Hero Graphic Prompt
Headline:
Growth Alone Won’t Save You
Subhead:
Investors demand growth and efficiency. The Rule of 40 proves both.
The Rule of 40 Isn’t Just for SaaS Anymore
The Rule of 40 started as Silicon Valley’s shorthand for figuring out if a SaaS company was worth betting on. But it’s no longer just a SaaS thing—it’s a capital discipline that’s bleeding into every industry where growth and profitability are on a collision course.
Let’s unpack why this 2-number formula is showing up in boardrooms from manufacturing to consulting.
The Original Rule of 40 (SaaS Edition)
In SaaS, the Rule of 40 is:
Revenue Growth Rate (%) + Profit Margin (%)
If the total is 40% or higher, you’re a balanced business—either growing fast enough to excuse losses, or profitable enough to survive slower growth.
Examples:
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30% growth and 15% profit margin = 45% → thumbs up
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60% growth and -30% margin = 30% → red flag territory
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10% growth and 35% profit = 45% → stable and investable
Venture capitalists, private equity firms, and public market investors all use this as a quick sniff test for health and sustainability—especially in a market where cash isn’t cheap anymore.
Current enterprise valuations for SaaS companies that meet or exceed the Rule of 40 are generally higher, often twice as high, compared to those that don't meet the benchmark. For instance in 2025, a SaaS company can expect EV/Revenue Multiples of 8x-12x if they are performing at >40% in the Rule of 40 whereas a company performing in the 20%-30% range can expect EV/Revenue Multiples of 3x-5x. That's a big difference when you're looking to sell your company!
Rule of 40 Thinking Outside SaaS
Let’s be clear—most industries don’t literally say “Rule of 40”. But the mindset? It’s everywhere.
Manufacturing
You’ll see a flavor of the Rule of 40 in:
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ROIC (Return on Invested Capital)
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Asset Turnover + EBITDA Margin
These metrics tell you if your machines, labor, and capital are working hard enough and paying off. Think of it as “build smart, grow steady.”
Product Companies (CPG, DTC, Industrial)
Here the playbook is:
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Revenue Growth + Contribution Margin
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Revenue Growth + CAC Payback < 12 Months
This is Rule of 40 in disguise—especially when acquisition costs and inventory turnover determine survival.
Professional Services
Consulting firms and agencies often track:
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Revenue Growth + Utilization Rate
Call it the Rule of 60, if you like. The point is the same: you’re only as strong as your bench is billable and your pipeline is growing.
Tech-Adjacent Sectors (Fintech, Healthtech, Proptech)
Anything subscription-based or recurring revenue-heavy—whether it’s managing rent payments, health records, or personal finance—is getting judged on a growth + margin combo. Just like SaaS.
Why It Matters Now
During free-money eras of super low interest rates, you can grow like a weed and worry about profits later. That's definitely not the case today.
Today’s capital markets punish companies that can’t show a clear path to profitability, even if they’re growing fast. And investors are no longer wooed by vanity metrics.
The Rule of 40 is the antidote to that delusion. It asks a simple question:
“Are you growing fast enough to justify your burn?”
If not, sharpen the axe or change your pitch.
AI Prompts
Use these prompts to apply Rule of 40 thinking in your own business:
- What are the valuation multiples for SaaS companies based on their Rule of 40 score?
- What are the valuation multiples for manufacturing companies based on their Asset Turnover and EBITDA Margin?
Final Thought
Whether you’re running a SaaS platform, selling freight software, managing a design agency, or making industrial pumps—investors care about the same thing: smart, sustainable growth.
The Rule of 40 started as a SaaS metric. Now it’s a business religion. And if you’re not using some version of it to guide your strategy, chances are your competitors—or your investors—already are.
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