Rule of 40

Definition

A software screen: growth rate plus profit margin should clear 40.

Why It Matters

Investors in recurring-revenue software use it to decide whether a company is allowed to be unprofitable. A business growing 30% at a 15% margin clears it; one growing 10% at a 10% margin does not, and no story about future scale fixes the arithmetic. For a buyer the useful part is the trade it makes explicit: every point of margin you spend on growth has to buy more than a point of growth, and a seller who has been buying growth expensively will show it here before it shows anywhere else.

In numbers: A company growing 22% with a 12% EBITDA margin scores 34, under the bar; the same growth at a 20% margin scores 42 and clears it.