denser, larger buildings in Pacific Heights and Presidio Heights, too.

  2. Allow as-of-right building. We should have the same in San Francisco: which would reduce the costs of building and the time-to-market when a developer is building within the existing zoning requirements. Beyond this, we should also simplify and shorten the variance process. That doesn’t mean eliminating democracy (quite the opposite) but it does mean creating one-unified coherent set of policies and associated timelines (like NYC’s Uniform Land Use Review Procedure (ULURP)).

  3. Reexamine bulk, parking, setback, and backyard requirements to encourage more density. For example, require much less parking, encouraging that space and money to be used for housing while also investing much more in public transit.

  4. Continue a high, economically sustainable, inclusionary requirement for affordable housing. Affordable housing is absolutely critical and the best way to get more affordable housing is through a combination of a reasonable requirement coupled with as much building as possible. With this approach, we could easily double or triple the number of below market rate (BMR) units in the city within a decade. If we prevent building, the number might scarcely increase at all.

  5. Increase investment in public housing by renovating and preserving the units, building more public housing in neighborhoods across the city, and set aside money when the economy is good to build public housing when the economy is bad.

  6. Allow for smaller more affordable units to be built, what SPUR calls “Affordable by Design.”

  7. Allow for an increase in the legalization of in-law and secondary units (even if they are going to be used for Airbnb - better these spaces be used than larger, higher occupancy ones).

  8. Rezone underutilized industrial and commercial zoning to housing.

  9. Create incentives for replacing underutilized sites throughout the city, including upzoning and a simplified permitting procedure.

  10. Consider big ideas that have worked elsewhere. For example, developing a Mitchell-Lama Housing-like program by building public-private partnerships so more housing can be built. That program had a ton of flaws and would need to be significantly reworked, but you couldn’t fault it for a lack of ambition.

I would also like to consider larger, bolder solutions that haven’t been tried yet. Maybe there is a grand bargain between the “sides” or maybe the pro-housing side just needs to win a political victory. Either way, we need a grand bargain that builds much more housing — over 100,000 units are needed by some estimates — in San Francisco, with a large chunk of it being affordable.

Everything should be on the table to make that happen. Our city, and the livelihood of many of our fellow citizens, depends on it. Right now, the future is bleak and only because of our own choices. Let’s make a promise — to each other and to the future generations of San Franciscans — to execute on a housing policy that preserves the spirit of this city. That’s a promise worth keeping.


[0] Census Bureau Estimates of San Francisco County’s population over the last three years:

2013: 840,715

2014: 852,537

2015: 864,816

So, in each of the last two years, San Francisco’s population grew by approximately 12,000 people. The city’s housing stock has increased by approximately the same amount -- 24,000 units at least according to Scott Weiner’s blog post cited below -- since 2003. That’s with over 100,000 people moving to the city since 2003.

[1] This blog post is born from an event last Wednesday evening (March 23). I organized a panel called “Affordable Housing - What's the Right Answer?” at the Eureka Valley Neighborhood Association, of which I’m on the board. The idea behind the panel was to have a selection of perspectives within the entire spectrum of perspectives on housing in San Francisco. The panel guests were Peter Cohen from the Council of Community Housing Organizations and Dennis Richards from the San Francisco Planning Commission. We had invited Tim Colen from the San Francisco Housing Action Coalition, to have a wider range of perspectives, but he was unable to attend at the last minute.

I left the panel energized but only because I disagree with both of the panelists that came. I wish that Tim was there. It it might have been less civil but it might have been more constructive. Overall, I ended up finding the conversation quite frustrating. I did my absolute best to keep my perspective to myself — I didn't talk very much — and just asked questions. But after the meeting, I couldn't contain myself and sent a long rant to the EVNA board. This post is an edited version of that email.

[2] Many sources have influenced my overall thinking about housing. Starting with my time working with and around city governments (particularly New York City, and also Newark, NJ) but also a ton of great reading out there, like, my Supervisor Scott Weiner on how "Yes, Supply & Demand Apply to Housing, Even in San Francisco", SPUR President Gabe Metcalf's writings, including, "What's the Matter With San Francisco?", subtitled “The city’s devastating affordability crisis has an unlikely villain—its famed progressive politics", or, of course, Kim-Mai Cutler's well-known posts on the history and realities of housing in San Francisco and California, for example, "How Burrowing Owls Lead To Vomiting Anarchists (Or SF’s Housing Crisis Explained)".

[3] Planning Commissioner Dennis Richard claimed this fact last Wednesday night on the panel: that we don’t need a single new unit of housing built in the city. I just cannot believe it. Peter could not believe that claim either, and that's saying something!

[4] This is a favorite argument of Peter Cohen that just sounds so sweet, but...

[5] Even I’ve written about big banks needing to be punished, but finance or financial services companies aren’t monolithically good or bad. They’re complicated. They’re different. Many investors are pension funds or university endowments.

[6] I recommend this amazing recent book on the financial crisis for a good rendition of monetary system design in this regard.

[7] Things are a little more complicated than I’m saying, but not much. “Land use actions” include both “private rezonings”, which are variances for individual projects and, I believe, the more important point here. “City neighborhood plans” also must include mandatory affordability, but those don’t happen particularly frequently.

[8] One thing that I do agree with housing advocates around is preventing speculation on real estate: policy should discourage it and encourage inexpensive housing. This post is about building a lot more housing, though, not discouraging housing speculation.

[9] Density is an under appreciated constraint on housing: density limits based on lot area encourage very large units.

Does the California Fair Pay Act Go Far Enough?

While it has been technically illegal to pay women less than men for doing the same job since the Federal Equal Pay Act (EPA) of 1963, women still earn substantially less than men in the United States. According to the American Association of University Women (AAUW), in 2014, women in full-time positions earned 79 cents for every dollar paid to men—and the numbers only get worse for women of color and older women.

The California Fair Pay Act of 2015 is a huge step forward in closing the pay gap, which hovers around $.84 for every dollar in our state. But despite the progress, California still has work to do if we are going to lead the nation in reducing gender-based pay disparities.

The California Fair Pay Act was signed into law as of October 2015 to revisit how comparisons are made between jobs to determine whether they trigger a requirement to pay men and women equally. Instead of the traditional and narrowly defined “equal work” standard, the Act requires equal pay for men and women performing “substantially similar” work.

Under the “equal work” definition, men and women could be paid differently for performing similar functions under different job titles or performing similar functions in different offices controlled by the same employer. Thanks to California’s FPA, jobs that are “viewed as a composite of skill, effort, and responsibility,” require equal pay for men and women. The law puts the responsibility on employers to prove that any differences in pay are a result of a bona fide factor such as “a seniority system, a merit system, a system that measures earnings by quantity or quality of production” or similar, and that the relevant factor or combination of factors must clearly justify any differences in male and female employees’ pay.

Additionally, the FPA mandates that businesses can no longer destroy pay records after two years—they are now required to keep these records for at least three—and it explicitly prohibits employers from preventing or discouraging workers from discussing their pay rates. Both clauses make it easier for women to uncover and document discrepancies in pay rates within the statute of limitations. Unlike many labor laws that exempt smaller businesses from compliance, these rules apply to every employer.

But does the California Fair Pay Act go far enough? Indeed, it covers some of the issues described in the National Equal Pay Task Force’s 2013 report, including a prohibition on employer retaliation against employees for discussing wages and a requirement that employers prove any discrepancies in pay rates are related to legitimate business reasons and not gender.

However, there are critical missing pieces. First, the Act doesn’t consider jobs that are primarily staffed by women. When there are no male employees to compare against, the law cannot be applied—even if pay is unreasonably low compared to industry standards. Second, there is little support for smaller companies that have neither the experience nor the resources to effectively analyze company-wide pay rates and correct gender-based discrepancies. Larger companies usually have the resources, but more complex pay structures and job descriptions make analysis a nightmare.  Finally, the act does not deliver services directly to girls and women. For example, the Act could set aside funds to teach pay negotiation skills, which would be an effective tool in reducing gender-based pay differences.

The California Fair Pay Act is commendable in its tough stance on holding companies accountable for removing discriminatory differences in pay, and it appears that California will lead the nation in reducing the pay gap. With a little additional work, California could be the first state to eliminate the disparate pay between men and women altogether.

California Should Take Its Business to Community Banks

(This op-ed originally appeared in the Sunday Insight section of San Francisco Chronicle on Sunday, February 14, 2016).

U.S. banks recently surpassed $200billion in fines, penalties and settlements for their misbehavior and fraud related to the 2008 financial crisis. The vast majority of these cases has involved the country’s biggest banks, but thousands of U.S. banks played no role in the fraudulent and criminal activities that led up the financial crisis. It is time for us to embrace the strong tradition of community banking for California’s government bank accounts and stop rewarding big banks that mistreat their customers and abuse our trust.

In the months leading up to the financial crisis, banks engaged in a range of predatory practices: deceptive marketing, inappropriate billing, rigging of benchmark interest rates, manipulation of the foreign exchange market, mortgage and mortgage-backed securities fraud, municipal bond rigging, and discrimination against minority buyers — to name just some of the misdeeds that regulators and criminal justice authorities have discovered.

