There’s a simple rule of thumb you can use to gauge the financial health of a software product company (yours, or someone else’s): The number of developers in a software company should be about equal to the the company’s revenue in millions. If the company has $10 million in annual revenue, then it should have about ten developers. For a startup in growth mode, you can use the revenue run rate rather than the revenue to date.
A couple of caveats:
- A company smaller than $5 million in revenues is likely to have different ratios. The revenue per developer will be lower, since the rest of the business’s expenses will be much lower. In other words, a $1 million revenue software company might have two or more developers.
- The revenue to developer ratio is per company, not per product. There’s another rule of thumb that suggests that until you have achieved a $10-20 million run rate you shouldn’t consider adding another product, but once you have achieved that company size, you need to start working on a new product offering. Obviously, it will get investment far beyond its (so far non-existent) revenue, meaning that the older product will get a somewhat reduced investment ratio – say 15 developers for a $20 million product, with five developers devoted to the new product.
Note that once you have a $20 million product you can’t bootstrap a new product in the same way you did your first one. You’ll probably need five developers to get the new product off the ground, not just one or two. For example, you may need to integrate the new product with the old product. And you probably need to make their user experiences comparable – you can’t put a V1.0 user experience on a new product if you already have a v4.0 user experience on an existing product with which it interfaces.
How To Use This Rule of Thumb
How do you use this $one million-to-one developer ratio?
- First, it’s a good reality check on your own organization. If you are investing in your product at a higher rate than that, it’s unlikely to be sustainable for long. If you are investing at a lower rate, then you can start taking steps to ensure the investment rate becomes more equitable.
- It can give you insight into your competitors. If your competitor has $60 million in annual revenue, and you have $10 million in annual revenue, it means they have six times as many developers as you do. I would use this information to help me prioritize what I’m going to do to beat them, and when.
- If you are interviewing for a new job, you should attempt to understand the ratio in effect at the new company. You can infer a lot – whether the product is profitable, whether the company is investing correctly, whether the company thinks of the product you will be working with as a growth area or a cost-center.
- It can help you understand how you need to allocate your resources as you develop new products that don’t yet have revenue while keeping existing products competitive and growing.
Do you have finance-related rules of thumb you use or recommend? Let me know about them in the comments!