The funny thing is how living out here in the valley warps your mind about real estate rental (and purchase) prices. When I moved out here I was stunned that I'd be paying twice as much as my mortgage in Austin for less than two thirds the space. Now that I'm out here, I see a place in SF going for $1675, and I think, "Wow, I need to jump at that one! Nah, probably already gone, at that price...why get myself worked up over nothing?"
I'm also probably shopping in somewhat nicer areas than is strictly necessary (in addition to shopping for a bigger place than someone right out of college is probably going to want). I have a dog, and I tend to walk at all hours of the night...it's just a habit I've had for ten to fifteen years, and I think altering it would negatively impact my life, so I'm shopping only in pretty safe areas. And, because my reason for moving to the city is to be nearer to live music, I'm shopping pretty centrally, as well.
You can get a small 1 bedroom place in the $1300 range in both SF and Mountain View. But, that's probably the lower bound, without living in a really sketchy or far out location. I guess that's a big part of the reason most YC founders live with roommates. Splitting a $2700 place three ways works out to a pretty good deal.
And +1 to your strategy of biting the bullet and paying what it costs to be happy, provided you can afford it of course. I'd prioritize keeping the commute short, because that wears on you every day. On the other hand, I used to work in Fremont and live in Fremont, and the commute was nice and short, and rents are decent, but... Fremont? Not such a happening place. At least a 20 minute drive away from all my friends except the one who was my roommate at the time.
So the ideal is probably to live in SF and work in SF, or live in Mountain View/Palo Alto (but not East Palo Alto, unless things have really changed since I left) and work there as well. Or live in Mountain View and work in your spare room. ;)
Okay, I take back what I said elsewhere on this thread: Boston is considerably cheaper than this. My wife and I had a 2BR, an entire floor of a house with off-street parking, in East Arlington for $1400 a month. A mile walk from the Red Line, on a major bus route. For a cute second-floor walkup 1BR in Davis Square, Somerville -- literally thirty seconds from the Red Line if you run -- I paid $1150.