We looked at the R&D spend of SaaS 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.
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 23% 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 $123mm with YOY growth of 49% on median.
Even the latest IPO’s are at ~25%. Looking at the past 20 IPO’s, the median and average R&D spend are 25% and 27% respectively.
There are standouts. Gitlab spends 70% of revenue on R&D. Samsara spends 40%. Blend spends 58%. The point is, while medians and averages are valuable, spend what’s right for you.
Visit us at blossomstreetventures.com and email me directly at firstname.lastname@example.org. All founders and funds welcome! We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.