Software Companies: The Bicoastal Divide

West Coast firms typically outspend Eastern ones and are growing faster, but they need twice the funding to achieve the same revenue growth, a new ...
Taylor ProvostDecember 10, 2012

It appears that what many suspected is true: the West Coast is far more aggressive in pursuit of growth, more top-line-focused than the conservative, bottom-line-oriented East Coast, at least when it comes to software companies.

In the 2012 Software Benchmarking Industry Report released today by the Software and Information Industry Assn. (SIIA), analysts for the first time benchmarked software firms by geography and found that East Coast and West Coast firms of similar revenue size exhibited comparatively different spending patterns.

Revenue growth in 2011 was higher for West Coast companies — almost 50% versus 36% — but they dipped further into the red to achieve that growth, says Lauren Kelley, CEO and founder of OPEX Engine, who wrote the report in conjunction with the SIIA. And on average, it took West Coast firms almost twice as much venture funding to get to the same revenue size.

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In general, the two coasts scored relatively similar bottom lines in 2011 (average recognized revenue of $25 million for the West Coast and $18.5 million for the East), but West Coast firms spent, on average, 34% more on operating expenses. And while companies on both sides of the country were in the red on operating income, those out West fared worse, according to the report.

“What we were trying to do is validate from the data some general preconceptions within the industry that the East Coast is more conservative than the West Coast, and the West Coast spends more money,” says Kelley. “And while we have to continue to track the data, it does certainly from this first year validate some of those notions.”

Software companies overall are experiencing the greatest revenue growth and strongest hiring expectations since before the recession, according the report, which surveyed about 100 public and private U.S. firms with between $1 million and $350 million in revenue. Software companies, Kelley says, are leaving behind the cost-containment policies they have favored since 2008 and are spending more on marketing, sales, and the creation of jobs for skilled workers, such as developers and marketing strategists.

She notes that after the recession, when not much venture capital was available, the software industry generally switched to a very cost-focused model, cutting back on hiring and other spending. Now companies have gotten through that tightening and are once more in investment mode, says Kelley.

Private software firms saw an average revenue growth rate of 37% in 2011, according to the report, which is 10% higher than the growth rate achieved in 2010. Companies reported they will increase employee head count in 2012 by an average of 27%, the highest hiring expectation in the industry since the recession.

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