Part 3/5: R&D is Your Largest Unmanaged Capital Allocation
Sponsors are rigorous about capital. Every add-on gets an IC memo. Every big capex request gets a return analysis and a debate.
Then there's R&D.
A PE-backed SaaS company at $100 million in ARR typically spends $10 to $16 million a year on R&D. Over a six or seven year hold, that's somewhere between $60 and $110 million. That's often more than the equity check on a meaningful add-on, and it almost never gets the same scrutiny.
Most boards govern R&D as a cost line. I think it should be governed as a portfolio of investments.
Think about where R&D shows up in a typical board deck. It's a percentage of revenue on the P&L, compared against a benchmark. It's in the headcount plan: hires, attrition, offshore mix. And it's on the roadmap slide, a timeline of features color-coded green, yellow, and red.
None of that tells the board whether the money is working. The benchmark tells you whether you're spending in line with peers, not whether you're spending on the right things. The roadmap shows what's being built, not why, and not what it's expected to return. So when cost pressure comes, the default is an even cut across teams, which protects the low-return work just as much as the high-return work.
What does it look like to govern R&D like an investment? It isn't complicated, but it does take someone who has run a product portfolio to do it well.
Group the spend into investment themes rather than teams: core retention, new segment expansion, AI capability, platform and tech debt, and customer commitments. Show the split to the board. Most leadership teams are surprised by how much goes to one-off commitments made to close deals.
Attach an expected outcome to each investment. Not a feature. An outcome, like lower churn in a segment, faster implementation, a module attach rate, or a price increase that sticks. Pick a leading indicator the board can actually see within two quarters.
Put every product and module in one of three buckets: invest, maintain, or harvest. Tie it to ARR and net revenue retention by product line. Harvest products shouldn't be absorbing growth investment, and in my experience they quietly do all the time.
Change the quarterly review from roadmap status to outcomes. What shipped, what moved, what did we learn, and what are we stopping?
Keep a small amount of capacity for testing new ideas cheaply before you commit a full team to them.
None of this needs new software or a consulting framework. It needs a board that asks different questions, and somebody in the room who knows what good answers sound like.
There's an exit angle too. Buyers increasingly go straight at this in diligence. How does R&D map to growth? Which products drive expansion? Is the AI investment tied to revenue, or is it internal productivity with a product slide on top? A company that can show two years of outcome-based R&D governance tells a very different story than one with a benchmark and a Gantt chart.
The best part is that this lever costs nothing to pull. You're already spending the money. The only question is whether anyone is managing it as an investment.
