Rule of 40

Definition

A metric suggesting that growth rate + profit margin should equal 40% for a healthy software company—8% growth with 32% margin, or 35% growth with 5% margin, both equal 40.

Example Usage

Our 30% growth rate and 15% profit margin met the Rule of 40, signaling we were well-positioned for next-stage growth.

Origin

Coined by venture investor Brad Feld in 2015, popularized by Bessemer Venture Partners.

Fun Fact

Most venture-backed startups violate the Rule of 40 (prioritizing growth over profitability) until they approach maturity.

Source: Modern SaaS metrics terminology

Related Terms

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Intermediate

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carried interest

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runway fumes

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Intermediate

capital call

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🚀 Startup / VC

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