Fact bite #1 Robustness of the enterprise software industry: R&D delivers added value

In fact bite #1 we discuss the relationship between R&D investments, innovation and economic performance in the software industry.

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Main Capital Partners
21/09/2022

Last year we wrote an article about the size and impact of the software industry in the Netherlands. Based on our research and discussions with domain experts from Dialogic we estimated that the direct contribution of software to the Dutch economy alone is about 4-4.5% of the Gross National Product (GNP). Now, less than 12 months later, the economic situation is significantly different: supply and demand is unbalanced – and resources are scarce – in many industries. This, in combination with the Russian aggression in Ukraine, negatively impacts consumer confidence and drives inflation. At the same time, Forrester reports a continued revenue growth rate of 12% for the global enterprise software market. How come? In this blog series Bram Kaashoek, head of Main’s Market Intelligence practice, highlights 3 fact bites that reflect the robustness and consistent contribution of the enterprise software market to the overall economy.

In fact bite #1 we discuss the relationship between R&D investments, innovation and economic performance in the software industry.

Consistent investment in R&D and Product Management, while growing profitably

The relationship between R&D investments, innovation and economic performance has been confirmed in various studies in the last decades, on company-, industry-, regional- and national levels. Put simply: investment in R&D pays off. It leads to improved product and service offerings, better positions in the competitive landscape and companies are able to monetize on the added value that they deliver.

Kaashoek: “In our hypothesis, this interplay between R&D, innovation and commercial success is extra obvious in the enterprise software industry. Rationale for that: software companies design their solutions for specific work processes of professionals in certain end-markets and know these work processes better and better. Most SaaS companies are purpose-driven, are looking for a ‘problem worth solving’ and adopted Eric Ries’ (2011) lean start-up approach for product development. Especially with cloud-based solutions, brought to the market via SaaS business models, software vendors are able to deeply track and understand usage patterns of end-users. Meaning that feedback loops on how software delivers value are closed, and uncover opportunities for product development relatively easy.

As a consequence, although success is not guaranteed, R&D within the software industry tends to be focused on the “D” (development) instead of the “R” (research). It’s less of a “trial and error”-business, in which both risks and gains are very high – like in the biotech industry. In other words, if done well, customer-centric product management in the software industry must be able to deliver innovative, value-adding solutions, modules, features or integrations relatively fast to the market. Monetizing on this added value, especially with the widely adopted recurring SaaS business models in our industry, leads to continued accumulated revenue growth.”

In order to dive into this topic, we looked at the latest data of the top-2500 global R&D investing companies. The European Commission publishes the Economics of Industrial Research and Innovation (IRI) Scoreboard yearly, including R&D- and turnover figures of large companies. Based on this dataset, we analyzed industry patterns – see the figure below.

Figure 1. R&D Intensity and revenue growth per Industry - top-2500 R&D investment companies worldwide [bubble size represents median margin] (source: European Commission - Economics of Industrial Research and Innovation, 2022. Analysis: Market Intelligence Main Capital Partners, 2022)

Kaashoek: “The analysis shows nicely that the largest software companies in the world consistently grow their revenues with double-digit figures. The median revenue growth is in the same bandwidth as Forrester indicated recently. Next to that it becomes clear that, even in COVID-19-year 2021, software companies invested 18% of their revenues in product development. That’s a lot. Although it’s hard to talk about causality, this reflects their long-term vision and belief that R&D investments will lead to new solutions, future revenue growth and positive cashflows. The healthy margins that we observe in the enterprise software industry, which are a result of the scalable business model of software vendors, really help in making these upfront investments. Even in challenging times.”

Main Software 50: facts & figures on the industry

Interestingly, the figures of the largest R&D-intensive software companies worldwide, as presented above, are quite comparable to Main’s portfolio. The average revenue growth in Main’s portfolio is more than 13%, while R&D investments are 20% of the revenues on average.

Are you a software entrepreneur and interested in hearing more about software industry statistics and developments? Please join our Main Software 50 industry event in November. The Benelux edition will be hosted for the 11th time this year and we are coming to Germany too. 

17 November 2022

De Fabrique, Utrecht

30 November 2022

LOFTHAUS, Düsseldorf

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