The Rule of 40 (using adjusted EBITDA) is a financial benchmark for SaaS companies stating that their annual revenue growth rate plus their adjusted EBITDA margin should equal or exceed 40%. It ensures that a company is not sacrificing too much profitability for growth, or vice-versa, with a sum ≥ 40 % ≥ 4 0 % indicating a healthy, sustainable balance.
The Rule of 40 SaaS states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.
Rule of 40 = Revenue Growth Rate (%) + Profit Margin (%)
Some other potential examples of the Rule of 40 include the following: Revenue Growth Rate of 20% + Profit Margin of 20% = 40% Revenue Growth Rate of 0% + Profit Margin of 40% = 40%
The data shows their Rule of 40 results in Q2 2025. The median is 12%, average is 6%, and interestingly median Rule of 40 is below median growth of 15% which implies negative profitability. If we look at only those companies that are growing above the 15% median, we're seeing more like the rule of 18% on median.
On the other hand, a high Rule of 40 can be misleading when the metrics are out of balance. For example, a company growing 80% with -30% EBITDA margin. The Rule of 40 is equal to 50, but a heavy cash burn can be unsustainable.
When to Use the Rule of 40. The Rule of 40 provides the most value for mature SaaS companies with established business models. Early-stage startups often prioritize aggressive growth over immediate profitability, making this metric less applicable since the company is only focusing on half of the equation.
The goal of a business is to create and keep customers. Profits are a measurement of how well the company does it. If you think the goal is profits, you will make decisions that alienate customers and eventually won't have a company.
Tesla, Inc. (TSLA) Rule of 40 (EBIT margin) annual & quarterly (2006–2024) Rule of 40 (EBIT margin) is a performance metric used to evaluate the balance between growth and profitability in software companies, combining EBIT margin and revenue growth rate.
Yes, retiring at 40 with $2 million is possible but challenging, requiring a lean lifestyle, low-cost-of-living location, and careful management of long-term costs like healthcare, as $2 million needs to last potentially 50+ years, necessitating a sustainable withdrawal rate (like the 4% rule for ~$80k/year) plus income diversification (Social Security later, part-time work) to combat inflation and market volatility.
What is 3GP, and how does it differ from the Rule of 40? 3GP (3 * revenue growth + profitability) is an alternative SaaS performance metric that places triple the emphasis on revenue growth compared to profitability. It better reflects valuation trends and the long-term value creation potential of SaaS businesses.
40% margin = 66.7% markup.
Average EBITDA Multiple range: 3.00x – 5.00x
The average EBITDA multiples for a small business typically fall between 3.00x – 5.00x.
The Rule of 40 wasn't born in a spreadsheet or MBA classroom. It came from a board meeting. Brad Feld, a venture capitalist and co-founder of Techstars, first blogged about it in 2015, after hearing it from a late-stage investor.
Warren Buffett's 8+8+8 Rule — A Lesson for Every Professional This rule reminds us of the importance of balance in our daily lives: 8 hours for work, 8 hours for rest, and 8 hours for personal time. This principle highlights the value of employee well-being, productivity, and sustainable performance.
A 2019 study by Harvard Business Review found either Vanguard, BlackRock or State Street is the largest listed owner of 88% of S&P 500 companies. There is a perception that a few select companies own a vast majority of the stock market.
Palantir's Rule of 40 performance has been exceptional, with scores recently reaching over 100% (e.g., 114% in Q3 2025), far exceeding the benchmark of 40% for fast-growing software companies, by combining high revenue growth (around 47-62%) with strong profitability (operating margins near 46-51%), showcasing a significant balance of rapid expansion and efficiency. This strong performance, particularly its accelerating scores, has led analysts to view Palantir as an elite software performer, suggesting strong potential despite traditional valuation concerns.
In the simplest terms, the Rule of 40 states that a company's combined growth rate plus profit margin should always reach or exceed 40%. It was popularized when Techstars founder Brad Feld wrote about it in 2015, after he heard it from a late-stage investor at a board meeting.
A company makes real progress only when its profits increase because that means it's managing its expenses well while still attracting customers. Focusing solely on turnover refers to chasing vanity metrics that don't necessarily indicate the long-term health or sustainability of a business.
Profit motive is thought to be one of the main drivers behind economic activity. Economists have often tried to figure out why people do the things that they do. Some answers point to simple survival. In most situations, people need some form of income to pay for the necessities of life.
Another reason why some firms may not profit maximise is in order to minimize the risk of investigation from the competition and markets authority. A firm operating at the profit maximization point is not acting in the consumer's interest.