Rule of 40
Balances growth vs profitability at scale ($50M+ rev).
- Formula
- Revenue growth % + profit margin % >= 40
- Unit
- pts
- Models
- SaaS, Usage-based, Subscription
| Cloud Index average | 31 | Brad Feld (2015); Bessemer Rule of X; Aventis 2026 |
| Cloud Index top decile | 48+ | Brad Feld (2015); Bessemer Rule of X; Aventis 2026 |
| EBITDA basis — share clearing 40 | 15 | Brad Feld (2015); Bessemer Rule of X; Aventis 2026 |
| FCF basis — share clearing 40 | 46 | Brad Feld (2015); Bessemer Rule of X; Aventis 2026 |
What it is
The Rule of 40 is a health check for SaaS and subscription businesses: Revenue growth % + Profit margin % >= 40. A score at or above 40 points is considered strong. It was popularized by Brad Feld in 2015 and has since become a standard investor shorthand for balancing growth and profitability.
How to calculate it
Add the year-over-year revenue growth rate (as a percentage) to a profit margin percentage. The margin component is where definitions diverge significantly — EBITDA margin and free cash flow (FCF) margin are the two most common choices, and they produce materially different results.
Why it matters
The Rule of 40 lets investors and operators evaluate trade-offs between growth and profitability on a single axis. A company growing 60% with −20% EBITDA margin scores 40 and is considered equivalent to one growing 20% with 20% EBITDA margin. It is most applicable to SaaS, usage-based, and subscription models; it is less meaningful for ecommerce or marketplace businesses where gross margins are structurally lower.
Benchmarks & pitfalls
According to Bessemer and Aventis 2026 data, the Cloud Index average sits at roughly 31 points and the top decile at roughly 48 points. The most critical pitfall is margin basis: only about 15% of companies clear 40 on an EBITDA basis, while roughly 46% clear it on an FCF basis — a swing of roughly 16 points. Always specify which margin definition is being used; comparisons across different bases are not valid. The Rule of 40 also loses meaning at very early stage (pre-growth-mode) or for hardware-heavy businesses.