What is the Rule of 40?
The Rule of 40 is the gold standard SaaS health metric: a company's ARR growth rate plus its profit margin should equal or exceed 40. Introduced by Brad Feld and widely adopted by VC firms after Bessemer Venture Partners formalized it, R40 captures the fundamental trade-off every SaaS company faces — you can grow fast and burn cash, or grow slow and stay profitable, but the sum of those two rates tells investors how efficiently you're building.
How to Calculate Rule of 40
The formula is simple: Rule of 40 = ARR Growth Rate % + Profit Margin %
A company growing 60% YoY with −20% EBITDA margin scores 40. A company growing 20% with +20% FCF margin also scores 40. Both are considered investment-grade. The BVP-weighted variant (growth × 1.33 + margin × 0.67) accounts for the fact that early-stage growth is harder to sustain than margin improvement.
Rule of 40 by Stage: What's Normal?
Seed
R40 10–25
Growth is everything. Margin matters much less.
Series A
R40 20–35
Path to 40 should be clear by close.
Series B
R40 35–50
R40 ≥ 40 is the benchmark. Investors check.
Pre-IPO
R40 40–60+
Efficiency drives public market multiple.
How Rule of 40 Affects Your Valuation
Public SaaS companies at R40 > 40 trade at 7×–15× ARR. Below 40, multiples compress to 3×–5×. The relationship isn't linear — there's a step-change at 40 where investor appetite shifts, reflecting the fundamental change in risk profile when a company is both growing and profitable. At R40 > 60, companies like Snowflake and Palantir have historically commanded 15×–25× ARR multiples.
Standard vs BVP-Weighted vs GM-Adjusted Rule of 40
The standard Rule of 40 weights growth and margin equally. The BVP-weighted variant (Bessemer Venture Partners methodology) weights growth 1.33× and margin 0.67× — reflecting that early-stage growth is harder to sustain and deserves more credit. The GM-adjusted score normalizes for gross margin: a 50% GM company growing 60% is less capital-efficient than an 80% GM company growing at the same rate. Use GM-adjusted R40 when comparing across industries with structurally different gross margins.