Companies we deem as scalable – derived from private equity formulas.
Why does this matter?
The Rule 40-the principle that a company's combined growth rate and profit margin should exceed 40%. The Rule of 40 is an important metric to help measure the trade-offs of balancing growth and profitability. We use this ratio to identify companies that are doing a good job of managing top-line revenue growth and profit margins.
The Rule-40 has typically been used by private equity firms to value SaaS technology companies. SaaS management teams are often driving towards either rapid growth or increased profitability, and the Rule of 40 has become a construct for framing the balance of these two phenomena.