

A Startup’s Minimum Revenue Per Employee - jlaurito
http://blog.joshlaurito.com/blog/2013/10/08/a-startups-minimum-revenue-per-employee/

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qq66
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.

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jlaurito
Agreed. I limited the sample to Advertising, Media, and Software only for just
that reason: they have similar (though not identical) expense structures.

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diziet
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.

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zamfi
> 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.

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jonathanjaeger
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.

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jlaurito
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.

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ghein
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.

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jlaurito
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.

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bcbrown
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...](http://blog.joshlaurito.com/wp-
content/uploads/2013/10/Screen-Shot-2013-10-08-at-12.12.03-AM.png)

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...](http://blog.joshlaurito.com/wp-
content/uploads/2013/10/Screen-Shot-2013-10-07-at-11.24.29-PM.png) 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.

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jlaurito
Hey bcbrown- I took the averages from the raw data: you can find them already
scraped at
[https://github.com/jlaurito/inc5000](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](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!

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rwhitman
Isn't it also possible the companies at the higher end of the revenue/employee
spectrum are outsourcing more of their labor?

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jlaurito
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.

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robszumski
First thing I wanted to do: play with those graphs. Is there a way you could
embed them?

~~~
jlaurito
Hey Rob- I wanted to but not with wordpress. Interactive one is at
[http://blog.joshlaurito.com/inc5000.html](http://blog.joshlaurito.com/inc5000.html)

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weixiyen
I'd like to see net profit minus salary per employee.

