<p>www.saas-capital.com SAAS SPENDING PAGE 1 HOW DO TOP-PERFORMING SAAS COMPANIES SPEND THEIR MONEY? How SaaS companies spend their money varies based on their specific product, size, and market. However, a detailed analysis from our survey of over 700 private SaaS businesses reveals noteworthy patterns among top-performing businesses that all SaaS company leaders should be cognizant of. We used our survey data to compare the spending patterns of top-performing growth+profitability1 companies to the spending patterns of bottom- performing businesses. To the right is a graph showing the difference in spending by category between the top quartile companies and the bottom quartile companies. Top-performing SaaS companies are finding ways to spend significantly less on direct cost of goods sold (hosting, support, consulting, third party software), and are also spending less on overhead relative to their peers. They are reinvesting those dollars into the areas that more directly touch the customer and drive revenue: sales, marketing, customer success, and product. Many times, the product itself dictates CoGS and is difficult to change. That said, those businesses that have lower direct costs appear to be able to re- direct those dollars into efficient growth. Breaking the top and bottom performers down based on the size of their revenue (ARR) reveals additional insights. SaaS businesses below $10 million in ARR (the bottom two groups) mirrored the general trends we observed for all SaaS businesses regardless of size – top performers have lower overhead and CoGS and spend more on sales and marketing. Looking across all revenue sizes yields additional insights: 1. As top performers scale, they invest more and more in customer success relative to their less successful peers. These companies appear to recognize the increasing importance of retention as their business matures and the percent of revenue coming from existing customers grows. 2. Top-performing SaaS businesses above $10 million in revenue are achieving economies of scale in sales and marketing that others are not. 3. Low G&A is a characteristic of all top-performing SaaS businesses regardless of size. 4. Investing heavily in marketing is a characteristic of top-performing SaaS businesses below $10 million in revenue. RESEARCH BRIEF 13: SAAS SPENDING -30% -20% -10% 0% 10% 20% G&A R&D Marketing Sales Success CoGS Top vs. Bottom Quartile Relative Spend by Function Spend Differential by Top Performers vs. Bottom Performers -50% -35% -20% -5% 10% 25% 40% $1 - $5 mil $5 - $10 mil > $10 mil ARR of BusinessG&A R&D Marketing Sales Success CoGS www.saas-capital.com SAAS SPENDING PAGE 2 ABOUT SAAS CAPITAL SaaS Capital is the leading provider of long-term Committed Credit Facilities to SaaS companies. Focusing exclusively on the SaaS business model, SaaS Capital delivers faster decisions, more capital, and longer commitments. SaaS businesses have used SaaS Capital’s Committed Credit Facilities, instead of equity, to finance growth and create hundreds of millions of dollars in enterprise value without sacrificing significant ownership or control. Also, through its partnership with DH Capital, a boutique investment banking advisory firm, SaaS Capital can assist with M&A and capital raising services. SaaS Capital has offices in Cincinnati, New York, and Seattle. Visit www.saas-capital.com to learn more. 810 SEVENTH AVENUE, SUITE 2005 | NEW YORK, NY 10019 1225 HAYWARD AVENUE | CINCINNATI, OH 45208 7900 E GREENLAKE DRIVE NE, SUITE 206 | SEATTLE, WA 98103 IWWW.SAAS-CAPITAL.COM TODD GARDNER | FOUNDER AND MANAGING DIRECTOR | TGARDNER@SAAS-CAPITAL.COM | 513-368-4814 ROB BELCHER | MANAGING DIRECTOR | RBELCHER@SAAS-CAPITAL.COM | 303-870-9529 Generally speaking, these spending trends are consistent with what we at SaaS Capital have observed over the years. Higher growth+profitability businesses have generally pursued a “purer” SaaS business model with higher gross margins that has allowed them to scale very efficiently. Also, top performers, almost without exception, have competent and well- funded marketing organizations. Stepping away from the comparative aspects of the analysis, below is a simple table of the spending allocation for top quartile SaaS businesses in each size category. Two takeaways are evident here. While top-performing SaaS companies spend less on CoGS relative to their peers, all SaaS businesses tend to spend more on CoGS as they scale. Also, top-performing businesses achieve significant economies of scale in R&D as revenue grows. SaaS Capital does not view these benchmarks to be overly prescriptive. Companies vary widely in their product, sales, and support needs and there is no “right way” to invest. That said, the data here can be used to challenge long-established spending patterns of existing businesses. Managers should be able to defend significant over or under investment in any specific functional area, and they should recognize the focus of their investments must change as a business scales. $1 - $5 Million $5 - $10 Million Above $10 Million CoGS (excluding customer success) 10% 16% 17% Customer Success 10% 11% 14% Sales 22% 21% 18% Marketing 11% 11% 11% R&D 31% 28% 22% G&A 15% 14% 16% Total Costs 100% 100% 100% Note: 1 Growth plus profitability is defined as the annual growth rate in annualized recurring revenue (ARR) plus the EBIT percentage gain or loss. For example, a business growing at 40% while losing 10% is a 30% growth plus profitability company. This is sometimes referred to as “The Rule of 40.” </p>