Metrics & Performance
Last updated
Quick Answer
A SaaS health metric: a company's revenue growth rate plus profit margin should equal or exceed 40%, balancing growth and profitability.
The Rule of 40 is a heuristic used to evaluate the overall health of a SaaS business by combining growth and profitability into a single number. The formula: Revenue Growth Rate (%) + Profit Margin (%) ≥ 40. A company growing 60% annually with a -20% profit margin scores 40. A company growing 20% with a 20% margin also scores 40.
The metric acknowledges the fundamental tradeoff in SaaS: high-growth companies typically burn cash to acquire customers and build product, while slower-growing companies can afford to focus on profitability. The Rule of 40 says either approach is acceptable — what matters is the combined score.
Profit margin in this context is typically measured as EBITDA margin or free cash flow margin, not GAAP net income. Some investors use revenue growth + operating cash flow margin. Scores above 40 are considered healthy; scores above 60 are exceptional.
In Practice
Snowflake grew 69% year-over-year with a -22% free cash flow margin, for a Rule of 40 score of 47 — healthy. A mature SaaS company growing 15% with a 30% free cash flow margin scores 45 — also healthy, just via a different mix of growth and profitability.
Why It Matters
The Rule of 40 became the dominant SaaS benchmarking metric because it lets investors compare high-growth money-losers to profitable slower-growers on equal footing. Post-2022, as capital became more expensive, investors began weighting profitability more heavily — a 40% growth + 0% margin is viewed less favorably than it was in 2021.
How to Calculate the Rule of 40: SaaS Health Score Formula
The Rule of 40 combines revenue growth and profit margin to score a SaaS company's overall health. Learn the formula, the benchmarks, and what it really tells investors.
ARR: What Annual Recurring Revenue Means in Venture Capital
ARR (Annual Recurring Revenue) is the single most-watched metric in SaaS venture capital. Here's exactly what it means, how it's calculated, what benchmarks matter, and why VCs obsess over it.
Product-Market Fit: What It Really Means and How to Find It
Product-market fit is the single most important milestone for any startup. This complete guide breaks down what PMF actually means, how to measure it, how VCs evaluate it, and what to do once you've found it — with real examples from Slack, Dropbox, Superhuman, and Notion.
Famous Pitch Decks: Real Examples from Airbnb, Uber, Buffer and 20+ Funded Startups
We analyzed the actual pitch decks from Airbnb, Uber, Buffer, LinkedIn, and 20+ other funded startups. Here's what worked, what didn't, and the patterns every founder should steal.
Guy Kawasaki's 10-20-30 Pitch Deck Rule: Still Relevant in 2026?
Guy Kawasaki's 10-20-30 pitch deck rule turns 20 years old. What was it designed to fix, how the landscape has changed, and what to take—and leave—from it in 2026.
Series A Funding: What It Means, How Much You Can Raise, and How It Works
Series A funding is the first major institutional round. Learn what it means, how much you can raise, what investors look for, and how the process works.
How to Run an Effective Board Meeting as a Startup CEO
Most CEOs walk into board meetings unprepared and walk out having wasted 3 hours. Here's how to run a board meeting that drives decisions, builds trust, and actually helps your company.
How to Build a Pitch Deck That Gets Meetings
A slide-by-slide walkthrough of what belongs in a pitch deck, what investors actually look for, and the design principles that make decks readable and compelling.
The Complete Guide to Startup Fundraising
A step-by-step guide to raising capital for your startup — from deciding when to raise, to closing your round and everything between. Written for founders, by people who've seen both sides.
The Rule of 40 is a heuristic used to evaluate the overall health of a SaaS business by combining growth and profitability into a single number. The formula: Revenue Growth Rate (%) + Profit Margin (%) ≥ 40. A company growing 60% annually with a -20% profit margin scores 40.
Understanding Rule of 40 is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Rule of 40 falls under the metrics category in venture capital. This area covers concepts related to the quantitative measures used to evaluate fund and company performance.
Newsletter
Join thousands of founders and investors. Every Tuesday.
The VC Beast Brief
Master VC terminology
Get smarter about venture capital every week. Our newsletter breaks down the terms, concepts, and strategies that matter.
VentureKit
Ready to launch your fund?