California Attorney General Kamala Harris has been a national leader in the fight to penalize banks for their actions, and helped to spearhead the National Mortgage Settlement, a joint state-federal settlement from five major banks — Ally/GMAC, Bank of America, Citi, JPMorgan Chase, Wells Fargo — relating to their marketing and sale of residential mortgage-backed securities. After harming Californians, these banks agreed to provide various forms of relief to consumers on both the principal and interest payments of their mortgages.

Despite the top criminal justice official of our state penalizing these banks for defrauding our citizens, these banks still get to do business with the state of California. Throughout the year, the state of California’s bank accounts have cash balances of billions of dollars a day.

John Chiang, the state treasurer, maintains California’s bank accounts with eight banks, including all three that were part of the National Mortgage Settlement. California should not be holding its money at these banks, which have been found, by our own attorney general, to have defrauded our citizens.

Deposits are the lifeblood of banking. They are the raw materials with which banks make loans. As we place the state’s deposits into banks, we are supporting those banks and their activities. California taxpayer dollars should only be used to support those banks that have been working to improve Californians’ financial lives, not destroy them. The only bank out of the eight the state does business with that meets that qualification seems to be San Francisco’s Westamerica Bank.

The state has no lack of alternate banking options: More than 100 banks have a branch in the Golden State. Most of them are local banks serving their community without incident before, during and after the financial crisis. Treasurer Chiang should spread the state’s money to these community banks. Doing so will reward them for good behavior and give them additional resources to help support loans to small businesses and local citizens throughout the state.

Big bankers will argue that that the small banks couldn’t handle the load or get the statewide coverage the treasurer’s office needs to conduct business. Neither is true: It would be easy to set up a network of small community banks to provide the state’s necessary depository coverage. And while there will be some administrative overhead of moving away from the big banks — as the treasurer will spread taxpayer dollars across more, smaller, community banks — modern technology will keep costs marginal.

Off-the-shelf technology solutions, likely already in use at the treasurer’s office, will provide everything we need. I’ve seen these tools in action — I built and sold a financial technology startup to Silicon Valley Bank (which, for the record, has no government business, and is not to my knowledge interested in any). Turns out that the “little guys” can do everything the big ones can — with far fewer shenanigans along the way.

The gains of leaving these big banks behind are clear: We punish fraudsters, support local banks, create financial opportunity across the state, and reward the good guys. The treasurer should act immediately. He needs no legislative action or outside approval. With so many good California banks, he should no longer direct our funds to bad ones.

Zachary Townsend is a partner with the Truman Project and the director of direct channels at Silicon Valley Bank, which he joined as the co-founder of Standard Treasury, a Silicon Valley startup that seeked to simplify banking technology. The views expressed here are his own. To comment, submit your letter to the editor at www.sfgate.com/submissions.

Analyzing Some (Miscited) Entrepreneurship Research

My background

While I was growing up my Dad was a postal clerk. Being a mailman is a decent blue collar job, all-in-all, and we were fine financially. But when I was twelve or thirteen, my Dad took a huge risk.

An avid reader, a curious soul, he felt stifled by his work. My Dad filled our house with books and our weekends always included a trip to the local library. He got an Associates degree by night, and then got a grant from (the NJ?) Department of Labor to go get a BA full-time. He quit his job. He spent all of his savings, retirement and otherwise, on graduating with a 4.0 GPA from Rutgers. Passionate about research, he went on to get an MA and PhD. He raised me through my high school years on his stipend alone. Coupon-cutting and free school lunch got us through those years. 

Through this time, my mother was completely out of the picture: I didn't see her between ages 10 and 18. Having said that, she's spent most of her career working in restaurants though: server, cook, etc.  

But it all seems worth it. My dad taught me that taking risks in pursuit of one's dreams was worthwhile, even at a deep economic expense. Since then, the post-great-recession era has not created the best academic market. My Dad has oscillated between short-term academic posts and unemployment. 

Needless to say, neither of my parents comes from any serious money. I didn't fall backwards in to a trust fund. Yet somehow I found a way to be an entrepreneur.

Entrepreneurs come from families with money?

Because of that fact, I was annoyed by the framing and conclusion of this article in Quartz "Entrepreneurs don’t have a special gene for risk—they come from families with money". Although the article is nearly a month old, it's sloppiness bothered me and it's holier-than-thou (counter-cultural?) argument against entrepreneurs is becoming more prevalent. That's fine, lot's of entrepreneurs are entitled, arrogant people — so are many journalists — but I find referring to large communities monolithically so commonplace, and so annoying, that I wrote this short essay.

The article makes a common mistake in journalist reflections of academic research: it turns a statistical fact ("On average, and holding all else equal, entrepreneurs are more likely to have received a gift or inheritance") and turn it into a categorical fact. The absolute divisions make better copy, sure, but reality is messy. I could likely spend my whole life pointing out these types of errors, but this particular instance got under my skin because I'm a fine but by-no-means-atypical counterexample to the "all entrepreneurs come from family money" claim.

