SaaS companies spend 23% of revenue on R&D

Building out, maintaining, and upgrading a technology stack requires a constant commitment to developers and engineers, so what is an appropriate level of development or R&D expense for a successful SaaS business? We looked at 74 publicly traded SaaS businesses at the time of IPO and 2 years prior to get a sense for how successful SaaS businesses allocate to R&D.  The raw data and observations are below:



R&D spend is 23% of revenue.  Leading up to the IPO, SaaS companies spent on median 23% 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 22% and 23% respectively)   For many of these companies, they were in their Series B or Series C 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 $20mm.  The median level of revenue at IPO for these SaaS businesses was $99mm so with 23% of revenue going to R&D, that means R&D spend was $20mm on median at the time of IPO.  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.


Smaller businesses spend more.  Not surprisingly, given the fixed cost nature of R&D, the 10 smallest companies by revenue spent 41% of revenue on R&D while the 10 largest spent 24%, closer to the overall median.  Smaller businesses are likely going to have to expend a larger percent of revenue on R&D than their more mature peers.  Note that those smaller businesses are faster growing, with average revenue growth of 127% for the 10 smallest on the list versus 47% for the 10 largest.


Visit us at