Definition
A SaaS benchmark stating that a healthy company's growth rate plus profit margin should sum to roughly 40% or more.
Why it matters for growth
The rule of 40 helps investors and founders judge whether a company is trading growth for efficiency in a reasonable, sustainable way.
Example
A company growing 60% a year with a -20% profit margin still satisfies the rule of 40, since 60 minus 20 equals 40.
FAQ
- What is Rule of 40?
- A SaaS benchmark stating that a healthy company's growth rate plus profit margin should sum to roughly 40% or more.
- Why does Rule of 40 matter for growth?
- The rule of 40 helps investors and founders judge whether a company is trading growth for efficiency in a reasonable, sustainable way.
- What is an example of Rule of 40?
- A company growing 60% a year with a -20% profit margin still satisfies the rule of 40, since 60 minus 20 equals 40.