SaaS Rule of 40 Calculator
The Rule of 40 = (ARR Growth Rate %) + (FCF Margin %) ≥ 40. A composite health metric balancing growth and profitability. Public SaaS companies above Rule of 40 trade at premium multiples; below, valuation discount. Source: Brad Feld, Bessemer Cloud Index.
What Is the Rule of 40?
Originated by Brad Feld, the Rule of 40 states that a SaaS company's annual revenue growth rate (%) plus its FCF margin (%) should exceed 40%. Examples: 60% growth + (-20%) margin = 40. 20% growth + 20% margin = 40. The trade-off: invest heavily in growth (accept low/negative margin) OR optimize for profit (slow growth) — but the sum should remain ≥40%. Source: Brad Feld blog post 2015.
Why Investors Care
Public SaaS companies above Rule of 40 trade at average EV/Revenue multiples 30-50% higher than below-rule companies. Bessemer Cloud Index tracks this regularly. In private rounds, Rule of 40 is a key benchmark for Series B+ funding. Sub-40 in 2027's tight funding environment makes raising harder.
How to Improve Rule of 40 Score
Option A — Grow faster: increase sales team capacity, expand TAM, reduce sales cycle, improve win rates. Best for early-stage companies with strong product-market fit and large TAM. Option B — Improve margin: increase prices, reduce churn, automate support, optimize R&D allocation. Best for mid/late-stage companies with established positions.
Rule of 40 Variations
Some variants use Net Revenue Retention (NRR) + FCF margin or use EBITDA margin instead of FCF margin. EBITDA-based: typically 5-10 points higher than FCF-based (excluding capex). When comparing companies, ensure consistent metric definitions.