The predominant narrative among Silicon Valley start-ups has been: don’t open a second office until you have reached 100+ employees. Yes, there are tremendous advantages when everybody works out of one headquarters. However, the pressure of sky-high housing costs, salaries and competition for suitable candidates is causing start-ups and investors to rethink their approach to distributed teams.

Since 2011, residential rents in San Francisco have doubled and condo prices have quadrupled. And, prices will only continue to climb if and when SF-based companies like Uber, Lyft and Airbnb go public. A recent article “Bay Area Bay Area’s High Costs Drive Away Some Tech Firms”  details numerous examples of Silicon Valley start-ups that are moving their headquarters or opening a second location in places like Austin, Denver and Atlanta  – and many engineers, marketers, even executives are considering moving.

Among our Silicon Valley-based portfolio companies, not a single company past “A” does not have a distributed team.

When it comes to opening a second location, there are two common approaches:

One: Open a location built around specific and well-defined tasks, e.g. platform integration or customer service.

We have portfolio companies that are building teams in secondary cities in the U.S. for customer service and in Eastern Europe and India for development.

This is a great way to quickly scale non-core activities at much lower cost. And as long as the task at hand and the interface to headquarters are clearly defined, this approach is very effective. The biggest challenges are typically: a) finding a local leader that can manage and scale the teams and b) finding somebody in the company that can effectively manage the interface to HQ.

Two: Distribute team members across the board.

This approach is harder to pull off and most teams usually end up with a mix of headquarter and distributed team members. Physically separating a team usually works best in areas where a general playbook exists, such as sales & marketing, and where teams don’t need to get together for frequent brainstorming sessions.

For this method to work, the company needs to have the structure and communication channels of a distributed company. It’s not going to work if there are offline discussions happening at headquarters and team members in the second location are left in the dark or updated as an afterthought. Fortunately, the tools to set up communication for distributed teams have never been better (e.g. Slack, Zoom).

Last but not least, companies with distributed teams need to work harder to create a tight culture absent of regular offline interactions. Bringing everyone together in person on a regular basis and using online tools like Donut can help in this regard.

Given the ongoing talent war in Silicon Valley, we should continue to see an acceleration of companies looking to grow headcount elsewhere – although I imagine that teams that need to collaborate closely on a daily basis (early phases of product development) will still stay centralized. It will be interesting to watch how best practices and tools for distributed teams evolve over time.