The article is so poorly written on so many fronts that maybe I shouldn't be so upset. It convolutes so many different arguments, and makes so many different arguments that sound the same but are not. I do not come from a family with any financial stability. On the other hand, I am white, male, and highly-educated. "Earned" or unearned, I have a huge amount of privilege, pedigree, and connections.[1] I was able to take risks that many people couldn't because of these facts, but it does a disservice to suggest that all the people in a group share the same characteristics. If the author had just written the word "most" or "more than average", etc., then the article would have been well on its way to accuracy. 

The research on entrepreneurship that the article cites is interesting though and it points to some deeper policy points than throwing up your hands and saying you have to come from money to be an entrepreneur. I'm going to write a different article in the future about policy prescriptions, but let me analyze the four research citations given related to entrepreneurship.

Blanchflower and Oswald, "What Makes An Entreprenuer?", 1998.

Linked to from this sentence in the article: "But what often gets lost in these conversations is that the most common shared trait among entrepreneurs is [access to financial] capital—family money, an inheritance, or a pedigree and connections that allow for access to financial stability. "

 Four conclusions from this study:

  1. "consistent with the existence of borrowing constraints on potential entrepreneurs, we find that the probability of self-employment depends markedly upon whether the individual ever received an inheritance or gift"
  2. "when directly questioned in interview surveys, potential entrepreneurs say that raising capital is their principal problem"
  3. "consistent with our theoretical framework's predictions, the self-employed have higher levels of job and life satisfaction than employees"
  4. "childhood personality measurements and psychological test scores are of almost no help in predicting who runs their own business later in life. It is access to start-up capital that matters."

Let's dive in here though. Firstly, the study uses the National Child Development Study (NCDS): "a longitudinal birth cohort study that takes as its subjects all those living in Great Britain who were born between the 3rd and the 9th March, 1958". Before I say anything else about this study, might it be that there are differences between the UK and the US? Those inheritances might have had a larger impact in that society at that time than they might in the US now? That there might be large differences in these facts for between people born in 1958 and 1988?

Putting all that aside, although people who received an inheritance of over GBP5000, the cut-off in their analysis, are twice as likely to be self-employed, most self employed people did not receive a big inheritance. In fact, there are more self employed people who received absolutely no inheritance (1,142) than there are people who received over GBP5000 (692) altogether! [2] If you took a random entrepreneur from the data and asked the question in reverse than Blanchflower and Oswald [1998] does -- how likely are you to have received an inheritance -- the data shows the opposite of the Quartz article's claim.

So, the study cited does not support the sentence that links to it.

Ernst & Young, "Nature or nurture? Decoding the DNA of the entrepreneur"

Linked to from this sentence in the article: "While it seems that entrepreneurs tend to have an admirable penchant for risk, [it’s usually that access to money] which allows them to take risks."

To quote the study, "In the struggle to build momentum and grow their businesses, survey respondents and interviewees agree that founders face three main challenges: funding, people and know-how. And of those three, the biggest obstacle is funding." No doubt that it's true, raising money is difficult. But the citation says nothing about the article's central claim that entrepreneur come from money or have easy access to it. You might well conclude the opposite: so many entrepreneurs note that funding is their biggest obstacle so they must not have access to huge pools of family money or easy cash from connections.

Xu and Ruef, "The myth of the risk-tolerant entrepreneur", 2004.

Linked to from this sentence in the article: "While it seems that entrepreneurs tend to have an admirable penchant for risk, it’s usually that access to money which [allows them to take risks.]"

This is a particular egregious citation. It suggests, on my initial reading, that the linked to article would show that access to money allows entrepreneurs to take risks. The study has nothing to do with that claim! It doesn't relate to the argument one bit. The goal of this article is to "investigate whether entrepreneurs can be assumed to be more risk-tolerant than the general population". Their conclusion: Entrepreneurs are not more risk-tolerant. They found business organization for "non-pecuniary" reasons, like being their own boss. They are in fact more risk-averse because they're trying to peruse profits quickly so they can "lower the risk of business closure" and stay as their own boss. Xu and Ruef [2004] doesn't talk about the backgrounds of entrepreneurs at all, family or otherwise.

Levine and Rubinstein, "Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?", 2013.

Paragraph from the article: "University of California, Berkeley economists Ross Levine and Rona Rubenstein analyzed the shared traits of entrepreneurs in a 2013 paper, and found that most were white, male, and highly educated. “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit,” Levine tells Quartz.

