Growth benchmarks are important indicators of your company’s success and are useful for setting goals. One such growth benchmark is the “Rule of 40” or R40. Below, we define how R40 is calculated, why it is an important metric for investors, and share the rates you need to be at to be considered in the top quartile of same-stage SaaS companies.
Rule of 40 Defined
Before analyzing the Rule of 40 (R40) and how your company’s R40 compares to that of other similar-stage SaaS companies, it is important to understand how R40 is calculated:
Rule of 40 = ARR Growth YoY % + Net Margin %
R40 is a measure of growth vs burn for both VC-backed and bootstrapped SaaS businesses. VC-backed companies typically have very good ARR growth, but are cash burning, and consequently have negative net margin. Bootstrapped businesses by nature have positive net margin, but more moderate growth.
Because R40 balances growth against burn, it’s a useful metric to determine the health of a business at a glance. It’s generally believed that to be attractive to investors, you need to achieve at least 40% ARR Growth YoY + Net Margin - hence the “Rule of 40”.
Comparing R40 by Company Stage
If you are looking to benchmark your company’s R40 against other SaaS companies, there are a few important trends to understand:
- Best-in-class companies (with ARR between $1 - $15m) consistently achieve an R40 of at least 80% - suggesting they pay just as much attention to unit economics as they do to top-line growth
- Even after going public, by which point ARR Growth YoY % will have slowed down significantly, top performers still achieve an R40 of 60%
About Our Data & SaaS Company Benchmark Report
Whether you’re planning to raise funding or preparing your worst-case scenario, it’s more important than ever to have a razor-sharp understanding of what good performance looks like and which metrics are the markers of a healthy SaaS business. You can view the entire benchmark report, including which companies we analyzed, here.
For this report, we analyzed 439 private SaaS companies with $1 - 15m Annual Recurring Revenue. The data reflects actual financial performance, sourced directly from companies’ own records. We believe it is the largest dataset of its kind that is based on financial actuals, rather than survey data.
We then compared the performance of these private companies against 43 SaaS businesses that went public in 2020 and 2021. Data on public SaaS performance was sourced from their S-1 filings.
Or, for more analyses of important SaaS benchmarks, see our findings on: