The general rule of thumb for spending in SaaS is 40/40/20/20. Explained further, R&D spend should be 40% of revenue, sales and marketing should be 40% of revenue, 20% should be COGS, and 20% G&A. Rules of thumb are just generalizations, so we wanted to see what the data really is. 75 SaaS companies have gone public since October 2017 and below are their margins. Perhaps the rule of thumb should be 30/50/20/30. The data is below.
Why we use recent IPO’s. The reason we like looking at companies at the time of IPO is because: i) an IPO is an exit event that receives intense investor scrutiny; and ii) companies at IPO are closer to the Series A to Series D companies that are the target of this article.
30/50/20/30. On median, R&D is 26% of revenue, sales and marketing is 48%, 21% is G&A, and COGS are 28%. So we believe “30/50/20/30” on R&D/S&M/G&A/COGS may be more accurate.
There are outliers. Rules of thumb are just general guidelines, and sure enough there are significant outliers. 45% of Dropbox’s spend was on R&D while only 13% of Zoom’s spend was on R&D. Similarly, 73% of Zoom’s spend was on sales & marketing, Rubrik spent 77%, Dropbox spent only 37% on S&M, and Bill.com spent 28% on S&M. Snowflake spent a whopping 130% of revenue on S&M and indeed their EBITDA margin is the worst of the bunch at -192%.
Don’t let G&A be the outlier. Obviously you should minimize spend on G&A. Building product and selling it should be the priorities. Cloudflare, Sendgrid, Snowflake, and Palantir are violators of this mantra (they spend 36%, 34%, and 37%, and 43% of opex on G&A).
COGS isn’t 20%. The other rule of thumb that needs to be debunked is that COGS is 20% of revenue. The median and averages are 28% and 29%. Below you can see percent of revenue calculations.
Visit us at blossomstreetventures.com for more SaaS data and blogs. Email the author at sammy@blossomstreetventures.com.
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