This article previously appeared in EIX – Entreprenuers and Innovators Exchange.
Data shows that pre-seed and seed startups with employees showing up in a physical office have 3½ times higher revenue growth than those that are solely remote.
Let the discussion begin.
During the pandemic, companies engaged in one of the largest unintended experiments in how to organize office work – remotely, in offices, or a hybrid of the two.
Post-pandemic, startups are still struggling to manage the best way to manage return-to-office issues – i.e. employee’s expectations of continuing to work remotely versus the best path to build and grow a profitable company.
Before we can ask which is the best configuration, the first question is what, exactly do we mean by “remote work” versus “office work”? Today work configurations span the spectrum from no office (fully remote, default digital) to some office (flexible hybrid, synchronized hybrid, office first,) to office only.
James Kim at Reach Capital, an early-stage tech ed investor, surveyed their portfolio of 37 companies using the following taxonomy of how virtual and physical work could be configured.
Using this model James found that pre-seed and seed-stage startups that had employees returning to some type of office had 3½ times the revenue growth of startups that were fully remote. Those are staggeringly large differences, and while other factors may play some role (see “What Does This Mean, below), the impact of the all-hands-on-deck approach can’t be ignored.
What might account for these differences? Not surprisingly, almost 90% of the responses from pre-seed/seed startups said team culture was influenced by work configuration. However, unexpectedly, self-reported team culture, eNPS (employee Net Promoter Score) and regrettable attrition – departures that hurt the company — are similar across work configurations.
So while the employees said regardless of the office configuration the team culture didn’t appear to change, the performance of very early stage startups (as measured by revenue growth) told a different story.
What Does This Mean?
The data is suggestive but not conclusive. See a full summary of the survey results here.
Let’s start with the data set. The survey sample size was 37 companies from the Reach Capital portfolio. That’s large enough to see patterns, but not large enough to generalize across all startups. Next, Reach Capital’s portfolio of companies are in education and the future of work. The revenue results by workplace configuration may be different in other markets. Reach Capital’s investments are made in many regions including Brazil, so the geography is not limited to Silicon Valley.
Finally office configuration is only one factor that might influence a startup’s growth rate. Still the results are suggestive enough that other VC’s might want to run the same surveys across their portfolio of companies and see if the results match.
(BTW, Nick Bloom at Stanford and others have done extensive research with thousands of people on remote and hybrid work here, and here. Their research is mostly focused on employees working on independent day-to-day tasks such as travel agents. However, we’re interested in the very specific subset of creative knowledge workers in the early stage of startups. Specifically at the stage when startups are searching for product/market fit and a business model not when they are executing day-to-day tasks.
If the results appear elsewhere, then one can speculate why. Working from home may offer more distractions by chores, family, network issues. Do those little things add up to meaningful productivity differences?
Is it that in early-stage startups the random conversations between employees at unscheduled and unplanned times lead to better insights and ideas? And if so, is the productive brainstorming occurring inside of departments –e.g. engineer to engineer — or is it the cross-fertilization between departments – e.g. engineering to marketing?
Research since the 20th century has proven that informal face-to-face interaction is important for the coordination of group activities, maintaining company culture, and team building. This informal information gives employees access to new, non-redundant information through connections to different parts of an organization’s formal org chart and through connections to different parts of an organization’s informal communication network. In addition, research has found that creativity is greatly enhanced in a “small world network – a network structure that is both highly locally clustered and often a hotbed of unscheduled fluid interactions that support innovation. In other words, inside an early-stage startup.
For decades Silicon Valley company founders and investors have known this small world network effect as tacit knowledge. It has been a hallmark of the physical design of Silicon Valley office space – from Xerox PARC to Pixar’s headquarters, to Google and Apple.
So perhaps the converse is true. Does remote work with ad hoc or fixed meetings via Zoom actually stunt the growth of creativity and new insights, just at the time a startup most needs them? Are there new tools such as Discord and others that can duplicate the water cooler effect of physical proximity?
Either way, it’s the beginning of an interesting discussion.
What has been your experience?
