A Startup’s Minimum Revenue Per Employee(blog.joshlaurito.com)
blog.joshlaurito.com
A Startup’s Minimum Revenue Per Employee
http://blog.joshlaurito.com/blog/2013/10/08/a-startups-minimum-revenue-per-employee/
6 comments
Comparing revenue per employee between different industries doesn't make any sense, since profit margins vary so wildly. For example, a healthcare distributor like McKesson has $122 billion in revenue, but since they're just distributing goods they are spending 95 cents of every revenue dollar in buying those goods. Their profit margin is under 2%. Meanwhile, software companies, especially with digital delivery, have COGS of 10% or less, leaving room for operating margins of 20-30%. Thus a software company makes the same profit per employee as McKesson with one-tenth of the revenue.
Agreed. I limited the sample to Advertising, Media, and Software only for just that reason: they have similar (though not identical) expense structures.
Software companies not in the ads/media industry or those not operating as marketplaces will always have less revenue. Whereas companies that are especially in the business of providing advertising will typically handle much larger revenue streams. So a SAAS company vs an ad network could see dramatically different revenues at similar sizes. Strangely enough, a SAAS company is not necessarily more profitable at similar revenue.
Isn't this an argument against comparing profit per employee since it is the margins that vary so greatly between industries? Also, it seems you are mixing terms here. You started talking about revenue and ended talking about profit.
His/Her point is that profit is what matters. If you can get the same profit per employee with wildly varying numbers for revenue, then it's pointless to use revenue as a metric.
> But software companies (in yellow) lag far behind the other industries on this metric: they typically generate 25% fewer revenues per employee, and a few smaller ones are operating on under $100k per employee. I believe much of that is due to the increased interest in funding software companies over the last few years (allowing money-losing companies to grow), though some might also be due to lower operating costs.
Those might play a role, but wouldn't it be more likely that most software startups are optimizing for something other than revenue? Most take funding specifically so they can not worry about revenue, and instead focus on user growth.
Those might play a role, but wouldn't it be more likely that most software startups are optimizing for something other than revenue? Most take funding specifically so they can not worry about revenue, and instead focus on user growth.
Also software often has higher gross margins, so the net profit per employee theoretically could be higher than a company with higher revenue per employee.
Well, I agree in theory, but I only chose industries where the major expense is people. So if revenue/employee is lower, either pay/employee is lower or margins are.
I suppose a third possibility is that software compensation may have a larger equity component, which would allow software employees to take similar overall comp at lower revenue/employee levels.
I suppose a third possibility is that software compensation may have a larger equity component, which would allow software employees to take similar overall comp at lower revenue/employee levels.
You actually didn't choose comparables.
Advertising and Media firms frequently have very high outside expenses, so that they appear to have much higher revenue than they really do. It's not just actors, it's all of the other contractors that are used to produce an ad or a show. So the real revenue is just their markup on outside costs. Plus much Ad firm revenue is from media buying - the real cost of a TV campaign is not in producing a spot but in buying placement, and the ad firm only sees a relatively small markup on the cost of placement.
Then you have the issue of conflating consumer software firms - Twitter, Facebook... who capture minimal revenue while they try to build out their userbase and network effects - with enterprise software firms who can and will charge their day 1 customers large amounts of money.
This exercise would be interesting if it were conducted by someone with a strong understanding of the structure and strategic choices of the software industry and how to compare firms with inherently different gross and net margins.
Advertising and Media firms frequently have very high outside expenses, so that they appear to have much higher revenue than they really do. It's not just actors, it's all of the other contractors that are used to produce an ad or a show. So the real revenue is just their markup on outside costs. Plus much Ad firm revenue is from media buying - the real cost of a TV campaign is not in producing a spot but in buying placement, and the ad firm only sees a relatively small markup on the cost of placement.
Then you have the issue of conflating consumer software firms - Twitter, Facebook... who capture minimal revenue while they try to build out their userbase and network effects - with enterprise software firms who can and will charge their day 1 customers large amounts of money.
This exercise would be interesting if it were conducted by someone with a strong understanding of the structure and strategic choices of the software industry and how to compare firms with inherently different gross and net margins.
ghein- I think a comparison of margin/profitability metrics would be interesting as well. If you find any data on that, please post.
This analysis is geared less at understanding profitability/valuation metrics and more at operational and modeling decisions around growth, like headcount needed to support revenues in high growth companies.
This analysis is geared less at understanding profitability/valuation metrics and more at operational and modeling decisions around growth, like headcount needed to support revenues in high growth companies.
Fair enough, thanks.
That's a fair point zamfi. Though I think that the ability to take that approach is due largely to the supportive funding environment. Ben Horowitz's post today speaks to that point as well: http://bhorowitz.com/2013/10/08/cash-flow-and-destiny/
Where did the 230-310k/employee figure come from? Looking at the graph, I would have guessed 80k-500k/employee as a more reasonable range. 10mm revenue and 100k/employee sure doesn't look like an outlier to me, based on http://blog.joshlaurito.com/wp-content/uploads/2013/10/Scree...
The 2mm/employee cutoff is an interesting insight. Sidenote - is that what the grey line in http://blog.joshlaurito.com/wp-content/uploads/2013/10/Scree... is supposed to represent? It wasn't fully clear to me.
Is there anything actionable that you found? This all seemed to me to be interesting but non-actionable to a founder.
>I assumed that software companies would be more scalable and generate more revenue per employee, but the numbers don’t bear this out.
Any chance that's a bias from your data? Software companies can span the gamut from startup that's optimizing for their monthly-active-user-count to enterprise-software firm that's established with a high margin and low capex.
Also, a little discussion around why you used log-log graphs would have been welcomed by me.
The 2mm/employee cutoff is an interesting insight. Sidenote - is that what the grey line in http://blog.joshlaurito.com/wp-content/uploads/2013/10/Scree... is supposed to represent? It wasn't fully clear to me.
Is there anything actionable that you found? This all seemed to me to be interesting but non-actionable to a founder.
>I assumed that software companies would be more scalable and generate more revenue per employee, but the numbers don’t bear this out.
Any chance that's a bias from your data? Software companies can span the gamut from startup that's optimizing for their monthly-active-user-count to enterprise-software firm that's established with a high margin and low capex.
Also, a little discussion around why you used log-log graphs would have been welcomed by me.
Hey bcbrown- I took the averages from the raw data: you can find them already scraped at https://github.com/jlaurito/inc5000 (inc5000data_cleaned.csv has only these industries).
You are right- the range is wider than I mentioned, and the true minimum is lower (the numbers in the post are industry-by-industry averages).
I used log-log graphs because they reduce the visual impact of outliers. You can play with the graphs yourself at http://blog.joshlaurito.com/inc5000.html if you want to see alternatives.
There are definitely biases in the sample: these are only fast-growing, 3yr+ old companies that want publicity badly enough to open their books to Inc.
If you are working in a company in a company with a similar profile or compete with any of the companies here, I think the data is useful for deciding how quickly to hire and benchmarking against any competitors that might be in the sample. Also, if you're writing a business/evaluating a business plan this might be useful data. For the rest of us, it's just fun to play with!
You are right- the range is wider than I mentioned, and the true minimum is lower (the numbers in the post are industry-by-industry averages).
I used log-log graphs because they reduce the visual impact of outliers. You can play with the graphs yourself at http://blog.joshlaurito.com/inc5000.html if you want to see alternatives.
There are definitely biases in the sample: these are only fast-growing, 3yr+ old companies that want publicity badly enough to open their books to Inc.
If you are working in a company in a company with a similar profile or compete with any of the companies here, I think the data is useful for deciding how quickly to hire and benchmarking against any competitors that might be in the sample. Also, if you're writing a business/evaluating a business plan this might be useful data. For the rest of us, it's just fun to play with!
Isn't it also possible the companies at the higher end of the revenue/employee spectrum are outsourcing more of their labor?
Yeah, absolutely- it's even more likely that outsourcing happens more in one industry than another, so the average numbers are skewed as a result. I would love to see data on that- will post more if I find any.
First thing I wanted to do: play with those graphs. Is there a way you could embed them?
Hey Rob- I wanted to but not with wordpress. Interactive one is at http://blog.joshlaurito.com/inc5000.html
I'd like to see net profit minus salary per employee.