Rule of 40

The Rule of 40 is a rule-of-thumb for judging whether a SaaS company balances growth and profitability well: its revenue growth rate plus its profit margin should add up to at least 40%. A company growing ARR 60% a year can afford to burn cash and run a -20% margin; one growing only 10% needs a 30% margin to pass. The metric became popular with growth-stage investors because it captures the core SaaS trade-off in a single number - you can buy growth with unprofitability, or bank profit while growing slowly, but you shouldn't do both badly. Margin is usually EBITDA or free-cash-flow margin, and growth is year-over-year recurring revenue. For founders, it's a sanity check rather than a target to game: hitting 40% by starving growth can be as unhealthy as missing it while scaling. Track it quarterly, and treat a persistent sub-40 score as a signal to fix either your growth engine or your unit economics.