Lessons Learned
- Data from one VC shows pre-seed and seed-stage startups with employees that show up to the office have 3½ times the revenue growth of those that work remotely
- Is the data valid? Is it the same in all markets/industries?
- If it’s valid, why?
- Is there a difference in remote vs. in-office productivity for creative tasks versus execution tasks?
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Filed under: Covid-19/Recovery, Family/Career/Culture |
there seems to be a BIG problem with this article’s title. All that your data subjects is that among your portfolio, the revenue among pre seed startups with office is 231% and without is 67%. These data are only usable in basic descriptive statistics to have an idea, and nowhere the generalization this blogpost announces. there may be exogen factors explaining the difference. On top of my head, the market size, the client persona, the amount of incumbents, the composition of the team (number of bizdev people vs sales) … what you may infer is correlation, but in no way casuation. Beware of the conclusion of this article if i may.
Good day,
Romaric.
It seems possible that is reflective of how early-stage or pre-product market fit the company is. Is it possible that very early startups that are still figuring out things and how to get to PMF are more likely to be remote, whereas companies that have some feeling of PMF are less likely to be remote at this stage?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3841457 This paper confirms your blogpost. Less work got done at home during Covid, and it took quite a bit longer to do it so people weren’t as efficient.
Thanks for publishing this, it indeed is an interesting start of a discussion. I like that you say “The data is suggestive but not conclusive.” There is a lot more research/data collection needed to determine causation vs correlation (we used to call in multicolinearization in grad school).
My initial thought is to find out how many employees, especially in seed/pre-seed companies, are working full time and their time zone difference. I have run across several early stage companies where one or more team members were students or working another gig to make ends meet while waiting for the next investment. These people often have restriictions in their ability to be in the office.
I have also observed people working across vast timezones and the nature of collaboration is less realtime.
I have a hunch that this additional data would create some interesting insights. Keep us posted.
“The survey sample size was 37 companies from the Reach Capital portfolio. That’s large enough to see patterns, but not large enough to generalize across all startups.”
This statement seems paradoxical, as how can one discern patterns in something that cannot be universally applied? While acknowledging the necessity for founder-only or pre-seeded companies to make swift decisions, it is contended that agility is derived from a company’s cultural disposition, rather than its physical presence. A culture of agility transcends the physical realm, meaning that regardless of whether employees share a room, campus or virtual platform, the company will possess a nimble quality, resulting in favorable growing conditions.
Could not agree more
I would guess that the higher performance and the option of physical presence are result of a highly execution-oriented founder, and not a direct correlation between both.
For the past seven years, I’ve been teaching startup founders how to establish and maintain a high performance organizational culture. As Steve discusses here, those informal face-to-face interactions, in the hallway before and after meetings, get togethers after work, “watercooler” and over the cubicle conversations, etc. play a key role in developing and maintaining the culture. Stories get told, values and norms discussed, and heroes are celebrated. Can those informal interactions take place remotely? Of course, but it ‘s one of the norms that needs to be established in that culture.
Another key element in creating and maintaining a high performance culture is leader social modeling, being able to observe leaders demonstrating and reinforcing the values and norms of the culture. Can this be demonstrated remotely? One way might be for organizational leaders to explain the whys of their decisions and plans in terms of organizational values and norms. Others would be to tell stories that illustrate those values and norms and publicly recognize these in others. But again, this would have to be an intentional norm within that culture.
After several years teaching entrepreneurship in a classroom environment, when I first started teaching remotely during the pandemic, I was concerned that the social bonds and peer mentoring that informally developed in the classroom environment would be difficult to re-create remotely. Much to my surprise, the opposite occurred. The virtual classroom became more like a group of people gathered around a campfire. The typical inhibitions about speaking out in class (either to me or each other) seemed to disappear in the virtual classroom, and as it did I gave them more time to interact with each other. As that level of interaction, which never occurred, I had the additional opportunity to coach them in mentoring. The virtual classroom is certainly a different environment that an early- or seed-stage startup, but it does suggest that the differential financial performance between in office and work from home might lie with the organizations leaders and their cultural leadership flexibility and not with the work from home employees.
