Rule of 40 Calculator

The Rule of 40 is a benchmark that says a healthy SaaS company's revenue growth rate plus its profit margin should equal or exceed 40%. For example, a company growing at 60% year-over-year with -20% EBITDA margins scores 40 (60 + (-20) = 40). A company growing at 20% with 20% margins also scores 40. The rule captures the fundamental trade-off between growth and profitability — fast-growing companies can afford to lose money, while slow-growing companies need to be profitable.

The Rule of 40 was popularized by Brad Feld, a venture capitalist at Foundry Group, around 2015. The concept gained widespread adoption after Feld wrote about it and it became a standard benchmark among growth-stage investors, public market analysts, and M&A teams evaluating SaaS businesses. While Feld popularized it, the underlying idea of balancing growth and profitability has been a fundamental concept in software investing for decades.

A score of 40 or above indicates a well-run SaaS business. Scores of 60+ are elite — companies like Snowflake and HubSpot at their peak operate at these levels. A score between 20-40 suggests the company needs to either grow faster or improve margins. Below 20 is concerning and indicates the company's growth does not justify its cash burn. For early-stage startups, a score below 40 is acceptable if growth is accelerating, but the trend should be moving upward over time.

The Rule of 40 is most useful for growth-stage and late-stage SaaS companies (Series B and beyond) with meaningful revenue. Early-stage startups (pre-seed through Series A) are typically growing very fast with deeply negative margins, which can produce misleading scores. For early-stage companies, metrics like burn multiple, monthly growth rate, and unit economics (LTV:CAC ratio) are more relevant indicators of business health than the Rule of 40.