We looked at the R&D spend of tech companies at IPO and in years prior to answer the question ‘what is the right level of spend on R&D’. The data is below and varies by industry.
SaaS spend is consistently a quarter 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 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. The median level of revenue at IPO for these SaaS businesses was $108mm so with 24% of revenue going to R&D, that means R&D spend was ~$22mm on median at the time of IPO. That’s a lot of dev talent.
Social Media. On median, social media companies spent $151mm on R&D prior to IPO which was 32% of revenue. No industry spent as much on R&D in terms of absolute dollars or percent of revenue. Snapchat was especially high spending 45% of revenue prior to IPO and 140% of revenue the year prior.
Marketplaces. On median, marketplaces spent 19% of revenue on R&D prior to IPO and 22% the year before that. Note the Real Real was at a whopping 51%.
Ride share. Uber and Lyft spent only 13% and 14% of revenue on R&D respectively.
E-commerce. Interestingly, most of the companies in this sector don’t break out R&D or tech spend.
Hardware. The R&D spend in hardware is surprisingly low relative to revenue, hovering at 7%. Surprisingly the spend as a percent of revenue hasn’t changed much over time, as Apple’s spend was in line with more recent peers like Sonos. That said, Apple spent $7.2mm on R&D prior to IPO whereas Sonos spent $124mm.
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