We did an analysis looking at product and R&D spend at 123 successful startups that ultimately exited via IPO to see what your startup should be spending on product.
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Specifically, to see trends, we compared product spend to revenue in the full year prior to IPO, the year before that, and, when available, two years prior to exiting.
The data and observations are below.
What should a SaaS company spend on product?
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. Our analysis showed this formula to be true at least for the product side.
In the last full year prior to IPO, product spend was 23% of revenue on the median, 22% the year before that, and 23% two years before IPO. The year when the SaaS company exited, the 73 SaaS businesses we looked at had on a median $96mm of revenue and were growing 54% year over year.
In the two years prior, they had on the median $40mm of revenue so these are larger, mature SaaS businesses where the rule of 20 for product spend seems to apply.
What should a Social Media company spend on product?
The product spend for Social Media companies that exited was the heaviest in the group, which frankly isn’t surprising as consumers can be a fickle bunch that demands constant product improvement.
In the year prior to exiting, Social Media 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. This was in comparison to only $184mm for Snap.
What should other startups spend on product?
The rest of the companies shown spent much less of their revenue on product. For instance, Marketplace companies on the median spent only 10% of revenue on product, Content distributors spent 18%, E-commerce companies spent 15%, and Hardware companies spent only 13%.
There are outliers of companies spending money on product include Expedia (55%), Zillow (35%), and Yelp (65%). However, the data does seem to be pretty consistent within industries.
So how much should your company spend on product?
During the lifecycle of your startup, the amount spent on product and research and development 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 to grow.
Hopefully, the analysis above provides some context for how your larger peers spend and what trend you can expect as you become larger.
Sammy is a co-founder of Blossom Street Ventures. They invest in companies with run rate revenue of $2mm+ and year over year growth of 50%+. We can commit in 3 weeks and our check is $1mm. Email Sammy directly at sammy@blossomstreetventures.com.
