Could tech startups save San Francisco? by Dan Primack @FortuneMagazine June 10, 2014, 1:13 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Venture capitalist and former Facebook executive Chamath Palihapitiya yesterday stepped into San Francisco’s income inequality debate. Or perhaps it’s more apt to say that he dove in head-first, sparking a war of words with legendary angel investor Ron Conway over whether or not the city has done enough to address local issues of housing and education disparity. Conway is a major supporter of SF Mayor Ed Lee, while Palihapitiya suggested that San Francisco would be better off if Lee resigned. All of this came following Palihapitiya’s appearance at a Bloomberg-sponsored conference, where he proposed an ambitious public-private partnership called the Equality Fund. Fortune caught up with Palihapitiya via phone, to further discuss his ideas: FORTUNE: What is your proposal? Palihapitiya: What I said was that San Francisco should establish a handful of special economic zones. The Tenderloin, SOMA and a bunch of these areas. In these special economic zones, you’d create subsidized rents and maybe some tax incentives for tech startups, and also for the supporting infrastructure like restaurants and hotels. In return, the startups would give 1% of their equity to what I call the Equality Fund, a pretty good trade-off for a young company that’s only raising $500,000 to $2 million in angel money. Over time there would be enough companies moving into the city and into these special economic zones that the company would build a portfolio that would largely track the value that the companies are creating in the city. When these companies go public, the Equality Fund liquidates that stock and allocates the money to three things: 1. Build more affordable housing. We need 100,000 new units just to keep pace. 2. Fund all public K-12 schools in the city. 3. Push a bunch of community-sponsored health projects around things like obesity and heart disease. Imagine if San Francisco had done this six or seven years ago, and that the fund had 1% of Airbnb and Uber and Dropbox. It could have done so much for the city without having to raise more public debt, or increase payroll taxes or increase retail taxes. You have previously referred to the government as “completely useless.” So why create the Equality Fund as a government entity, rather than as an independent nonprofit? What I’d want to see is a three-person board. One from the city and two from the private sector. They’d meet once per quarter and make explicit allocation decisions. So long as you have tightly constrained what the money can be spent on, without wasting much money on administration and other things, then I think it can work. For example, maybe I had 1% of a $25 billion company, which got diluted 50% in subsequent rounds. So 50 basis points, which is worth $125 million. The board meets and greenlights construction of 100,000 more units and selects from a pre-vetted list of general contractors. We’d try to pre-wire as much of this as possible, and maybe even get bank financing against the equity to start earlier. This is where the government can do great good. Their imperative is to fix the broadest class of problems for the greatest number of people. What companies like Yelp YELP and Salesforce CRM are doing is amazing. But for every company like that, there are many that choose to instead just focus on their product or service. So let’s have the city make a bet on its own future. In the next 30 years, my suspicion is that San Francisco will have built new companies worth $1 trillion of cumulative value. Do you think startups will move into these special economic zones, or avoid them to keep their equity? I think it’s their choice. But it’s a quid-pro-quo. For example, the salaries startups now need to pay engineers are so high that the incentives might give an extra four or five months of runway. Ask for a defined benefit, ask for a defined return. But, that said, I don’t think it’s fair to ask for q% of equity in companies that have already made it… over the next couple of years [until participating startups mature] we’ll have to live with whatever progress the people in power think they’re making. Broadening this out a bit, do companies have a social and/or philanthropic responsibility to their local communities? If it’s a very mission-driven company, then it probably is a responsibility. But that’s something that’s specific to a company’s culture and its leadership. If it’s in business only to build a product and sell it, then it’s probably not a responsibility. You live 20 minutes or so south of San Francisco. Why do you care about this? I grew up on welfare. My mom was a housekeeper. We lived above a laundromat and didn’t have a car. But look at where I am. I think there are so many people with the potential to do that, or 100 times better, and we’re robbing them of their social mobility. I don’t think that startups will really feel 1% over the long run, but it really will be felt by those who get the benefit. Some of thse young people could built the next billion dollar business in San Francisco. Why wouldn’t the city want to invest in them and get that ultimate benefit? I think what people like Ron Conway have done is good, but you shouldn’t get upset when someone says you have to do more. I’ve lived that life, it’s personal for me. And I’m hapy to give 1% of my carry, which is millions of dollars, even though I don’t live in San Francisco. I want my path to exist for many other young people.