R&D ROI stands as a crucial indicator of a company's ability to convert innovation investments into revenue growth. This metric, defined as the ratio of new revenue in the current year against the previous year's R&D expense, offers valuable insights into the efficiency and effectiveness of a company's spend on products and innovation.
Reaching Scale
Two of the most highly valued SaaS companies - Snowflake (SaaS Infrastructure) and Hubspot (SaaS application software) - achieved almost a $2.50 return on every $1 invested in R&D in the year before each went public (as sourced from S1 data in BenchmarkEngine Public).
R&D ROI in 2024
Let's look at current benchmarks for both revenues in the $100M-$500M stage as well as the stage before, for SaaS companies with revenues between $50M-$100M. Currently, SaaS companies with strong growth in the $100M-$500M range are averaging about $1.5 for every R&D dollar spent.
A broad benchmark (not filtered by growth rate) for SaaS in the $50M-$100M range, average R&D ROI comes in at $0.57 (as sourced from OPEXEngine’s private company benchmarks). For SaaS CFOs, this data point should serve as a wake-up call. While an R&D ROI of $2.5 might be difficult in today’s market, top quartile performers are achieving a return of $1.5 and more for every R&D dollar spent in the previous year.
In 2024, investors are setting valuations based on operational efficiency and R&D ROI is a good, easily comparable indicator. Private equity playbooks are focusing more and more on R&D returns as a way to assess and improve returns.
Improving R&D ROI starts with tracking this KPI, and optimizing operations. Successful SaaS companies maintain a laser focus on this metric as they scale. By doing so, you pave the way for reaching the next stage of growth and market competitiveness.
R&D ROI and Execution Effectiveness
In our recent white paper on R&D, we delve deeper into the broader concept of Execution Effectiveness. This approach focuses on turning strategy and talent into tangible outcomes, which directly impacts your R&D efficiency. This involves adopting best practices in software development, leveraging technology efficiently, actively tracking R&D resource allocations, and fostering a culture of quality and agility.
Read our white paper on SaaS R&D to learn more about best practices for R&D ROI.
