      Dave Kellogg (publication unknown) · 2017-07-25
      · 3236d
    

The SaaS Rule of 40: Balancing Growth and Profitability

The Rule of 40 is a key metric for valuing SaaS companies, where growth rate plus profit margin should equal or exceed 40%. This framework emerged after the 2016 SaaSacre as investors shifted from a growth-at-all-costs mindset to valuing balanced growth and profitability. The Rule of 40 score explains nearly 50% of SaaS company valuation multiples.

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Metrics in this report

Public SaaS Companies Above Rule of 40

42%

percentage

Public SaaS companies by count

Public SaaS Market Cap Above Rule of 40

77%

percentage

Total public SaaS market capitalization

Rule of 40 Threshold

40%

minimum

Growth rate + profit margin for SaaS companies

Rule of 40 Valuation Explanation

50%

R-squared

Variance in SaaS company valuation multiples explained by Rule of 40 score

Tintri Growth Rate

45%

at IPO

Revenue growth at public offering

Tintri Operating Margin

-81%

at IPO

Operating margin at public offering