Formula
How to Calculate Rule of 40
A SaaS benchmark where a company's revenue growth rate plus profit margin should exceed 40%. Companies above 40% are considered well-balanced between growth and profitability.
Rule of 40 Score
Rule of 40 = Revenue Growth Rate (%) + Profit Margin (%)
Where
- Revenue Growth Rate
- = Year-over-year revenue growth as a percentage
- Profit Margin
- = EBITDA margin or free cash flow margin (varies by analyst)
What Is Rule of 40?
The Rule of 40 is a widely used benchmark for evaluating SaaS company performance. It states that a healthy SaaS business should have its revenue growth rate plus profit margin equal to or exceed 40%. Formula: Revenue Growth % + Profit Margin % ≥ 40. For example: a company growing 60% with -10% margins scores 50 (good). A company growing 20% with 25% margins scores 45 (good). A company growing 15% with 10% margins scores 25 (concerning). The metric acknowledges that high-growth companies can sacrifice profitability, and slower-growth companies should compensate with stronger margins. Originally popularized by Brad Feld and venture investor Bain, the Rule of 40 has become a standard evaluation framework used by growth equity investors, public market analysts, and boards of directors.
Why Rule of 40 Matters
The Rule of 40 gives founders and investors a simple health check that balances two often-competing priorities: growth and profitability. It's particularly relevant for SaaS companies approaching or past Series B, where investors expect a credible path to sustainable economics. Public SaaS companies trading above the Rule of 40 command premium valuations — Datadog (score: 70+) trades at 20x+ revenue while companies below 40 trade at 5-8x.
Frequently Asked Questions
How do you calculate Rule of 40?
Rule of 40 is calculated using the formula: Rule of 40 = Revenue Growth Rate (%) + Profit Margin (%). A SaaS benchmark where a company's revenue growth rate plus profit margin should exceed 40%. Companies above 40% are considered well-balanced between growth and profitability.
What is a good Rule of 40?
What constitutes a "good" Rule of 40 depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.