The Rule of 40
The Rule of 40 states that a healthy SaaS company's growth rate plus profit margin should equal or exceed 40%. It balances growth against profitability and is a key investor benchmark.
Growing at 50% YoY with -20% profit margin: 50 + (-20) = 30. Growing at 30% with +15% margin: 30 + 15 = 45 (healthy).
The Rule of 40 captures the growth-profitability tradeoff. A company growing 100% with -60% margins (score: 40) is as "healthy" as one growing 20% with +20% margins. It's the universal SaaS health check.
Elite
Strong
Acceptable
Needs work
Most commonly EBITDA margin, but FCF margin or operating margin work too. Be consistent and note which you're using. Investors will likely adjust to their preferred metric.
Post-2022, yes. In zero-interest-rate era, growth trumped all. Now investors want efficient growth. A 50% grower burning cash inefficiently is less attractive than a 30% grower with good margins.
Typically Series B and beyond. Pre-Series B, growth rate matters more. You're finding PMF and proving scalability. Post-Series B, efficiency starts to matter.
We build real-time dashboards that track Rule of 40 and every other metric investors care about. Updated daily. Investor-ready.
