Rule of 40 (SaaS)
Short answer
Rule of 40 is a SaaS heuristic popularised by Brad Feld and SaaStr: ARR growth rate (%) + EBITDA margin (%) should sum to at least 40. It captures the trade-off between growth and profitability — companies scoring 40+ are conventionally considered investable at SaaS multiples regardless of which side of the equation provides the points.
Formula
Rule of 40 = Revenue Growth Rate (%) + EBITDA Margin (%)
Add your year-over-year revenue growth percentage to your EBITDA margin percentage. The sum should be ≥ 40.
Why it matters
The Rule of 40 is the canonical SaaS efficiency benchmark — invented by Brad Feld and SaaStr. It captures the trade-off between growth and profitability. Either grow fast or be profitable; you don't need both, but you need their sum to clear 40.
Benchmarks
People also ask
Common questions about Rule of 40 (SaaS)
What is Rule of 40 (SaaS)?+
The Rule of 40 says a healthy SaaS company's revenue growth rate plus EBITDA margin should add up to at least 40.
How is Rule of 40 (SaaS) calculated?+
Add your year-over-year revenue growth percentage to your EBITDA margin percentage. The sum should be ≥ 40.
What is a good Rule of 40 (SaaS)?+
A healthy rule of 40 (saas) is typically around ≥ 60 — best-in-class. Specific targets vary by industry and stage; check our benchmarks above for your sector.
Why does Rule of 40 (SaaS) matter?+
The Rule of 40 is the canonical SaaS efficiency benchmark — invented by Brad Feld and SaaStr. It captures the trade-off between growth and profitability.
See your business's rule of 40 (saas).
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Related concepts
Where this matters most
See Rule of 40 (SaaS) in the context of saas & software.
Industry-specific benchmarks, common pitfalls, and what lenders look for in this sector.