The Uncoupling of Cities & Capital
Much has been written and discussed about the future of cities, in the face of the global COVID pandemic. There’s been a huge de facto migratory wave out of the major cities in the United States over the last nine months. Everyone knows people who have moved to suburbs and rural areas. Media is ablaze with clickbait stories about “will cities survive?”
Of course cities will survive. Thanks to the hidden hand of the market, with less demand for urban housing and commercial buildings, rents will fall, and people will return. Most cities will avoid the fate of Detroit, which declined in population from 1.8 million in 1950 to roughly 700,000 people today.
Cities have a long history of renewal. But the big question is whether cities post-2020 will be the centers of capital which they’ve historically been. To provide superior returns, investors of capital felt a strong need to be physically proximate — both to other investors, their sources of capital, and to their investments. Despite high state taxation levels, San Francisco and NYC have served as global centers of capital formation for decades, reinforced by historical norms and strong network effects.
Many of the the first people to leave San Francisco and NYC during the pandemic were the investors. When every venture fund stopped having their weekly partners’ meetings in person, stopped meeting with entrepreneurs in person, stopped attending conferences in person, and everything moved to Zoom … there was no need at all to stay in major metropolitan areas.
Nine months into the pandemic, investors are discovering that they can invest effectively from anywhere in the world. In fact, they’re becoming really, really good at it. The only limiting factors are time zones and bandwidth. Thousands of venture firms, most of which had weekly in-person partner meetings, have proven they can work effectively on a geographically distributed basis. What about startups? Often, startup CEOs were the first to move to Wyoming or Texas, at about the same time they wrote blog posts announcing everyone in their companies could work from home forever.
The proverbial genie is out of the bottle. Zoom is now socially acceptable. It wasn’t before. Before the pandemic, admit it to yourself, videoconferencing was a bit weird. In the past, did you have a business colleague Zoom in from Montana? Cue the snarky comments. In 2020, those snarky comments disappeared as fast as a pepperoni pizza delivered to a college dorm at midnight on Friday night.
Imagine for a moment that Biden wins the election, and Democrats win the Senate. And then federal tax rates skyrocket to at least 40% for all types of income and gains. Suddenly that additional 13.3% California tax bite (not to mention high sales and property taxes) hurts a lot more — both for investors and for entrepreneurs. Yes, that’s the top marginal rate for top earners. But remember that risk-taking entrepreneurs get rewarded in unexpected bursts. Earn Ramen Noodle wages for a decade, have a huge outcome, and then say goodbye to most of it in a high-tax state.
What happens then? Well, the cities don’t disappear. They’re fun, lively, vibrant, socially rewarding places to live. But they won’t be anywhere as enticing for investors, or as sources of capital and talent for entrepreneurs. California will get hit the hardest. The good news is that it will be easier than ever for top entrepreneurs with amazing ideas to get funded, since great investors are now only a few megabits of high quality bandwidth away from anyone in the world. For investors and entrepreneurs, geography will be much, much less of a constraint. Just be sure to brush up on your Zoom skills.
