Rule of 40

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The Rule of 40 is a financial heuristic used to measure the performance and health of software as a service (SaaS) companies. It states that a SaaS company's annual revenue growth rate and its profit margin should add up to 40% or more. The rule provides a high-level view of a company's sustainability by balancing two competing objectives: growth and profitability. It is widely used by venture capitalists, public market investors, and company executives to assess the trade-offs in capital allocation and strategy, particularly in determining whether to invest more heavily in growth or to focus on operational efficiency.

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