The Rule of 40 states that a SaaS company’s revenue growth rate plus profit margin should equal or exceed 40%, balancing growth and profitability.
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Tip: The Rule of 40 becomes most relevant above $50M ARR. Early-stage startups should prioritise growth even at the expense of margin.
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Fun Fact
Bain research shows SaaS companies scoring above 40 trade at significantly higher EV/Revenue multiples - often 2-3x higher.
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