Building out, maintaining, and upgrading a technology stack requires a constant commitment to developers and engineers. What is an appropriate level of development or R&D expense for a successful SaaS business? We looked at 140 SaaS IPOs at the time of IPO 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 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 $29mm. The median level of revenue at IPO for these SaaS businesses was $123mm so with 24% of revenue going to R&D, that means R&D spend was $29mm 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.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at firstname.lastname@example.org. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ 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, 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.