The Rule of 40
Grow fast or print cash — but the two together should clear forty, or the engine's leaking.
- Term
- The Rule of 40
- Formula
- Growth rate % + profit margin % ≥ 40
- Habitat
- SaaS, growth investing
- Margin basis
- Usually FCF or EBITDA margin
Forms & parts of speech
Definition in plain terms
The Rule of 40 is a health heuristic for software companies: revenue GROWTH rate plus PROFIT margin should sum to at least 40%. A company growing 60% while burning 20% margin scores 40 (passing); one growing 20% at 25% margin scores 45 (also passing). It encodes the core SaaS trade — you may spend growth OR bank profit, but the combination is what investors price.
The mechanics
The margin term varies by who's measuring — free cash flow margin, EBITDA margin, or operating margin — so always state the basis (the same company scores differently on each). The rule's logic: early companies score via growth (negative margins forgiven by high growth), mature ones via profit (slowing growth offset by cash generation), and the dangerous middle is the company doing neither well. It's a SCREEN, not a target — public-market SaaS investors use it to flag the leaking-engine companies fast, and the best performers clear 40 by a wide margin in whichever term their stage favors.
When it matters
The Rule of 40 matters at board level and fundraising, where it's the single number summarizing 'is this growth worth its cost?' For marketers it sets the CAC-efficiency context: at a company scoring 25, marketing spend is under scrutiny because the engine isn't clearing the bar; at 50, growth investment is welcome. Its limits are real — it ignores absolute scale (40 at $5M ARR differs from 40 at $500M), market context, and one-time distortions — so it screens, then the diligence begins.
Synonyms & antonyms
Synonyms
Antonyms
Origin & history
Popularized by venture capitalist Brad Feld in a 2015 blog post ('The Rule of 40% For a Healthy SaaS Company'), crediting it to a board member; the heuristic spread through the SaaS-investing community (Bessemer, a16z) into the standard one-line health check for software companies.
Etymology: source.
Usage trends
Search interest for this term over the last five years:
Common questions
- What is the Rule of 40?
- A SaaS heuristic — revenue growth rate plus profit margin should total at least 40%.
- Which margin does it use?
- Varies — free cash flow, EBITDA, or operating margin — so always state the basis; the same company scores differently on each.
- Is the Rule of 40 a target?
- No — it's a screen. Healthy companies clear it by a wide margin via whichever term (growth or profit) their stage favors.
Related tools & calculators
- toolCAC calculator
- toolLTV-to-CAC ratio
Resources & people to follow
- referenceBrad Feld — the 2015 essay that popularized it
- referenceBessemer / McKinsey SaaS benchmarks
- referenceRGM analysis — state the margin basis or the score lies
Curated, non-competitor resources verified per term.
Related training
- moduleMarketing analytics
Disciplines
Areas of marketing where the rule of 40 is a core concern: