What is Rule of 40?
Nexa Consultancy | Startup & Finance Glossary
The Rule of 40 is a popular benchmark for SaaS companies that balances growth and profitability. It states that a healthy SaaS company's growth rate plus its profit margin should be equal to or greater than 40%.
For Startups: Early-stage startups are expected to be unprofitable, so they must have a very high growth rate to meet the Rule of 40. As the company matures, its growth will slow, and it will need to become more profitable.
For SaaS: This metric forces founders to make strategic trade-offs between investing in growth (which reduces profit) and managing for profitability (which may slow growth).
Calculation: Rule of 40 = Revenue Growth Rate (%) + EBITDA Margin (%)
Example: A company growing at 60% with a -10% EBITDA margin has a Rule of 40 score of 50%, which is considered healthy.