What is an appropriate level of development or R&D expense for a successful SaaS business? We looked at 144 SaaS IPOs at the time of IPO (since Dropbox in March 2018) to get a sense for how successful SaaS businesses allocate to R&D. The raw data and observations are below:
R&D spend is 24% of revenue. Leading up to the IPO, SaaS companies spent on median 24% of revenue on R&D. As you can see there is almost no deviation between the financials reported at IPO and 2 years prior. (medians were 23% and 23% respectively) For many of these companies, they were in their Series C or Series D two years prior to IPO, so it’s safe to say that spending a quarter of revenue on R&D is the right level for a SaaS business even at earlier stages. No matter where your SaaS business is in its lifecycle, as one founder put it to me, “managing a large and growing stack for a cloud application is damn tough” so you’re going to be spending materially on the stack no matter how fast you’re growing or how mature you are.
Median spend is $30mm. The median level of revenue at IPO for these SaaS businesses was $124mm (YOY growth of rev was 43%) with median R&D spend of $30mm. That’s a lot of dev talent.
The range of spend is wide. Hortonworks and Castlight spent more on R&D than they generated in revenue, with R&D/revenue of 110% and 117% respectively. On the other end, Paycom software spent only 2% of revenue on R&D, and that business did $108mm in revenue prior to IPO. Similarly, Tabula Rasa spent only 2% of revenue on R&D.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.
Enjoyed this post?
Share it using the links below.