Five public software companies spent more on R&D than sales in 2016. Should they be proud?

May 24, 2017

One of my favorite charts for public companies is what I call a "growth efficiency" chart (I've used it on this blog multiple times). It asks a simple question: how much growth is each company generating, relative to its current profitability? Here's what the chart looks like for the public companies I follow, as of today:

 

 

 

All else equal, it is better to be above the line like Shopify, MuleSoft, Okta, Twilio and ServiceNow, rather than below it (if you disagree with that, let's chat). However one limitation of this chart is that it gives us a simplistic, uni-variate view of how SaaS companies are spending their money. To go a bit deeper, I use a different chart that breaks down spending into R&D and Sales and Marketing (I exclude G&A, primarily because it is a two dimensional world we live in). Both are included as a % of overall revenues. To add another layer, I've colorized the chart by growth rate (greener => higher growth). 

 

 

Takeaways from looking at the world this way:

 

1) Hortonworks spends lots of money on everything.

2) Atlassian is a big outlier, spending far more on R&D than sales and marketing. This makes lots of sense, as the company brags about not employing salespeople. 

3) Overall only 5 of the 36 companies listed spend more on R&D than sales and marketing: WDAY, TEAM, TWLO, GWRE and ELLI. 

4) Shopify is growing remarkably fast for its low spending (a green ticker in a see of red/orange).

5) All in, on average companies spend 46% of revenue on Sales and Marketing and 24% on R&D.

 

The last one, of course, is a surprise to no one who has studied SaaS companies- the go-to-market is absolutely crucial, and almost always costs way more than building the product once a company has scaled.

 

Should "below the liners" be proud? Not necessarily.

 

A fascinating question is whether companies below the dotted line (spending more on R&D than sales) should be proud of this or not: the temptation is obvious, as spending more on product "feels better" than a big marketing budget. However I disagree- the right thing to do is whatever is best for the business, and a dollar invested is a dollar invested. Some of my favorite SaaS companies (and largest personal investments) are way above the line- and I wouldn't have it any other way. 

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