The Right Level of Development Cost for a SaaS Business

At DAN Fund we look at a number of SaaS startups every day.  These companies have varying levels of development/R&D costs which brings up the question: what is an appropriate level of development or R&D expense for a SaaS business? We looked at 15 of the most well-known publicly traded SaaS businesses to get a sense for what bigger technology players spend.  The raw data is below and the results are as follows:

 

-The 15 companies we looked at included the likes of Salesforce, Marketo, Hubspot, and BazaarVoice. The median and average 2015 revenue of these companies was $279mm and $925mm, with the median and average software development cost (includes expensed development and capitalized software costs) being $67mm and $212mm.  On a percent of revenue basis, development cost as a percent of revenue was a median of 26% and average of 29%. 

 

-Hortonworks spends the most on development as a percent of revenue, at 55%.  Lifelock spends the least at only 12%. 

 

$ in MM

 

 

 

Capitalized

R&D+Software/

Company

Ticker

Revenue

R&D

Software

Revenue

Salesforce

CRM

$6,205

$946

$50

16%

Hubspot

HUBS

$182

$32

$4

20%

Box Inc

BOX

$303

$103

$0

34%

Lifelock

LOCK

$587

$69

$0

12%

Marketo

MKTO

$184

$39

$1

22%

Netsuite

N

$741

$136

$3

19%

Wix.com

WIX

$80

$30

$0

37%

Workday

WDAY

$1,162

$470

$0

40%

ZenDesk

ZEN

$209

$63

$5

32%

BazaarVoice

BV

$191

$38

$0

20%

Broadsoft

BSFT

$279

$61

$0

22%

DemandWare

DWRE

$237

$65

$2

28%

Hortonworks

HDP

$122

$67

$0

55%

LinkedIn

LNKD

$2,990

$776

$0

26%

Splunk

SPLK

$405

$215

$0

53%

 

 

 

 

 

 

Average

 

$925

$207

$4

29%

Median

 

$279

$67

$0

26%

 

While none of the businesses above are startups, they are high growth SaaS companies that provide a good baseline for what a steady state level of development cost relative to revenue should be.  I would argue that based on the data, if you’re spending ~26% of revenue on development/R&D, you’re in line with peers which is good.  If you’re appreciably above 26% and a Series A company or later, you better be doing more than just improvint the product or doing upgrades: you've got to be adding significant new features to the product.   

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