the Rule of 40—the idea that a software company’s combined growth rate and profit margin should be greater than 40%—has gained traction as a high-level metric for software company success, especially in the realms of venture capital and growth equity.
The popular metric Rule of 40 says that a SaaS company’s growth rate when added to its free cash flow rate should equal 40% or higher. The rule has become a favourite of SaaS industry watchers, including boards and management teams because it neatly distills a company’s operating performance into one number.