Zac Townsend

(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.

(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.

(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.

(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.

Endnotes

[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.

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.

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

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.

Conclusion

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. 

Footnotes

[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. 

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.

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 (Mixpanel, Dwolla, 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. 

I have posted on my blog exactly twenty times since September 2013 when Dan and I and Standard Treasury got out of Y Combinator and raised our seed round. Some of the posts have been quite business related while others have been deeply personal. 

All in all, I've had a couple hundred thousand uniques on the blog (my most popular post is about weight loss). Recently I got concerned about Svbtle, the blogging platform I was using. Svbtle is the brainchild of Dustin Curtis, and it's pretty well-designed. But it seems like a side project, and I just don't know much about its long-term viability. 

So, I have decided to switch over to Posthaven. 

My reasons: 

(1) Permanence. I believe that Posthaven, my content, and my links will be here a long time. The pledge says forever, but a decade or two would be nice.  

(2) Inexpensive. Five dollars a month is pretty damn cheap. I am also actually more comfortable paying for something than not: I know they're covering their costs.

(3) Trust. I know Garry personally through my time in YC. I trust that the pledge is real and he always try to do the right thing by us users. 

What I lose:

(1) Time. Posthaven doesn't seem to take markdown, so I had to convert all my markdown to HTML. There are some other basic administrative annoyances. 

(2) Kudos. On Svbtle, if someone enjoyed your post they could give you "Kudos". On Posthaven they can "Upvote". For good reason, I can't set the number of upvotes myself, so that's all gone.