![]() ![]() In reality, the top quintile of tech companies reaches a gross profit ratio of 50% in such a short time. The Rule of 40 was created by venture capitalists as a simple way to measure the success of small, fast-growing businesses.Įxecutives in the tech industry are increasingly using the Rule of 40 as a key criterion for assessing the trade-offs involved in managing growth and profitability.īeating the Rule of 40 in a single year is not unusual for bigger businesses. The rule of 40 is among the strongest indicators that puts forward you are successful as a SaaS company. While the punch line is that you can lose money if you are growing faster, the minimum point of happiness is 40% annual growth rate. Rule of 40 was first written by Brad Feld It solves the complex question for founder on how to balance growth and profitability. This is a simple rule of thumb to measure and track technology startups. ![]() ![]() Growth = Flat 0% you have 40% profit margins.Growth = 20% you have a 20% profit margins.Growth = 40% you can't burn cash, you have to break even.Growth = 50% you can have a burn rate of 10%.Growth = 100% you can have a burn rate of 60%.Rule of 40 says that a tech company can make losses, burn cash as in order to drive growth - as long as the company is scaling the business and growth is more than 40%. The rule of 40 became a well-adapted industry standard to measure technology startups. It is tough to balance between growth & profits for startups founders. ![]()
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