Why software CEOs are building manufacturing companies

Steve Allan, head of SVB Analytics, presented at SVB’s security summit in Boston this week. He had a great slide, which I surreptitiously photographed:

SVB-engineering-to-sales-marketing-spend-ratio

What are we looking at? Steve has built an amazing dataset of private company income statements. This metric is S&M to R&D expense ratio. The cross over point is around $1M in revenue.

Think about what this means: when you reach $1M in revenue, you start spending more on sales & marketing than you do on engineering. You go from being a product company to a sales company. You shift the organization’s focus from developing software to selling software.

And here’s the kicker – you never go back. Successful companies just spend more and more on S&M, fueled by profitable revenue they can reinvest in the business. Successful software companies are manufacturing companies. They manufacture revenue.

For what it’s worth, Steve made a slightly different point. He says the big guys ($100M+ revenue) are the commercialization engines, and are buying up early technologies and pushing them through mature sales teams. But if you can manufacture revenue for yourself (i.e., stay independent), you’ll accrete much more equity value.

One thought on “Why software CEOs are building manufacturing companies

  1. Pingback: Endpoint security’s funding problem | belay.io

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