This study is the one that’s closest to supporting the central claim of the Quartz piece, but, again, the categorical nature of the claims is not supported in the empirics — or in Professor Levine's comments. On family background: mothers' education tends to be one year longer (12.6 vs. 11.7 years) for the incorporated self-employed (Levine and Rubinstein's proxy for entrepreneurship[3]), stable two-parent families are true for 83% of entrepreneurs vs. 76% in the general population, and average income for the family is 13k higher, which is a lot (70k vs. 57k). They also do tend to be whiter (83% vs. 70% of the population in the study), more male (72% vs. 52% of the population of the study), more educated by a half year (14.2 years vs. 13.8 in the general population), and slightly more college educated (36% vs. 30% in the general population). The study has some really interesting logit estimates on the probabilities of all of these things, but I'm not going to go in to all that.

I agree that the research here shows that most entrepreneurs are white, male, and highly educated (for some definition of that). But part of the point of all this is to say that statistical significance is not a proxy for actual significance. Saying in an academic paper that the backgrounds of entrepreneurs have more privilege than average, with the numbers plainly available to see, is one matter. Writing a sensational gotcha article that claims that "entrepreneurs ... come from families with money" feels like another.

This isn't even the big take-way from the article though: the big takeaway is that even when you control for whiteness, and richness, and maleness, it still takes something else to be an entrepreneur. We live in a racist, sexist, classist society, I don't think anyone doubts that, but the takeaway from this study — which is almost exactly what the Quartz article is trying to dismiss, is that:

as teenagers, the incorporated tend to have higher learning aptitude and self-esteem scores. But, apparently it takes more to be a successful entrepreneur than having these strong labor market skills: the incorporated self-employed also tend to engage in more illicit activities as youths than other people who succeed as salaried workers. It is a particular mixture of traits that seems to matter for both becoming an entrepreneur and succeeding as an entrepreneur. It is the high-ability person who tends to “break-the-rules” as a youth who is especially likely to become a successful entrepreneur.


There are also some big problems with the datasets looked at, which tend to be longitudinal in nature: they leave out the thriving entrepreneurial spirit in, for example, immigrant communities. To be in the two studies cited above which have serious data, you had to be born in the UK or live in the US at a young age, respectively. That data just does not account for a lot of the entrepreneurship I see. 

Sometime next week, I hope, I'm going to come back to this train of thought and articulate policy ideas around encouraging more entrepreneurship given the observations in these studies. 


[1] "Privilege" can end up an endless enumeration, but let me mention a few others: my vaguely being a Christian is I think not irrelevant, along with my being American (I felt fairly comfortable where I grew up and in all communities I have been part of, well, except Brown to start, but that's a different story); my being cisgender has helped me fit in with men in positions of power; my father valued education which is a privilege, etc. 

[2] This is basic Bayes Theorem reasoning. The conical example is usually given in terms of a medical test. Let's say you have a test that is 99% accurate but a disease that exists in 1% of the population. You use this test on a million people. 10,000 of them actually have the disease of which 9,900 are correctly identified as having the disease and 100 are not. 990,000 people do not have the disease, of which 9,900 are falsely identified as having the disease and 980,100 are correctly identified as not having the disease. So, if I get a negative result from the test, I can be pretty sure I don't have the disease (only 100/980,200 false negatives). But, if I have a positive result, there is only a 50/50 shot I actually do have the disease (9,900/19800)!

[3] This is an imperfect proxy, obviously. 

Standard Treasury Joins Silicon Valley Bank

We're proud to say that Silicon Valley Bank (SVB) has acquired the assets and team of Standard Treasury. More information can be found in the press release

Dan and I started Standard Treasury a little more than two years ago because we saw that APIs would become the dominant way that commercial clients connect with their financial institutions. Since then we have had the honor to collaborate with leading bank's in the US and Europe in their goal of creating open APIs for their customers. We have also worked with hundreds of start-ups around the world to understand how they consume banking services and how doing so over secure RESTful APIs would dramatically improve their business processes.

Last year we decided that the best way to bring the Standard Treasury vision to fruition was to build our own bank. That's a big dream. Earlier this year, primarily because of concerns around regulatory and geographic risks, we were unable to raise a Series A funding round against that goal. With that door closed, we decided the next best thing was to closely align ourselves with one bank, in order to build a richer, more full featured, set of API based services for customers. The more we learned about SVB, the more we believe this partnership will be a faster, better, way to create the impact that we sought to create. 

We've been working with SVB since almost the very beginning of Standard Treasury. Bruce Wallace, Megan Minich, Seth Polansky, and numerous others at the bank have been some of our strongest advocates. When Bruce approached us about being acquired earlier this year, we knew that SVB would be an ideal partner. SVB is the bank of the innovation economy and we couldn't be happier to join them in making their vision of a global digital bank for the world's most innovative companies a reality.

