The Rule of 40 is a heuristic that states a healthy SaaS company revenue growth rate plus profit margin should equal or exceed 40%. It balances growth and profitability: a company growing 60% year-over-year with -20% margins scores 40, the same as a company growing 20% with 20% margins. The metric is most relevant for growth-stage and mature SaaS companies evaluating the trade-off between investing in growth and generating profit.
Balances growth and profitability for mature SaaS; heuristic, not a law.
YoY growth 55%; EBITDA margin −10% → Rule of 40 = 45.
Using quarterly rates without annualizing; comparing across different revenue quality.
Financials slide: small callout with growth %, EBITDA/FCF margin %, Rule of 40.
55% YoY growth; −10% EBITDA → Rule of 40 = 45.
Some use FCF margin instead of EBITDA.
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