During the pandemic, companies made one of the biggest unplanned attempts to organise office work—remotely, in offices, or a combination of the two. Post-pandemic startups are still struggling to figure out the best way to navigate back-to-the-office issues—that is, employee expectations about continuing to work remotely versus the best way to build and grow a profitable business.
Before we can ask what the best configuration is, the first question is: what exactly do we mean by “remote work” or “office work”? Today, work configurations run from “out of office” (fully remote, digital by default) to “some office” (flexible hybrid, synchronized hybrid, office first.) to office only.
James Kim of Reach Capital, an early-stage technology investor, examined their portfolio of 37 companies using the following taxonomy of how to configure virtual and physical work.
Using this model, James found that startups and early-stage startups whose employees returned to the office in some form experienced 3.5 times more revenue growth than completely remote companies.
These are staggeringly large differences, and while other factors may play a role (see the What It Means section below), the impact of a holistic approach cannot be ignored.
What could be the reason for these differences? Unsurprisingly, nearly 90% of initial responses said job composition affects team culture. However, surprisingly, self-reported team culture, eNPS (employee net promoter score), and regrettable departures that harm the company were similar for all groups in all work settings.
Although employees in all groups said that regardless of the office layout, team culture did not seem to change, the performance (as measured by revenue growth) of very early-stage startups told a different story.
The data shows that, especially in the pre-seed or seed stage, companies with some office space grow significantly faster than companies without offices.
What does this mean?
The information is indicative but not definitive. See the full summary of the study’s results here.
Let’s start with the dataset. The sample size of the study was 37 companies from the Reach Capital portfolio. It’s big enough to see patterns but not big enough to generalize to all startups. Next, Reach Capital’s business portfolio focuses on education and the future of work. In other markets, salaries may vary depending on job composition. Reach Capital’s investments are made in many regions, including Brazil, so the geography is not limited to Silicon Valley.
Finally, office composition is only one factor that can affect a startup’s growth rate. However, the results are suggestive enough that other venture capital firms may want to do the same research on their entire portfolio of companies and see if the results match.
By the way, Stanford University economist Nick Bloom and others have done extensive research on remote and hybrid work with thousands of people here and there. Their research focuses mainly on workers in independent day jobs such as travel agencies. However, we are interested in a very specific subset of creative knowledge workers in the early stages of startups—especially at the stage when startups are looking for product/market fit and a business model, not when they are performing day-to-day tasks.
If the results are seen elsewhere, one can guess why. Working from home can be more of a distraction due to homework, family, and network issues. Do these little things add up to major differences in productivity?
Is it because in early-stage startups, casual conversations between employees lead to better insights and ideas at unexpected and unplanned times? And if so, is there productive brainstorming within departments—eg, engineer to engineer—or is there cross-fertilization between departments—eg, engineering to marketing?
Research since the 20th century has shown that informal face-to-face communication is important for coordinating group activities, maintaining company culture, and building teams.
This informal information allows employees to obtain new, redundant information through links to different parts of the organization’s formal organizational chart and different parts of the organization’s informal social network. In addition, research has found that a “small-world network”—a network structure that is both locally clustered and a hotbed of often unpredictable fluid interactions that support innovation—significantly increases creativity. in other words, in the early starting phase. Founders and investors in Silicon Valley companies have known this small global network effect as tacit knowledge for decades. It was a hallmark of the physical design of Silicon Valley office space—from Xerox PARC to Pixar headquarters to Google and Apple.
So maybe the opposite is true. Does remote work with ad hoc or fixed meetings via Zoom stop the growth of creativity and new knowledge just when a startup needs it most? Are there new tools like Discord and others that can replicate the cooling effect of physical proximity?
Anyway, this is the start of an interesting discussion.