We are proud of the great technology we have built and the positive feedback we got in private user sessions: APIs for payments and account information, a developer dashboard, a range of SDKs, and AML and transactional fraud detection tools for the volumes that we expected our API to handle. We are looking forward to transforming these products for the SVB context and launching some versions of them. We want to thank our past and present team — Brent Goldman, Keith Ballinger, Mike Clarke, Jim Brusstar, Erin Odenweller, Chris Dean, and W. David Jarvis. They were the true creators of our products. 

The past two years have been quite the ride and we are so grateful for the many people that support our efforts: Y Combinator, Index, RRE, Columbia Nova, Susa, Promus, and all the angels believed in Dan and I when we were only a powerpoint deck. The FinTech Innovation Lab, and specifically Maria Gotsch, gave us an incredible platform for sharing our vision with the world.

We're looking forward to continuing to push forward the future of financial services and will have lots to share (and show) in the coming months. 

Dan and I wrote this post collaboratively.

What Business Is Square In Exactly?

Square has reportedly confidentially filed for an IPO under the JOBS act (BloombergWSJ, etc).

In response to the announcement and long before there has been a lot of skepticism about Square's core credit card processing business model. Even with thirty billion dollars a year in processing, running a large engineering, product and design organization on top of such a low-margin business has lead to large losses. I've written in that past that Credit Card Processing is a Hard Business and about Credit Card Processing as a Commodity Business

As a contrast, with Stripe's recent announcement of Visa's investment, a number of outlets reported that they're doing approximately the same volume as Braintree's $20B. Their press site says they're at 270 people as of May. It's not hard to imagine Stripe with that leverage being profitable. Square has, in my sniffing around, roughly ten times as many people as Stripe with only 50% more processing.[1]  

Obviously Square does not perceive their business to be that of merchant acquirer and credit card processor. That is, the old model that Stripe and Square were two sides of the same coin, one card-present and the other card-not-present, does not make sense any more. The differences between them are only increasing. 

Square As The Small Business Operating System

I have theorized previously that Giving Credit Card Processing Away might be an effective way to build a big business. Square has done just that. Square created an cloud-based OS platform for their merchants by effectively giving away credit card processing and then cross selling their customers first party apps that tie into the point-of-sale and card-reader solutions. 

Specialization is a virtue in corporate planning. Square lists sixteen products on their site and people assume they aren't specialized. 

Product specialization is frequently cited as the best way to build a business. The argument goes that businesses usually get big on their singular excellence in one product: even broadly defined. ZenPayroll and Zenefits are providing payroll and employee/benefit management, respectively, better than Square could ever do. 

Square looks like a company that will throw anything at the wall to see what sticks. My reading though is that they specialized in one customer set. That's the internal rationale for all their products — "we're the one stop-shop for (very) small businesses".  I'll admit that some of their products feel a little afield, Caviar in particular. But in the finance space, customer segment specialization is common even when offering a number of different products: American Express and the high-end consumer, Capital One and subprime, Lending Club and subprime, Earnest or Sofi and high-end millennial, LendUp and subprime. 

To me, Square is building an interesting cross between how many finance companies operate and how many technology companies operate. They're cross-selling to a particular market segment with a loss-leader. 

This actually isn't that dissimilar than the business models of most retail banks. You get a demand deposit account, which really doesn't make them very much money, on the idea that they'll cross-sell you other financial products in their supermarket. 

Square is actually even better off because their supermarket of products are mostly high-margin technology products, something that banks often try to emulate but fail at. Email marketing, invoicing, payroll, employee management, appointments are SaaS businesses, with the margins to match.

There are a lot of small businesses in the world where one holistic solution is the right one. Maybe some of those businesses graduate to better tools, but most businesses aren't startups: they don't see radical growth. They go slow and steady and peak as "life-style" businesses. Just this morning I was at Philz Coffee, where I was rung up on a Square register. Philz is growing rapidly and maybe they'll need bigger and more complicated tools, but I bet you could run that business still today completely within the Square ecosystem. 

Taking Square Capital As An Example

I want to focus down on Square Capital as prototypical of their business model moving forward.

Factoring (selling invoices or receivables at a discount) and invoice discounting (borrowing against invoices or receivables) are big businesses. Historic ones too. Although I'm not an expert on the history, I've heard it said that these two tools were some of the first financial and banking products to exist ever. Some models of the development of money markets start with these tools. But I digress, invoice discounting is something frequently used by corporate treasurers to manage liquidity, their cash position, and even, yes, make certain capital investments. 

