Editor’s Note: Peter Fenton has been a General Partner at Benchmark Capital since 2006 and serves on the boards of DotCloud, EngineYard, HortonWorks, Lithium, Minted, New Relic, Pentaho, Polyvore, Twitter, Yelp (IPO: YELP), Zendesk and Zuora.

Today Benchmark Capital announced with Mayor Ed Lee our long-term commitment to the City of San Francisco, opening a new office on the top floor of the Warfield Theater, in the heart of the Tenderloin district.

It’s our intention to create a counterpart to our existing office on Sand Hill Road in Menlo Park, in keeping with the new spirit of entrepreneurship in the city.

Follow the Customer

Our move to the city speaks to this change in the entrepreneurial landscape. Two out of every three new investments we have made since 2009 have been in San Francisco. Our partners currently sit on more than 20 boards in San Francisco including Twitter, Yelp, Instagram, Uber, NewRelic, Zendesk, Dotcloud, Asana, OpenTable, DemandForce, NextDoor, ServiceSource, Lithium, Marin Software, 1Life, Second Life, Coverity, EngineYard, Couchsurfing, Grockit and Pipewise.

Benchmark’s model of working shoulder-to-shoulder with entrepreneurs who aspire to change the world requires we be close to our customer, the entrepreneur. Our approach requires us to be available 24/7 to our entrepreneurs. In the past decade, this commitment increasingly means being in the city. Our center of gravity is no longer limited to the 5-mile radius around Stanford, and now includes fundamentally the 3-mile radius around Yerba Buena Gardens.

What Changed?

So, what changed in the last decade? We see several major factors driving the rise of San Francisco.

1. The primacy of Interaction Design

The new digital landscape in which entrepreneurs operate is no longer dominated by sales-driven cultures, or by the need to deploy and maintain infrastructure. Instead, amazing products, products that are often bought rather than sold, dominate this new landscape. Designers of these products are increasingly in direct touch with their users. We have spoken of this product-driven versus sales-driven change, and it impacts every sector we invest in. Design moves to the center. We believe designers are choosing urban life in the city over suburban life elsewhere.

2. A deeper talent pool

Google pioneered the bus service, and by 2007 25% of its company was being ferried to work. Other companies followed suit. Young engineering graduates could now live in an urban environment, get work done on the commute, and enjoy the pleasures of city life at night and on the weekends. This has expanded the pool of exceptional engineers in San Francisco and many of these people have either started their own companies or joined growing startups. The new wave of companies based in San Francisco is producing a generation of engineering leaders who have real ties to urban life.

3. A new model of production

With the advent of the cloud and the proliferation of tools for distributed work, engineers can innovate anywhere in the world. Coding has become more social, more urban; it’s no surprise that the two leading companies in that initiative are both based in San Francisco (Atlassian and Github). This mode of production removes the need for the “bay of cubes”, the norm for many south bay engineering teams.

4. Re-urbanization movement in the United States

The New Yorker had a fantastic piece on the re-urbanization of our country a few years ago. After decades of flight to the suburbs, American workers are waking up to the benefits of urban living, trading long commutes and larger houses for the dynamism and diversity of raising families in the city.

5. San Francisco government policy

For all the positive forces, there is obviously a long list of things that need to improve in San Francisco. Transportation, crime, blight, tax codes, and education, to name a few. Enter Ron Conway. Ron moved to the city in the mid-2000’s, and took an interest in re-making San Francisco as the Startup Capital. He helped identify and catalyze massive support for Ed Lee as Mayor, attracting a number of firms including Benchmark in that support. Ed brings pragmatic, forward-looking views — in a city notorious for self-interest and cronyism, he operates in an endearing, selfless manner. Ron’s leadership took organizational form with the launch of sfCITI (@sfciti on Twitter) at the beginning of the year, creating a sustained effort to seize the opportunity in front of the city to become the innovation capital of the world.

The Challenge & The Opportunity

Despite the positive momentum, San Francisco’s rise could easily fall back and fragment if major changes don’t occur. One of the biggest challenges city-based startups face is the potential for distractions in city life. We’ve found open, contiguous floor space materially helps achieve the collective sense of mission and deeper commitment that avoids such distractions. Unfortunately, many of the offices in SoMa are chunked-up, and work against these cultural goals of young companies. But if you go west along Market Street, to the tenderloin and the civic center area, wonderful open floor space abounds. Yet this is ground zero for urban blight.

The Warfield

Our inspiration for the Warfield location comes from restaurateur and OpenTable board member Danny Meyer. Danny taught us in the context of opening new restaurants to seek locations before there is a “there there” and to play a civic duty in transforming abandoned or disfavored urban areas:

“One of the things we love to do is come to a neighborhood before the rest of the world does. We did that with Union Square. We did that with Gramercy Tavern in the Flatiron district. We come down here to Battery Park City, there’s a real dearth of restaurants down here.”

So, like Twitter last year, we saw an opportunity to go into a tough neighborhood, and to be part of the transformation. Twitter’s new headquarters are at 10th/Market (80kft+ floor plates), and the Warfield is at 6th/Market.

We look forward to seeing you at the Warfield. Just don’t go to the door on the left or the one on the right….

[Warfield photo via AGI Capital.]