The Rule of 40 is a very popular concept at the moment. We hear founders citing it with more frequency, doing whatever they can to generate growth and profitability at the same time. But is it real or just an outdated rule of thumb? The data suggests the latter.
Below is every publicly traded SaaS company that has IPO’d since October 2017, of which 62 are still actively traded. The data shows their results in Q1 2024. Looking at the median and average or their rule of 40 results in a median of 6% and average of -4%. If we look at only those companies that are growing above the median, we’re seeing more like the rule of 12% on median.
So where is the Rule of 40? The data certainly isn’t supporting it. Our advice to founders is to continue to push hard for cash-efficient growth. That means generating ARR of at least $0.70 for every dollar of operating loss. Don’t destroy your growth just to get to profitability, or break something trying to get to the Rule of 40, which we don’t see anywhere in the data.
Thank you for your readership. Visit us at blossomstreetventures.com for more SaaS data and blogs. Email the author at sammy@blossomstreetventures.com
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