Traditional banks and factors are not very good at originating business from small- or micro- businesses. It just doesn't make sense within the context of their costs of acquisition and, even more acutely, their cost of underwriting to work with these businesses. A number of startups have cropped up recently within this market. Kickpay, Fundbox, Bluevine, etc. Let us stipulate theses companies are smart enough to build a great product and to acquire users cheaply, the biggest difficulty for these new entrants is verifying data, identifying the merchant, and ascertaining their credit worthiness. One can often make very good money on these collateralized loans but only if you can underwrite correctly. 

Enter Square. Fifteen of their sixteen products produce data on merchants: their activities, their growth, their sales, their employees, the number of appointments they have, the number of deliveries their making, and on, and on. Capital can effectively make high-margin returns on that data by deploying what amounts to invoice discounting against future credit card receivables. The program is young. They've only deployed $100M in Capital. But even if none of their other businesses made any money, they could get a Lending Club style P/E ratio (still 73 despite getting pounded in the markets) by doing a larger, much smarter, much more data-driven version of OnDeck's business.[1] 

If that's the case, Square would be a great business. It just won't be the one we thought it was.

Bullish on Square

And that's just one product line! I leave it as an exercise for the reader to repeat the analysis through all of Square's products one-by-one. Some of them are duds. But enough of them are winners. They're fast-growing, high-margin businesses built on top of a simple premise: let's make card processing cheap and then cross-sell.

I'm eager to read Square's S-1. I think they might have a tumultuous IPO and a difficult roadshow given people's perception of their business but, in the long-term, I'm bullish on their prospects.  


[1] These two businesses are actually really different not just in their target market but in how they source their capital and manage it on their balance sheet, but that's not particularly important here. 

Standard Treasury's Series A Pitch Deck

We have some news upcoming about Standard Treasury. But before that...

Almost every week, I get thank you notes for publishing our YC application. It is one of my most viewed blog posts ever. Those notes remind me over the large, supportive community of entrepreneurs. It's been one of the more heartwarming lessons about running an early stage company: there is a supportive conspiracy between all founders against the world (and, well, investors in particular).

That support — of lessons learned, or how to improve your pitch, or tidbits on investor's quirks, or how to manage psychology, or how to fail — is often private but is sometimes public. Whether its about a second seed round, laying off a large part of the team, or selling your company, many founders are quite generous about passing their learnings forward, good or bad.

One thing I found very useful while fundraising was to look at published fundraising decks, both successful and unsuccessful (MixpanelDwolla, and LinkedIn come to mind on the successful side). Since almost all of the "ideas" from our deck have published elsewhere, either on our website or in the Standard Treasury as Bank post, we decided to publish our Series A deck. It's imperfect (slide 7 is inaccurate, we got asked a thousand times to explain slide 14 (it's in '000s), the appendixes tend to be too long, we did not focus enough on the already built product), but Dan and I think it might be instructive for others.

In time, we'll be able to talk more about this process and the things that did and didn't work. Lots of lessons learned. To start though, here is the deck. 

My Brief Time Fighting Human Trafficking

At Y Combinator Alumni Demo Day, I had a chance to talk to the co-founders of Rescue Forensics (who have a fascinating backstory). I learned a lot about their analytics tools for law enforcement while we talked at length about our shared backgrounds in fighting human trafficking. They are doing a lot more work on the topic now, obviously, and much better work than I ever did.

It got me thinking about my work against trafficking in college, which also came to mind twice in recent weeks: once when I had a discussion with SF Supervisor Katy Tang about her work against it in the city and the recent breakdown in the US Senate over the reauthorization of the Trafficking Victims Protection Act (TVTP). I thought I would briefly share my work with Polaris Project as well as both the British and US governments, and what I learned from these experiences. 

Starting with the Polaris Project

When I was a child, I had a brief interaction with the child welfare system. While I was at Brown, in Rhode Island, I began to think more about that experience. At the same time, I was becoming engaged with the Swearer Center, which puts forward a model of service based on sustained commitment and engagement. 

I started doing research for a professor I was close with in late 2005, who does a lot of work study responses to child abuse. He was asked to write an encyclopedia article on how child abuse laws differ across countries. Helping with that research, I find it pretty difficult to figure out the laws in other countries but learned a lot about the 2000 Protocol To Prevent, Suppress And Punish Trafficking In Persons, Especially Women And Children. I became fascinated by the problem, if confused by the terminology. Trafficking doesn't involve movement, just any situation of exploitation through, what the TVPA would later call, force, fraud, or coercion. 

Right around that time, Polaris Project and its founding story were featured on the cover of the Brown Alumni Magazine. Polaris was built by two Brown graduates and now stands as one of the preeminent anti-trafficking organizations in the country, with a strong focus on domestic trafficking. They now even run the National Human Trafficking Resource Center and the national 24-hour hotline. 

