Alp SuleimanGrowth Partner

Benchmarks

Rule of 40: what is a good score?

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Short answer

The Rule of 40 asks that growth rate plus profit add up to 40%. Brad Feld heard it from a late stage investor; it is meant for SaaS at scale, at least $50 million in revenue. 20% growth with 20% profit meets it. It is a rule of thumb; there is no measured industry average behind it.

Ranges by segment

SegmentRangeContext
ThresholdGrowth % + profit % = 401Feld: ‘your growth rate + your profit should add up to 40%.’ An investor's rule of thumb; no measured industry average behind it.
Feld's example: balanced20% growth · 20% profit1Feld's own example.
Feld's example: growth with no profit40% growth · 0% profit1Feld: if you are growing at 40%, you should be generating a 0% profit.
Feld's example: growth with a loss50% growth · 10% loss1Feld: if you are growing at 50%, you can lose 10%. Doing better than 40% is, in his word, ‘awesome’.
At what scaleAt least $50M in revenue1Feld describes the rule for SaaS companies at scale. He adds that his own product/market fit analysis correlates with it once you hit about $1M of MRR.
Bessemer's scale caution$25M+ ARR (Bessemer)2Bessemer: the efficiency score is generally applicable after $25M+ ARR; revenue bases below that are ‘too small for it to be meaningful’.
Which profit measureFeld's preference: EBITDA1Feld uses EBITDA as the baseline and backtests with operating income, net income and free cash flow. You have to be precise about which number you use.

Reminder: These ranges are reference points, not targets. Your segment, contract structure and stage change the number.

Rule of 40

How to read it

  • Feld does not present the rule as his own invention. He writes that at a board meeting he heard a late stage investor describe what the investor's firm called the 40% rule. The name belongs to the investor, the write-up to Feld.
  • For growth, Feld's own baseline is year-over-year growth of monthly MRR, which he finds the easiest and cleanest. Total revenue works too, but you should also run MRR: if there is one-time services revenue in the mix, GAAP accounting can show odd things. For profit he prefers EBITDA; if you run your own infrastructure, EBITDA, operating income and free cash flow diverge from net income and cash flow because of equipment purchases, debt and lease expense.
  • The threshold is one number, but the same total can hide two very different businesses. In Feld's own examples 20% + 20% and 50% − 10% give the same score. Look at which component carries it (our inference).
  • Scale matters. Feld describes the rule for companies with at least $50 million in revenue and tells sub-scale companies to focus first on getting to scale, then on the 40% rule. Bessemer likewise says efficiency scores are generally meaningful above $25 million ARR; the thresholds differ, the direction is the same.

What moves this metric

  • 01

    Growth

    Feld's baseline is the year-over-year change in monthly MRR, which he calls the easiest and cleanest. Total revenue or ARR also work; check the others to see what is going on underneath.

  • 02

    Profit measure

    Feld takes EBITDA as the baseline; if you run your own infrastructure, operating income and free cash flow diverge from net income. State which measure you chose.

  • 03

    Gross margin

    Feld also suggests backtesting growth against year-over-year growth of gross margin: it shows whether COGS scale properly with revenue.

  • 04

    Slowing down to reach profit

    Feld writes that he often hears sub-scale SaaS companies say ‘we can get profitable right away if we slow down our growth rate.’ That is often true, he says, but at 20% growth and 20% profit you stay sub-scale much longer.

Calculate your own

Rule of 40 calculatorGlossary term: Rule of 40 →

Frequently asked

What should my Rule of 40 score be?

On the rule as Feld reports it, growth rate plus profit should add up to 40%; better is ‘awesome’. It is a rule of thumb with no measured industry average behind it.

Who came up with the rule?

Feld writes that he heard it from a late stage investor at a board meeting, whose firm called it the 40% rule. He does not present it as his own.

Which profit measure should I use?

Feld takes EBITDA as the baseline and backtests with the others. If you run your own infrastructure the results diverge; state the number you use.

Sources

  1. 1.Brad Feld, “The Rule of 40% For a Healthy SaaS Company” (feld.com, February 2015)Year and scope: 2015. A rule of thumb relayed from an investor, for SaaS companies at scale (at least $50M revenue); it contains no measured sample or industry average.
  2. 2.Bessemer, “Scaling to $100 Million” (2021)Year and scope: 2021. Bessemer's scale caution for its ‘efficiency score’; it gives no measured industry average.