Butter or sand on the gears? It’s a question every founder should ask before choosing SF or Seattle

The City by the Bay may be considered the hub of AI and technology, but that doesn’t mean every innovator has to flock there to set up shop, right? That’s the argument presented by Yifan Zhang, co-managing director of AI2 Incubator and creator of AI House.

In a speech at last week’s Seattle AI Startup Summit, Zhang addressed the classic San Francisco-versus-Seattle debate. And while he praised San Francisco, he also highlighted the benefits for founders of building right here in the Pacific Northwest. It was less about civic boosterism and more about the founder’s diagnosis.

Zhang said the same qualities that make San Francisco attractive to some innovators can work against others — especially those creating the phase-defining startups of the AI ​​era.

Is your original butter or sand in the gears?

When weighing their decision to move to San Francisco or stay in the Pacific Northwest, Zhang suggested that entrepreneurs ask whether they are building a “butter” or “sand in the gears” startup.

As he described it, “butter” startups are those that “succeed solely on the basis of pure speed of execution, a very smooth customer experience, that removes all friction from your users.” These are very suitable for San Francisco.

Otherwise, startups with “dirt in the gears” have real-world difficulties, hardware, human relations, and regulatory edges, all of which Zhang believes could be considered drawbacks in the Northern California city.

“The sand on the gears can give you a defense, a trench to resist the attacks of the same rivals,” he explained. “This is especially true in the age of AI, when building has become so cheap. The people, the innovators, who are willing to grind through these sand-in-the-gear startups, as opposed to shying away from the hard stuff, will end up succeeding in these stages.”

Zhang used AI2 Incubator’s portfolio of Friday Harbor startups as an example. Founded in 2023, the company faced a challenging technical problem: how to use AI to match borrower documents against lender guidelines to determine who qualifies for a loan. Unfortunately, the AI ​​back then wasn’t as good as it is today. There were short context windows and no agent systems. Advanced thinking models were not widely available.

“It’s a difficult problem and when it comes to the customers you work with, the customers are not technically proficient,” he said. Mortgage loan originators and originators are often skeptical of AI and distrustful of outsiders with no industry experience.

But instead of throwing in the towel and pivot, Friday Harbor chose to face all the difficult technical problems, stay focused on customer results, and finally deliver a mortgage book that benefits today from the latest AI development.

Zhang said that the willingness to solve difficult technical problems is what sets Seattle apart from other US cities focused on technology such as New York, Los Angeles, Austin, and Miami.

“We have a significant engineering culture here that is head and shoulders above all other cities and on par with San Francisco,” he said.

Building a startup in San Francisco vs. Seattle

Zhang knows what it’s like to build in both cities. He founded two startups – Gympack and Loftium – in San Francisco and Seattle, respectively. So how do the two cities compare to founders?

San Francisco’s biggest advantage is its concentration of people focused on founding and building large companies, Zhang said. Founders there absorb best practices faster than anywhere else, can draw from a talent pool that actually prefers startups to Big Tech, and gets early access to cutting-edge technology.

That said, there are significant downsides, such as significant pressure from investors.

“You might be tempted to do big rounds if that’s actually pouring jet fuel into the plane when you’re learning to fly,” Zhang said. “You can be swayed to go from great first impressions and just a few tweaks to make it great.”

San Francisco can also be an echo chamber, Zhang said. When everyone shares the same startup and technology background, founders often hear the same feedback over and over again, whether or not it’s relevant to their company.

Seattle has its advantages outside of the engineering culture, Zhang said. Founders here are more than willing to admit they don’t have paying customers rather than ship a product that doesn’t work — a fact San Francisco’s all-costs launch culture often punishes. He called Seattle’s humble approach a good quality, especially in an industry where technology has to be completely functional.

Of course, Seattle isn’t perfect. With Amazon and Microsoft dominating the tech space, founders are more likely to get advice from people with Big Tech experience than those who have actually built or funded startups. And the thinking and best practices that have worked in big companies don’t translate to startups.

He also cautioned that Seattle can have a narrow view of who can call itself an innovator, often mistaking people who have held top or senior roles at Amazon or Microsoft. That logic might work if you’re building a B2B SaaS company that sells back to Big Tech, Zhang said, but otherwise it’s irrelevant.

His advice: “Pay attention to what you bring to the table in particular and build a company around that.”

Finally, Zhang gave this tip to founders: “Geography affects your vision [and] your chances of success. So choose it carefully and wisely as you choose your first idea and field. “