But back then, it was really just ten people who were fighting the good fight and getting a lot of recognition for it. I reached out wondering if I could come work for them in the summer of 2006. They thought that sounded like a great idea but they had an alternative: how about I help organize Polaris Project Rhode Island. 

This sounded like an amazing opportunity, so I went down to DC for a week, got trained by the two co-founders on everything I had to know, and then tried to work on the problem in Rhode Island. Derek, one of the co-founders, told me that I had to be prepared for the fact that with just the week of training, I might be one of the expert on the topic in Rhode Island. I didn't believe him, but it ended up be more true than I could have possible imagined. 

Working for Polaris Project

When I became the co-coordinator of Polaris Project Rhode Island, I believed that getting legislation passed would be easy. On the one hand, I learned how naive I was, while on the other, Rhode Island proved to be a manageable microcosm for policy and politics. It's a world where it's pretty straightforward to meet all the interested parties. I wanted a meeting with the Governor's office, I just called them up. Things don't quite work that way in bigger states. 

We gave lectures to community groups all over RI and built an email list numbering in the thousands. We created a working group with the Providence Police, the International Institute of Rhode Island (for language interpretation), and the Sexual Assault & Trauma Resource Center to raid illegal brothels and provide services to the sex trafficking victims. We helped organized twelve non-profits to band together and form the Rhode Island Coalition against Human Trafficking with over forty community members, and I was honored to be elected a co-chair. Reaching out to coalition volunteers, we organized the group into three committees — public education, legislation and service provision — and began work on raising awareness.[1]  

Ultimately, our greatest victory was getting a state law passed providing provisions on prosecution of human trafficking and victim protections. For over a year, fellow volunteers and we lobbied most state legislators directly and secured the endorsement of the Governor, the Attorney General, and a number of mayors. Despite all that I thought there would be little resistance; no one is “for” trafficking. I drew up a lengthy bill with the Polaris Project Attorney. Yet, other anti-trafficking and anti-prostitution bills[2] were introduced, confusing the issue. There was also strong resistance from the RI ACLU and other organizations about the bill's creating new felonies. Ultimately, a compromise was reached and a shorter version of the bill I helped author was passed. Making trafficking a statewide issue by getting a short bill passed was a satisfying effort that, I think but am not sure about, led to the much bigger fight in 2009 around these issues, which I played no part in. 

Internships around international human trafficking

My focus at Polaris Project has been on state and national policy issues, but human trafficking is a global problem, so I extended that experience by spending two summers interning at government agencies that work against human trafficking on more international scales. 

The first summer, I had a Liman Undergraduate Public Interest Fellowship to work at the United Kingdom Human Trafficking Centre. While working there I learned about operations, legal practices and cross-agency cooperation within the British Government and its work with European allies. I got to travel all over Europe, particularly Eastern Europe, to see how the British were trying to prevent the sourcing of trafficking victims before they ever reached the UK. I also got to work on building a number of academic networks across the UK. 

The second summer, I worked at the US Department of State's Office to Monitor and Combat Trafficking In Persons. I got to work on addressing the widespread use of forced labor in the Thai and Bangladeshi shrimp processing industries and the use of child labor in West Africa cocoa farming, staffing a cabinet-level task force on human trafficking, and conducting a bunch of research related to various reports and fact sheets. 
What I learned from my work against human trafficking

By the end of my time at Brown, I felt burned out by working against human trafficking. It’s a hard topic to talk about day in, day out. It’s draining. I think that human trafficking is some of the worst suffering that exists in this world, which is exactly why I saw it as the natural extension and logical end to my interest in child welfare. 

A lot of my anti-human trafficking work in Rhode Island felt like it was helping particular people (in a local, personal way), but working for two governments taught me that there was an opportunity to help even more people — if I could figure out how to make governments function better. Good, on a larger scale, was possible. I started to think about how one could make more policy changes, even small ones, that effected many people's lives. From that idea, I went on to work for Bennett Midland — but that's a different blog post — where I worked on several policies and programs at NYC's Administration of Children's Services, effecting the services provided to tens of thousands of children and families in the City. 


[1] One nice thing about this experience was that PPRI basically became my college job. Through winning things like J.W. Saxe Prize, and some other Brown fellowships, it was the greatest work-study job I could have hoped for in retrospect.  
[2] At the time, and I obviously am not an official spokesman of Polaris Project, I basically avoided any position on prostitution. It's a topic that elicits strong responses. Prostitution, sex workers, freedom, victimization, etc, are often polarizing flash points, especially so between the various factions of the anti-trafficking community. To square that circle, Polaris had an exclusive focus on exploitation: I don't know whether prostitution should or should not be illegal, but I know that a lot of prostitution is forced and that certainly should be illegal.