Financial health

Rule of 40

Definition

A benchmark that says a healthy SaaS company should have its revenue growth rate plus profit margin equal or exceed 40%. It balances growth against profitability.

In depth
4 sections

What Is the Rule of 40?

The Rule of 40 is a benchmark that says a healthy SaaS company's combined revenue growth rate and profit margin should equal or exceed 40%. For example, a company growing at 30% year-over-year with a 10% EBITDA margin scores exactly 40. The metric was popularized by venture investors as a quick heuristic for evaluating whether a SaaS business is balancing growth and efficiency appropriately.

How to Calculate the Rule of 40

Rule of 40 = Revenue Growth Rate (%) + Profit Margin (%)

Revenue growth is typically measured year-over-year using ARR or total revenue. Profit margin is usually EBITDA margin, though some use free cash flow margin. The key is consistency — pick one method and stick with it for tracking over time.

What Is a Good Rule of 40 Score?

Scores above 40% are considered healthy. Top-tier SaaS companies like those in the BVP Cloud Index often score 50-60%+. Early-stage companies may sacrifice profitability for growth (e.g., 80% growth + -40% margins = 40), while mature companies flip the ratio (e.g., 15% growth + 30% margins = 45). The key insight is that neither extreme growth nor extreme profitability alone makes a great SaaS business — the balance matters.

Rule of 40 and SaaS Valuation

Companies that exceed the Rule of 40 consistently trade at higher valuation multiples. Investors view the Rule of 40 as a proxy for capital efficiency — it shows whether a company can grow without burning through cash unsustainably. If you are preparing for a fundraise or exploring revenue-based financing, your Rule of 40 score is one of the first things a lender or investor will check.
Eligibility

See your terms in
under five minutes.

No pitch deck, no scarcity, no countdowns. Connect your data and we'll show you exactly what you qualify for — every figure disclosed up front.

Check what you qualify forTalk to a human
$500K+Last-year revenue
RecurringSubscription or repeat revenue
HealthyRetention & gross margins
Questions
Rule of 40

The Rule of 40 is most useful for companies with at least $1M ARR. Very early-stage startups typically have extreme growth rates paired with significant losses, which can make the metric misleading. Once you reach a meaningful revenue base, it becomes a valuable way to track the growth-profitability trade-off.

Most public SaaS companies use EBITDA margin because it is standardized and widely reported. However, free cash flow margin can be more accurate for startups with significant stock-based compensation. The most important thing is to be consistent in your measurement approach.

You can improve your score by increasing revenue growth (better sales efficiency, lower churn, expansion revenue) or improving margins (reducing COGS, optimizing spend). Most companies find that reducing churn and increasing net revenue retention is the highest-leverage path because it improves both growth and profitability simultaneously.

Your metrics are the application. See what they qualify you for.

Check your terms