---
title: "Halving R\u0026D with AI \u0026 the Impact to Valuation"
description: "Discover how AI could halve SaaS R\u0026D costs, boost profitability by 11.4%, and why focusing on growth delivers 5x more enterprise value than cost-cutting."
categories: ["AI","data analysis"]
keywords: ["Theory Ventures","Tomasz Tunguz","venture capital","SaaS R\u0026D","AI in software development","enterprise value","profitability in SaaS","revenue growth strategies"]
ai_summary: "Explore how AI can reduce SaaS R\u0026D costs and significantly enhance enterprise value through growth-focused strategies."
date: 2025-03-17
lastmod: 2026-07-31
canonical_url: https://www.tomtunguz.com/what-if-cut-rd-50-percent/
author: "Tomasz Tunguz"
---

Engineering teams within AI application startups are much smaller than a classic software company - maybe half the size or less.

Let's run an experiment : let's assume every public software company benefits immediately to the same extent & cuts R&D spending by half.<sup>1</sup>

How would the value of these businesses change?<sup>2</sup>



![image](https://res.cloudinary.com/dzawgnnlr/image/upload/n5mffezsfahvbmdtjtpw.png)
72% of unprofitable SaaS companies would become profitable. 



![image](https://res.cloudinary.com/dzawgnnlr/image/upload/ipagaif50zoawd3mgmya.png)

The typical SaaS company would increase from 4.4% net income margin to 15.8%.


![image](https://res.cloudinary.com/dzawgnnlr/image/upload/dzbbx4ioo7clepl0wdlj.png)

And the total impact? $465b of increased enterprise value from $14.9t to $15.4t. That may sound like a lot, but it's about a 3% improvement. 

Because software companies aren't valued on profitability - true within the venture capital & public markets alike - the cost savings from halving engineering teams aren't that impactful. 

Much better would be to focus those teams on revenue generating products to boost revenue growth. 

A 30% increase in revenue growth would increase enterprise value by $2.3t - 5x the impact of cuts.

Yet another reminder that in software, growth is king.

---
<sup>1</sup>My goal is to understand the financial impacts of such a move. To be clear, I'm not advocating for this. It's a hypothetical thought experiment.    

<sup>2</sup>Software companies trade on Enterprise Value (EV) to Forward Revenue (projected revenue in the next 12 months) multiple. I created a linear regression of these companies' valuation based on revenue growth, gross margin, net income margin, & cash flow from operations margin (R^2 of 0.23 - not hugely predictive, but p < 0.001). Revenue growth is the most important determinant factor.