Which VC sponsored this study?
As you well know Steve, success in startups is the sum of SO MANY moving parts – parts we can control, and parts we can’t such as luck.
How on earth can you isolate this one variable as being so heavily influential on revenue growth?
I call bullsh*t.
Is a study really needed to arrive at this obvious fact? The praise for remote work comes only from a personal gain aspect. People do not want to see the obvious.
The wokes and remotes are coming in hard on this article 🤣
I guess 37 is a very small number and revenue is not the only metric we should consider (though it is important one)… generally speaking while all of us can see benefits of face to face faster interaction etc… I better do some startup with fully remote team than no startup at all ))) and in many cases now we are not able to get to the same garage in the same city even if we wanted to. After all other studies shows that working from home benefits everyone, so we just need to learn (or create) more tools for early stage startups that they can communicate if more effective real time manner even if they are all in different parts of the world
My research shows that remote work is not going away for many reasons. This is the wrong question. At this point we need to get over the old model and ask the question how you get higher performance with remote work environments? I am sure people who loved horses and hated cars had lots of reasons why this new technology was bad for the farm.
Perhaps those same startups that have the funds to
afford an office (and all the associated costs) are more likely to survive to begin with.
This is further proven by the fact that once they get to the later stages the growth rate seems about the same.
Steve is providing an experienced view of a problem and situation. Many of you are looking for statistically valid thinking and reasoning to confirm his hypothesis. Some are looking at the issue of whether you can isololate and only consider the hypothesis when there are so many other factors that can impact these issues. Does anyone really believe and feel assured that economists, who use those same methods, to prove their points, are truly accurate? (Look up the term ceterus peribus, a common method to solidy a forecast and means… with all other factors being equal or constant).
In my experience evaluating companies for investment, acquisition, and disposition, or conducting due diligence before a transaction, I have come up with a greatly proven tool. “One is a statistic, and two is a trend!” looking at the success of my investments, strategy assessments, startup growth hacking, and business turnarounds, this paradigm has served me well.
1. It provides a viewpoint, from experience, that creates some directional accuracy to decide on a path forward and its ability to validate progress towards a goal,
2. The amount of energy, capital, resources, assets and other details that are used to derive this paradigm are exponentially cheaper/lower cost than statistically valid research in both value and risk metrics
3. Improves the time to market in decision making and iterating while you are getting closer to a real value creator
4. Can be more effective than the random stock pickings of a monkey that beat the investment professionals and hobbyists in returns for several years
I believe that Steve is pointing to a trend that real leaders will see as more obvious, worth reviewing and very worthwhile, if being questioned, to deal with as opposed to take the words from a vocal few. With experience, its very clear to see how we innovate, evolve, and learn from just listening to others in a sales pit, or be near other product managers in a marketing zone, or listening in on other customer service people to hear what they are saying and seeing what works and doesn’t work that make us all better over time. How can we be truly customer obsessed or employee centric without mixing with them regularly or frequently.
Its worth exploring and not ripping apart as a ridiculous assumption from only 37 companies in the research pool. (Its better than just the trend of two). And look how many decisions and judgements are being made today without real facts, understanding, or context surrounding single events…
Its Russian Disinformation, not a real laptop from Hunter Biden… said 37 Intelligence Executives from the Government with the utmost certainty…
Steve can be trusted to be directionally accurate and let others decide how and what they need to do to prove or disprove his hypothesis and assumptions on their own.
Thanks Steve. Important and timely subject.
As the world recovers from the pandemic, we’re witnessing a fascinating shift. An overreaction, perhaps—a recalibration—as businesses attempt to find their footing in a new reality. In time, an equilibrium will emerge; a blend of hybrid and remote work will become the norm, opening doors to endless possibilities.
Fascinating insight! The correlation between startups with in-office employees and accelerated growth is remarkable. This highlights the strategic advantage of fostering a physical work environment for certain businesses. An intriguing read for anyone navigating the startup landscape.