How close are publicly traded SaaS companies to achieving the Rule of 40? They’re not. Below is Rule of 40 math in 2024 and 2023 for SaaS companies that have gone public since October 2017. 63 of them are still public Observations follow:
Rule of 9? On median in 2024 and 2023, the data shows that Rule of 40 was more like Rule of 9. The averages in 2024 and 2023 were even worse, at 2% and 2%.
Profitable companies are closer. Profitable companies on median had a Rule of 21 in 2024 while unprofitable ones had a Rule of -4%. The profitable companies got there with a blend of margins and growth; the median operating margin was 11% while median YOY growth was 9%. The unprofitable companies had far stronger growth with a median of 22% but where weighed down by a median operating margin of -18%.
The paradox of valuation. While profitable companies are much closer to the Rule of 40, they achieve much lower multiples than high growth companies with higher losses. In our quarterly analysis of SaaS comps (different blog), we showed that of the publicly traded SaaS companies we follow, the 50 most profitable but slowest growing companies have average and median revenue multiples of 10.2x and 6.5x respectively. Alternatively, the 50 fastest growing but least profitable companies have average and median revenue multiples of 14.7x and 9.8x.
Should you strive for Rule of 40 in your SaaS business? We’ve always been dubious of Rule of 40 and actually believe it to be a dated, somewhat lazy saying. Instead, push for cash efficient growth with high customers that show high retention rates (100%+ NDR).
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.
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