The Rule of 40 is the SaaS heuristic stating that revenue growth rate plus profit margin should be 40% or more. The metric provides a single number balancing growth (which drives valuation but costs cash) and profitability (which signals capital efficiency). It is widely used by SaaS investors as a quick health check at growth and scale-up companies, with the underlying logic being that companies should either grow fast enough to justify burn (high growth + negative profit OK) or be profitable enough to justify slower growth (modest growth + positive profit OK). It is a useful directional metric and one frequently misapplied at early-stage where the math doesn't work yet.
The calculation:
Basic formula: