AI slashes R&D costs in SaaS, boosting company valuations

The theoretical halving of R&D costs in SaaS companies through AI reveals a counterintuitive truth about software economics: cost-cutting provides far less value than growth acceleration. While AI-enabled engineering teams in startups are showing remarkable efficiency gains, this hypothetical analysis demonstrates that even dramatic reductions in development costs yield relatively modest valuation improvements compared to revenue growth strategies. This thought experiment highlights a fundamental principle that continues to drive investment decisions in both venture capital and public software markets.

The big picture: Halving R&D spending would turn 72% of unprofitable SaaS companies profitable overnight, yet would only increase total enterprise value by about 3% across the software industry.

By the numbers: The typical SaaS company would see net income margin jump from 4.4% to 15.8% if engineering teams were cut in half, creating $465 billion in increased enterprise value across the industry.

Growth trumps efficiency: A 30% increase in revenue growth would generate $2.3 trillion in enterprise value—five times the impact of even dramatic R&D cost reductions.

Behind the numbers: The author created a linear regression model of SaaS company valuations based on growth, margins, and cash flow, finding revenue growth to be the most influential factor in determining market value.

Why this matters: Despite the AI-driven efficiency revolution happening in software engineering, this analysis reinforces a long-standing truth in software economics: investors consistently reward growth over profitability in both public and private markets.

Reading between the lines: AI-enabled engineering efficiency should be leveraged primarily to accelerate product development and revenue growth rather than to cut costs, as the market places significantly higher premiums on companies that expand their top line.