SaaS Rule of 40
Compute Rule of 40 = revenue growth % + operating margin %.
Rule of 40: the SaaS growth-vs-profit heuristic
The Rule of 40 states that the sum of a SaaS company's ARR growth rate and its EBITDA (or operating) margin should be at least 40%: ARR_growth% + EBITDA_margin% ≥ 40%. Popularized by Brad Feld (2015), it lets companies trade growth for profitability and vice-versa. Example: a company growing 60% can run a −20% margin and still pass; one growing 20% needs at least 20% margin. A startup at 80% growth and −30% margin scores 50 — healthy under the rule.
Applications and benchmarks
Top public SaaS performers — Atlassian, CrowdStrike, Datadog — have historically scored 40–50+. In 2022–2023 the market started demanding Rule of 50+ for premium multiples as the ZIRP era ended. Used by PE/VC investors for public SaaS analysis, by boards for the burn-vs-growth tradeoff, and as a quick screen against high-growth-at-any-cost narratives.
FAQ
Growth or revenue — which to use? ARR (or recurring revenue) year-over-year growth, not GAAP revenue. The rule is built for recurring-revenue businesses.
Margin: EBITDA, operating, or FCF? The original Feld post uses EBITDA. Many investors today prefer free cash flow margin, which captures working capital and capex effects.
Does it apply to early-stage startups? Less useful below ~$10M ARR — at that scale growth is usually so high (100%+) that the rule is trivially satisfied. It matters most at $50M+ ARR.
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