VC Benchmark

Rule of 40 Calculator

The golden metric for SaaS: Growth Rate + Profit Margin ≥ 40%. Balance growth and profitability for sustainable success.

What is Rule of 40?

Rule of 40 states that a healthy SaaS company's combined growth rate and profit margin should equal or exceed 40%. It's the key metric VCs use to evaluate SaaS business health and valuation potential.

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

Example 1: High Growth

50% growth + (-10%) margin = 40 ✓

Example 2: Profitable

20% growth + 25% margin = 45 ✓

How to Calculate Rule of 40

Step 1: Calculate Growth Rate

Year-over-year revenue growth percentage

Growth % = ((Current ARR - Last Year ARR) / Last Year ARR) × 100

Example: ($10M - $6M) / $6M = 67% growth

Step 2: Calculate Profit Margin

Use either EBITDA margin or Free Cash Flow margin

EBITDA Margin (Common)

EBITDA Margin % = (EBITDA / Revenue) × 100

FCF Margin (Alternative)

FCF Margin % = (Free Cash Flow / Revenue) × 100

Example: -$1M EBITDA / $10M revenue = -10% margin

Step 3: Add Them Together

Rule of 40 = 67% growth + (-10%) margin = 57

Score

✓

≥ 40

Target

Rule of 40 Benchmarks

> 50

Excellent

Top quartile SaaS companies. Premium valuation multiples (10-15x ARR). Either very high growth OR very profitable (or balanced).

Examples: 60% growth + (-5%) margin, or 30% growth + 25% margin

40-50

Good

Healthy SaaS company. Above average valuation (7-10x ARR). Balanced growth and profitability approach.

Example: 50% growth + (-10%) margin = 40

30-40

Acceptable

Below threshold but workable. Average valuations (4-7x ARR). Need to improve either growth OR profitability.

Example: 40% growth + (-8%) margin = 32

< 30

Poor

Unsustainable. Low valuation multiples (2-4x ARR). Must fix: either accelerate growth or cut to profitability. Difficult to raise capital.

Example: 25% growth + (-15%) margin = 10

Growth vs Profitability Strategies

High-Growth Strategy

Prioritize growth over profitability. Works best early-stage with strong unit economics.

Example Profile:

100% growth + (-30%) margin = 70

• Invest heavily in sales & marketing
• Negative cash flow acceptable
• Land grab in large market
• Need strong fundraising ability

Profit-Focused Strategy

Prioritize profitability over growth. Good for mature SaaS or challenging fundraising environment.

Example Profile:

25% growth + 20% margin = 45

• Efficient customer acquisition
• Positive cash flow
• Sustainable without funding
• Lower valuation multiples

Why Rule of 40 Matters

Valuation Impact

Companies above 40 trade at 2-3x higher multiples than those below 30. Direct correlation to valuation.

Capital Efficiency

Balances growth investment with profitability. Shows you can grow without burning infinite cash.

Investor Signal

VCs use it as quick health check. Above 40 = strong investment candidate. Below 30 = red flag.

How to Improve Your Rule of 40

Increase Growth

• Expand to new markets/segments
• Launch new products/features
• Increase marketing spend (if CAC works)
• Improve conversion rates
• Build partnerships for distribution

Improve Margin

• Increase prices (10-20% boost)
• Reduce cost of goods sold
• Automate customer support
• Optimize infrastructure costs
• Focus on higher-margin segments

Calculate All Your SaaS Metrics

Rule of 40, growth rate, profitability, and all key metrics in one place

Start Calculating