For many founders, especially those that haven’t managed product & engineering teams before, the R&D function can feel a bit like a black box.
- Am I spending the right amount on product and engineering?
- Am I getting the most out of my spend?
- Are my heads of product and engineering leading effective and efficient orgs
These questions are nearly universal, and for good reason. R&D doesn’t always have an immediate ROI, and it’s harder to measure than sales funnels and bookings.
Within a fully developed R&D team, product typically sets the product vision and ensures the company builds what customers need. Engineering builds and maintains the products. Early on, a founder may lead one or both of these functions. While there is a lot of collaboration on the product roadmap, the Product team typically owns it. There can and often should be a healthy tension between the two functions as they work together to balance and prioritize product features vs. the engineering work required to deliver them.
Benchmarks: There is no one-size-fits-all approach to benchmarking startup R&D spend. Spend depends on factors like stage, product technical complexity, R&D org structure, and the location of R&D employees (onshore/offshore). It is important to consider each of these when evaluating your company against others. That said, there are several helpful public resources for benchmarking (links below). These resources taken together indicate that startup R&D spend by stage is generally:
- Pre-Seed/Seed: 40-60% as a percentage of ARR
- Early Stage: 30-50%
- Late Stage: 20-40%
Should I be concerned if I’m outside these ranges? Not necessarily. There are perfectly good reasons for companies to be above or below the ranges noted above. For example, one Vocap portfolio company deliberately underspent the benchmark range in the early days to focus on validating demand and building a distribution engine. Once they released the relatively simple v1 product, they were able to iterate rapidly based on market feedback and then increased R&D investment to deepen the product.
This approach isn’t always possible, especially in enterprise software. Another Vocap portfolio company is outspending the benchmark range due to the mission critical nature of its products and the considerable breadth required to achieve parity with existing competitors.
Founders should only be concerned if spend varies considerably from the benchmark and you do not know why. There are both strategic (e.g. should we be putting our full organizational might behind new product development right now?) and execution (e.g. are the product and engineering functions operating optimally?) questions to consider. The execution half of the equation is often a black box. If that is the case in your company, there are questions to ask to truly discern R&D effectiveness.
Questions to ask: Revenue-related metrics are informative and useful but can be clouded by factors outside of the R&D org’s control. A data-driven analysis of other KPIs should be put in place to help assess R&D org effectiveness. While these can vary by product type, typical product and engineering KPIs include:
- Customer Retention Rate
- User Session Length
- User Session Frequency
- User Actions per Session
- Time from Login to Usage
- Velocity (measured on sprint/point/feature per time period basis)
- Uptime %
- New Bugs/Critical Bugs per Week and/or Critical Bug % (of Total Bugs)
- Code Churn over Time Period
Note: The above are illustrative metrics that will evolve over time as company/product matures. Product KPIs should focus on user behavior and customer value. Engineering KPIs should focus on code quality, availability, and efficiency.
If you aren’t already regularly reviewing these metrics, ask your team to start reporting them – on an aggregated and individual basis – to understand if your R&D org is producing value in your products and operating efficiently. (Vocap Tip: when you see outliers in the product data, contact those users to understand their behavior.) Relative spend level and KPI trending should inform a healthy discussion between the CEO and R&D leaders.
In summary: R&D spend (vs. benchmarks), basic KPI analysis, and your own business context will allow you to answer the key R&D function questions.