To return to the office or not? That seems to be one of the biggest existential questions facing companies big and small as they emerge from the pandemic.
But even as Elon Musk mandates Twitter and Tesla employees show up to work at least 40 hours a week, and Mayor London Breed has urged workers to “take the pajamas off”—are venture-capital-backed startups actually flocking back to centers of commerce, like Manhattan or Downtown San Francisco?
Kruze Consulting, a San Francisco-based accounting firm for startups, recently crunched the numbers and found that while the percentage of VC-funded startups renting office space has returned to pre-pandemic levels nationally, their expenditures on rent have decreased dramatically since the start of Covid—and San Francisco follows the trend.
Across the board, office rent dropped from an average of 7% of a startup’s total expenses in January 2020 to 3% at the start of 2023, with San Francisco and the greater Bay Area following in step with the decline.
But startups in San Francisco spent considerably less on rent compared with startups in New York, Texas, Florida and other parts of California. For instance, startups in New York allocated an average of 3.4% of their expenses to rent, while SF startups allocated only 2.2%. In contrast, startups in other parts of California allocated 3.8% of expenses to rent.
So, what accounts for the discrepancy in startup rent spending?
Healy Jones, Kruze’s vice president of financial planning and analysis, theorizes that a depressed commercial real estate market and San Francisco’s embrace of remote and hybrid work may be the cause of the decreased spending on rent. Even though the city has the highest percentage of startups with a rent expense (67%), Jones has noticed that startups appear to be moving away from larger, more traditional commercial office spaces and toward smaller, shared or flexible workspaces, like WeWork. Because of this, he predicts that tech startups won’t be the industry to revive beleaguered Downtown San Francisco.
“I don't think you should look to tech startups to save San Francisco Downtown,” Jones said. “Startups don't have big offices, so they just can't take all that space.”
He hypothesizes that downtown centers close to transit, like Downtown San Mateo, or funkier and potentially cheaper SF neighborhoods, could be more attractive to early-stage startups.
“I don't think most founders want to have their office in this giant, nameless building,” Jones said.
Among Kruze’s other findings: Fully remote startups grew 2.7 times faster than ones with offices and fully remote startups also started earning revenue about one-month faster than startups with an office. While it does take an average of five months for a startup to start generating revenue, fully remote startups took an average of 4.5 months to start making money versus 5.6 months for startups with an office, according to Kruze’s number-crunching.
“I feel like that at least puts a pin in the bubble that early founders have to be clustered together super close to actually be able to develop something,” Jones said.
Jones has a few theories as to why office-less startups might generate revenue faster, including the ability to hire top talent regardless of geographic location and cost savings on rent, especially in expensive markets like San Francisco, leading to more money to spend on new hires.
“If you have a 10% cost savings, suddenly you have an extra person you can hire and more hands make lighter work,” Jones said.
“I'm not optimistic about office space,” he added. “I wouldn't be an office space investor right now.”
That being said, Jones doesn’t think that the lack of a San Francisco HQ will stop startups from hiring Bay Area-based talent even if companies might be able to find cheaper hires elsewhere because the Bay remains a hub of cutting-edge tech talent.
“I think that if you were a startup executive somewhere else in the country, in the Midwest, [...] you might balk at the extra expense of a San Francisco person, but you might also realize that [...] there's a lot of talent in this area, so you might be willing to give it a shot,” he said.
Jones also observes that a startup with no office space allows employees, particularly knowledge workers whose deliverables might require intense focus or creativity, to pump out lines of code or paragraphs of analysis with fewer distractions.
“I think the open office plan is actually pretty, pretty miserable for certain types of workers,” Jones said. “And developers are probably in that bucket.”
Kara Egan, CEO of Teal Health, a San Francisco-based startup that delivers at-home cervical cancer screening kits, doesn’t foresee leasing a traditional office space anytime soon for her company, which she founded during the pandemic. While she works out of an office at Tides collaborative workspace in the Presidio herself, she only expects her team—which is distributed across the Bay Area and throughout the country—to come into the flexible workspace for quarterly on-site meetings.
Before the pandemic, she wouldn’t have thought about creating a company without a traditional office space, but now she can’t imagine having a company that isn’t remote-first and appreciates the flexibility of a space, like Tides, to adjust to her team’s needs.
She says the benefits of a remote-friendly workplace outweigh any potential drawbacks, including allowing her company to hire the best talent from around the country, giving greater flexibility to working parents and creating a happier, more productive work culture overall. While cost savings on commercial rent are a nice perk, Egan says having a remote-first company without a traditional office space is more about creating a work culture that supports employees’ preferences and ability to produce their best work while supporting flexible work schedules and work-life balance.
“I think there's a lot more to gain in terms of employee satisfaction and employee productivity,” she said. “Most people are remote so spending on a larger and more traditional office setting doesn't really align with the interests of our employees.”