We did an analysis looking at product/R&D spend at 123 successful startups that ultimately exited via IPO. Specifically, we compared product spend to revenue in the full year prior to IPO, the year before that, and when available 2 years prior so we could see trends. What we found was interesting. The data and observations are below:
SaaS. The typical rule in SaaS is for a growing and mature software company, 40% of revenue is spent on sales & marketing, 20% is spent on product/R&D, and 20% is spent on G&A. Put simply, it’s the rule of “40/20/20” and our analysis showed it to be true at least for the product side. In the last full year prior to IPO, product spend was 23% of revenue on median, 22% the year before that, and 23% two years before IPO. In the year of IPO/exit, the 73 SaaS businesses we looked at had on median $96mm of revenue and were growing 54% year over year. In the 2 years prior, they had on median $40mm of revenue so these are larger, mature SaaS businesses where the rule of 20 for product spend seems to apply.
Social Media. The product spend in Social Media was the heaviest in the group, which frankly isn’t surprising as consumers can be a fickle bunch that demand constant product improvement. In the year prior to IPO these companies spent on median 32% of revenue on product/R&D. While Snapchat spent the most as a percent of revenue (45%), Facebook outspent them by nearly double, with R&D expense of $388mm in the year prior to exit versus only $184mm for Snap.
Other sectors. The rest of the companies shown spent much less of their revenue on product. For instance, Marketplaces on median spent only 10% of revenue on product, Content Distributors spent 18%, E-commerce spent 15%, and hardware spent only 13%. There are outliers of course like Expedia (55%), Zillow (35%), and Yelp (65%), but the data does seem to be pretty consistent within industries.
During the lifecycle of your startup, the amount spent on product/R&D will vary wildly. For instance, when you’re first starting out, you’ll likely spend every dollar you have on product and it’s not uncommon for product spend to exceed 100% of revenue generated. As your business matures though (2 and 3 years out), product spend will start to look more normal as revenue, G&A, and sales & marketing spend grow. Hopefully the analysis above provides some context for how your larger peers spend and what trend you can expect as you become larger.
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