R&D spend should be 24% of SaaS revenue | Software Venture Capital | SaaS VC (2024)

FAQs

What percentage of revenue is R&D for SaaS? ›

Now, it's time to look at the industry numbers and search for a definitive answer about how much you should spend on building and maintaining a SaaS product. There's a rule of thumb: 'Sales & Marketing' usually receives 40% of revenue, 'Product and R&D' gets 20%, and General & Administrative gets 20%.

On average, leading software companies invest between 10–15% of their revenue in R&D.

Software companies live by the mantra of “innovate or die.” As a result, research and development programs are among their most indispensable functions. The average software company spends about 20% of revenue on R&D; some spend more than 40%.

Mid-sized (Series C+) SaaS companies on a fast growth trajectory have an R&D productivity measure between 2 – 3. World class R&D productivity is closer to 10+. This means that companies with a slower growth trajectory will recoup 2 or 3 times their R&D spend on new products.

Industry benchmarks indicate that SaaS companies spend 10-14% of Revenue or 40% of OPEX on sales and marketing. Fast-growing SaaS companies can increase this spend to up to 50% of OPEX.

After good ideas are identified and business cases are built, a product innovation budget should grow to include product development, launch and ongoing improvement of products. This secondary infusion of resources can range anywhere from five to thirty percent of revenue, depending on the types of products built.

The general rule of thumb for spending in SaaS is 40/40/20. In other words, 40% of operating expense should be on R&D, 40% should be on sales and marketing, and 20% should be on G&A. Rules of thumb are just generalizations, so we wanted to see what the data really is.

The 2 most clear metrics to assess in R&D are inputs and outputs. Input can usually be defined as the time or cost spent on R&D. Output on the other hand can be more complex. It must summarise what the department produces - the results of successful projects.

Engineering utilization, productivity and throughput are among the most important metrics for measuring R&D performance. If you want to improve your R&D capability, focus on these three metrics.

Most innovative companies budget 5 to 15 % toward R&D spend. However, there is no fixed percentage to define how much R&D spend is appropriate for a startup. "It is a function of the nature of business, the market they are going after and how they plan to go about it.

How much does Big Tech spend on R&D? ›

The 10 largest companies listed on Nasdaq100 spent a whopping $222 billion on R&D in 2022. The Big Tech are also the biggest spenders on R&D. R&D spending has also been growing - It increased by 28.4% since 2021 and is 6.5x higher than 10 years ago.

R&D expenses are those a company spends researching and developing new products or improving their current offerings. R&D expenses can include costs associated with the development of the concept, design, and testing of new products or improvement of existing products.

SaaS KPI Metric: Rule of 40 Guideline by Brad Feld

In recent years, the 40% rule has gained widespread usage as a popularized measure of growth by SaaS investors. The Rule of 40 states that if a company's revenue growth rate were to be added to its profit margin, the total should exceed 40%.

A high and positive gross margin means you're generating more revenue than you're spending. According to Software Equity Group, a good gross margin for a SaaS company is 75%+.

According to a study by Bessemer Venture Partners, the average monthly growth rate for successful SaaS startups is 7-8%. This means that a company's revenue is increasing by 7-8% each month.

As we'll see from the figures below, marketing budgets for successful and established SaaS companies sit at an average of around 50% of their revenue. But this percentage will vary depending on the kind of services you sell, your volume of sales, and your profit.

SaaS companies need to have a combined percentage growth rate and percentage profit margin of over 40% to be considered a sound investment. For example, if your revenue growth is 25% and your profit margin is 20%, then the rule of 40 number is 45%.

However, the subscription remains the largest revenue source for the SaaS Company. You develop software and then charge a client monthly, quarterly, or annually for consuming your service. Earning decent income from the subscription revenue stream could not be commercially viable.

2023 Public SaaS Valuation Multiples

The revenue multiple is based on annualized current run-rate revenue, not trailing or projected revenue. We believe run-rate revenue is the most accurate and objective measure of the current scale of the business and, therefore, the best measure to be used for valuation purposes.