Operating Expense Benchmarks for SaaS Startups (S&M, R&D, G&A)

Parsa Saljoughian
Dec 4, 2019 · 5 min read
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Follow me on Twitter for my thoughts on startups and venture capital.

I’ve written posts in the past aimed at helping founders benchmark their revenue growth and sales efficiency. This new post is focused on helping benchmark SaaS operating expenses (S&M, G&A, R&D) in more detail. Are your expenses in-line with other peers at your scale?

Historically, I would guide founders to benchmark their growth and expenses by using the “Rule of 40” which is a formula to analyze the health of a software business. Simply put, your growth rate and profit margin should add up to at least 40%. While this is a helpful rule of thumb, it is fairly high-level and doesn’t differentiate between costs allocated to different parts of the business. If you aren’t meeting the “Rule of 40” benchmark, how do you know where to better optimize? I recommend combining the “Rule of 40" with the benchmarks I’ve created below.

A quick overview of the methodology:

  • Gathered historical GAAP revenue and operating expense detail (S&M, R&D, G&A) from 100+ enterprise SaaS IPOs between 2010 and 2019. The data excludes stock-based compensation expenses.
  • Calculated expense ratios (“Y”) for each revenue data point (“X”).
  • Estimated percentiles (75th, 50th, 25th) from power trendlines based on a regression of the data.

Sales & Marketing Benchmarking

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S&M Efficiency Targets

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Research & Development Benchmarking

“To remain competitive, we must continue to develop new features, integrations, capabilities, and enhancements to Slack… Our failure to maintain adequate R&D resources or to compete effectively with the R&D programs of our competitors would give an advantage to such competitors and may harm our business, results of operations, and financial condition.”

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R&D Efficiency Targets

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Returning to our example, when Slack generated $105M in revenue, the company spent 59% of sales on R&D which benchmarks well below the 25th percentile. However, Slack’s R&D expenses are somewhat justified given the growth. The company grew revenue 110% year-over-year in 2017, representing a 1.9x multiple (110% / 59%) which is near the 50th percentile of efficiency.

A few caveats: 1) The data here is noisier than for S&M efficiency, 2) these ratios do not control for spend in other areas which may also contribute to that growth, 3) the data doesn’t account neatly for investments that may take years to pay-off.

If anyone with a statistics background wants to volunteer some time to help me with a follow-up regression project, email me at parsa@ivp.com!

General & Administrative Benchmarking

When evaluating G&A spend, make sure to ensure that the spend is associated with and directly impacts business results. Do these investments improve a company’s productivity and efficiency on a daily basis?

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Final Thoughts

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parsa.vc

Investor at late-stage VC firm, IVP.

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