Rule of 40

A rough health check for growth-stage software: revenue growth rate plus profit margin should exceed 40.

Example

60% growth with a −15% margin gives 45 — acceptable. 15% growth with a −40% margin gives −25, which is not.

Important

It is a benchmark for companies with real scale, not a target for a company with twenty customers. Applying it early produces the wrong decisions in both directions.

Related terms

• Burn multiple — Net burn divided by net new ARR — how much cash you consume to add a dollar of recurring revenue.
• ARR (Annual Recurring Revenue) — MRR multiplied by 12 — the annualised run rate of your recurring revenue.
• Gross margin — Revenue minus the direct cost of delivering it, as a percentage of revenue.
• Profitability — Making more than you spend over a period.

All 176 terms in the Founder glossary