SaaS and the ‘Rule of 40’ Rule of 40 is a commonly used metric by Investors and Boards to measure the health and growth potential of a SaaS company. It’s a simple calculation that adds the company’s growth rate to its profit margin as a percentage. If the total is equal to or greater than 40, the company is seen as being in a strong financial position and likely to continue growing. For example, if a SaaS company has a 30% year-on-year growth rate and a 20% profit margin, the Rule of 40 number would be 50, which is considered great and investors reward it with higher revenue multiples for valuation!
