Let's consider a more extreme version of the question. Do startups work well when all development is outsourced?
Assume you have a very capable outsourced team. You will naturally have more difficulty communicating with the external team, both in terms of expressing requirements to them and in getting feedback from them. On the other hand, you might get better people and be able to work with them on a more flexible basis. If you can understand and communicate your requirements in written form, and they don't change very rapidly, this may be a worthwhile trade-off. If you underestimate your product's rate of change, or overestimate your ability to communicate requirements, your life will suck. This is extensively documented in the lore of outsourcing.
Distributed teams are incrementally better than outsourced. You get better people, there is less turnover, and the team members are focused on your project. You might get decent communication if everyone uses chat and a wiki. But you'll still have to work hard to communicate, and you'll probably misjudge your difficulty/capability ratio. You're essentially copying the model of open source software development, and should take note of where that model has been successful.
Remote work is great because developers can focus for hours at a time without interruption. If you are at a stage where most people are working on big chunks of implementation or fixing bugs, this is a huge productivity boost. The other major benefit is that you can hire great people who are blocked from most tech jobs by their location and/or family obligations.
Remote work sucks because communication is more difficult. A group brainstorming session conducted by phone is, optimistically, one fifth as productive as an in-person session. If you are trying to generate ideas or generate a specification, you should expect this to be very difficult to do by phone.
As far as I can tell, having worked for about 2.5 years in a distributed tech company, the determining criterion of success in distributed work environments is specialization. If you have separate people in charge of design, marketing, and coding, it works well. But this often isn't the case in startups; sometimes your best design ideas come from some hacker with an offhand interest in usability, or you decide you can't find a good marketing person and you'll just have everyone pitch in a bit. Those sorts of group-work decisions imply a communication cost, and if you don't realize that your team will feel strangely hobbled and directionless.