It’s technically illegal to run a business out of a San Diego home if more than one person works there – a fact that unsurprisingly frustrates some local startup CEOs.

Telecommunications giant Qualcomm famously began in Irwin Jacobs’ den. Apple was born in Steve Jobs’ Los Altos garage. Startup evangelists often encourage fledgling companies to set their initial roots at home.

San Diego’s municipal code doesn’t allow such ventures. Businesses operating out of San Diego homes must get a permit to include a second employee who works from 8 a.m. to 5 p.m. but that’s all that’s allowed.

San Diego-based startup veteran Olin Hyde was shocked to learn of the city rule earlier this year and complained to the City Council’s economic development subcommittee in March.

In months since, a message has spread across some segments of the local startup community, particularly those working out of houses and apartments: San Diego effectively bans startups while meccas like Austin and the Bay Area roll out the red carpet.

That’s not quite true.

In fact, Austin, San Jose, San Francisco, Palo Alto and Los Altos also bar home businesses with employees.

The details of the rules vary. Austin, for example, allows a second employee without a permit, but such codes are pretty unremarkable.

“This is incredibly common and standard,” said Corey Teague, San Francisco’s assistant zoning administrator. “One of the main reasons zoning code was created in the first place was to adequately separate land uses.”

Namely, Teague said, commercial and residential uses.

Cities don’t want a manufacturing business or a restaurant to sprout up in a neighborhood, or to have a string of cars driving in and out of a cul-de-sac. Such activities might disturb neighbors.

But the rules have ruffled feathers in San Diego, where many startup CEOs say the city hasn’t historically catered to their needs.

“That ordinance reflects the cluelessness of the City Council on what it takes to build a tech ecosystem and the fact that they’re missing opportunities,” Hyde said.

Hyde learned of the regulation during a February meeting with a tech startup co-founder who said his company was mulling a move to the Bay Area. After noting concerns about raising capital in San Diego, the CEO pushed a copy of the ordinance across the table to Hyde.

“He said, ‘Look, it’s illegal for me to start a business in San Diego,’” Hyde recalls.

The startup has yet to flee San Diego but Hyde later circulated a PowerPoint presentation titled “San Diego bans startups” that he displayed during a City Council subcommittee meeting. And in April, he met with City Council President Pro Tem Sherri Lightner, who chairs the economic development committee, to discuss his concerns.

Mo Kantner, a spokeswoman for Lightner, said the councilwoman’s office has been researching the issue and is considering whether to update the rule.

Five months later, Lightner has yet to decide next steps. Any change would require outreach to businesses and community groups, Kantner said.

Mayor Kevin Faulconer is also reviewing the home business rule.

“The mayor’s office supports the growth of entrepreneurship here and it’s something that we’re looking into,” said Faulconer’s press secretary Charles Chamberlayne.

It’s not clear any startups have been booted or even fined as a result of the ordinance, though.

Since last August, the city has opened 180 investigations involving home businesses. The city generally sends a cease and desist warning and then allows violators to appear before a hearing officer before any fines are assessed. The city couldn’t immediately say how many violators, if any, were tied to startups or how many were fined.

The city’s code enforcement strategy is complaint-based so the city officials say they’re unlikely to crack down absent neighborhood concerns.

“Those most likely to get cited usually have a significant impact on a neighborhood,” said David Graham, a deputy chief operating officer who oversees city planning, code enforcement and economic development. “Often it’s a business with a high volume of products out of the home. People get concerned when there are a bunch of cars taking up parking or deliveries occurring at all hours of the night.”

That profile wouldn’t match the traditional tech startup.

Dozens, if not hundreds of them, operate quietly, many of them unaware they’re violating a city rule.

Jimmy Hendricks, CEO of coupon software startup Deal Current, was once a violator.

He and the company’s cofounder once ran an online contest software startup out of their three-bedroom apartment in North Park.

What started as a three-person operation – the two roommates and an intern – grew to include three sales people and a developer.

Voice of San Diego wrote about Hendricks’ company and its North Park headquarters in 2010. Hendricks never heard from city code officers despite the feature story, complete with photos.

The company later moved to an office space in Little Italy.

When VOSD informed Hendricks about the city’s rules, Hendricks said he’d still recommend young startups start their efforts from home.

“When you start a business, you don’t know if it’s going to be successful. You don’t know if you’re going to survive,” Hendricks said. “You just want to get started and starting out of your home seems like the easiest way to get started.”

But Hendricks also doesn’t oppose the city code, or think startups should be worried about it.

“They’re never going to be on the radar until they’re successful,” Hendricks said. “If they’re successful they’re going to get an office.”

This is part of our quest digging into the difficulties – real or perceived – of doing business in San Diego. Check out the previous story in our series, Stop Confusing Small Businesses and Startups, and the next, The City’s Hand-Picked Growth Industries.

Lisa Halverstadt

Lisa is a senior investigative reporter who digs into some of San Diego's biggest challenges including homelessness, city real estate debacles, the region's...

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