The kinds of people who work in startups are probably living in cheaper neighborhoods and finding creative ways to make their dollars go further. As pg has commented, nerds tend to be rather frugal. Also, salaries are high equivalent to the higher rents, so it all evens out in the end. Calling NY expensive is misleading. It can be expensive. But it can also be inexpensive if that's your goal.

Are salaries actually commensurately higher? As far as I can tell, typical engineering pay in NYC is about the same as typical engineering pay in California.

Depends on what you do. Finance jobs (they hire people with engineering degrees) will typically pay better than an engineering job.

California is not exactly known for it's low cost of living. Try comparing NYC and SF to Kansas or something.

You can definitely find cheaper places, but in the end you are still going to be paying almost double what a cheap place in the Valley costs.

Also if you are bootstrapping, your salary isn't really tied to cost of living.

It is what markets are willing to pay. Rent is outrageous, but there are also people in college or just out of college who doesn't mind having a few roommates.

My friend's old studio was 1600, and was replaced by two college guys paying 1800.

Not that I'm happy about it, but it is what it is.

Additionally, it depends on how you track "rent" going down. Prior to the dip, the rents also required an agent's fee, which is easily a month or two's rent. I think more places nowadays are without these fees, so it is a little bit cheaper.