The CEO of a SaaS startup, who has successfully undergone the "Fundability" assessment, was ready for the roadshow. During the due diligence process, an investor requested a detailed breakdown of the R&D expenses. The investor employed a compelling metaphor to distinguish between the two components, stating that Research enables the company to catch the next "wave" of innovation, while Development ensures that the company remains on the current wave for as long as possible.
In a SaaS startup, the Research efforts generate new insights, ideas, and theories that can shape and inform future development efforts. On the other hand, Development activities usually involve designing and implementing new product features, improving existing features, and troubleshooting bugs and software glitches. Additionally, it encompasses an exhaustive testing and quality assurance regimen to guarantee that the software solution caters to the specific requirements of its target user base.
When segregating the "R" and "D" functions, creating a concise and transparent framework for apportioning the R&D expenses to the relevant categories is advisable. The majority of startups do not typically undertake this exercise. However, generating this type of overview can substantially assist in augmenting internal focus and efficacy in ongoing development efforts, as well as enhancing the "Equity Story".
Table I serves as a quick “cheat sheet” that can assist in distinguishing between Research and Development activities. By posing specific queries such as "What proportion of a developer's job involves long-term versus short-term initiatives?" or "What is the balance between improving customer value and architecture design?" Startups can better allocate expenses between "R" and "D," encompassing both in-house personnel costs and third-party expenditures.
After analyzing your resource allocation and projecting future needs, you'll receive a Table II-style table to help guide your planning. This example of Research and Development allocation within R&D, offers distinct insights into the company's product roadmap, and opens up strategic and operational inquiries, such as:
- Is it prudent to allocate only 3% of R&D expenses towards Research in 2024?
- Is the development amount aligns with the product's current and forthcoming waves?
- Could outsourcing a portion of development be a viable option, given that it falls outside core technology?
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By conducting an analysis of the "R" versus "D" split, CEO can optimize resource allocation, evaluate the feasibility of future product “waves”, uncover strategic blind spots, and add another layer of depth to the startup's "Equity Story".
