What is the rule of 40 in sales?

What Is the Rule of 40 in SaaS Sales?

The Rule of 40 has become a go-to benchmark for evaluating the health of SaaS companies, especially in the eyes of investors. At its core, it’s a simple but powerful formula: revenue growth rate (%) plus EBITDA margin (%) should equal or exceed 40%. This concept, popularized by venture capitalist Brad Feld, helps balance the often-competing priorities of growth and profitability.

Why does this matter? In the fast-paced world of SaaS, companies are often pressured to grow quickly—sometimes at the expense of profits. But burning cash indefinitely isn’t sustainable. On the flip side, a highly profitable company with stagnant growth may lack long-term potential. The Rule of 40 offers a middle ground: a company growing at 30% annually only needs to be within 10 percentage points of profitability to meet the standard. Conversely, a slower-growing business at 15% growth would need to achieve a 25% EBITDA margin to stay in compliance.

It’s not a rigid law, but rather a guiding principle. For early-stage startups, heavy investment in growth (and thus negative margins) can be justified—especially if revenue is scaling rapidly. But as companies mature, the expectation shifts toward achieving a healthier balance. Public market analysts and venture investors alike use this metric to assess performance, make funding decisions, and benchmark against peers.

While the Rule of 40 isn’t perfect—and doesn’t account for factors like customer churn or capital efficiency—it remains a valuable litmus test. In a landscape where both speed and sustainability matter, it helps founders and investors ask the right questions: Are we growing fast enough to justify our losses? Or are we sacrificing too much potential for short-term profit?