I think it's definitely possible not to have office space. However, working without ever meeting any other people in person is much more difficult (but not impossible).
I worked in a startup where we didn't have an office but we were all in the same city so we held meetings in cafes or at my place. The main inconvenience of not having an office was meeting with clients, but we worked around that either by meeting at their premises or again in cafes. Whether that's going to work for you will depend on the type of clients you have.
As far as distributed work goes, I think there was a lot of value in the meetings we had in person, and it would have been much more difficult to work things out by Skype or email (tried that at another company so speaking from experience). I could also easily meet up with the other developer to knock up a spec or for pair programming, which was invaluable. The other thing is that it takes more discipline to work from home, so success of distributed work will depend on the people you work with.
My personal preference is to stay away from offices, so I hope you can make it work!
A few thoughts:
The biggest problem it's about how the learning process of the employees. It's very difficult to teach about the market, technical information or even create a company culture spending little time together.
I think a distributed team works only if your employees have very good experience in the market and the technical aspects of your product, and this usually means expensive people.
37signals have had quite a bit of success in implementing this strategy! You could read more on their blogs / REWORK
I've run a hot-desking centre and fund-raised (successfully) for an incubator. My observation is that there are two counter-trends.
Fully remote teams seem to drain energy and increase stress. Weekly or fortnightly physical meetings seem to me the bare minimum. Actually, having been involved in facilitating a local Jelly, that's true even for freelancers and solo projects!
But closed-door startup teams very easily get stuck in ruts - I've seen great teams spend 6-12 months in blind alleys because their working arrangements kept them out of the way of external critique.
So anyone trying to work fully remotely is in my estimate doubling the time to achieve meaningful objectives than a team meeting physically at least fortnightly. And conversely, if I had a team working space I'd only use it for concentrated 1-2 week work sprints, and mix it up between-times.
From my own experience it is very difficult despite the existence of technologies addressing this issue. I can estimate that the productivity is half of the one in same place and same location
I have a team of 3, not including me. I last saw my co-founder 4 years ago and have never physically met the other two guys (or even spoken to them by voice), even though we're all in Europe.
Pick good, self-motivating, focused people and the remote working problems don't turn up. Manage them so that not more than 2-3 days passes without some conversation. As an aside, I've tested out more guys than I currently have full-time, none of the under-30s had the aptitude I needed. Not being ageist, that's just how it is.
In my current FT job I run a team of programmers that are scattered across the US and none of us have met in person. With that said, we have had a very high success rate, given by our customer, because we meet almost every other day on a teleconference and discuss the issues and tasks at hand. I also hand picked the developers and tech writers based on past experience, references, attitude and ability to work in a disconnected environment. For the developers I also requested code samples from past projects, if they were slow or unwilling to give them then they were disqualified.
Just staying on top of it all is the key I think with regular meetings, email communication and possibly the occasional video chat but we haven't really done any of those.
Hope this helps,
Tim - VA