What is a good Rule of 40 score for a SaaS company?

40+ is the baseline that passes the rule. 50+ is above average and begins attracting premium investor interest. 60+ is top-tier, achieved by companies with strong growth combined with improving margins. The median for publicly traded SaaS companies is approximately 38-42, meaning only about half of public SaaS companies actually pass the Rule of 40.

Rule of 40: How It Works and Its Impact on Your SaaS Valuation Multiple

Q: What is the Rule of 40 in SaaS?

The Rule of 40 is a SaaS benchmark where Revenue Growth Rate (%) + EBITDA Margin (%) should equal or exceed 40. A company growing at 60% with -20% EBITDA margin scores exactly 40 and passes. The rule balances growth and profitability, acknowledging that fast-growing companies can burn cash as long as their combined score remains healthy.

The Rule of 40 is now the dominant valuation benchmark for SaaS investors. Every 10-point improvement above 40 adds approximately 1.0-1.5x to your ARR multiple.

What is the Rule of 40?

The Rule of 40 is: Revenue Growth Rate (%) + EBITDA Margin (%) ≥ 40. It was popularised by Brad Feld and Bessemer Venture Partners as a simple test of whether a SaaS company has a sustainable balance between growth and profitability.

The rule acknowledges that early-stage SaaS companies should prioritise growth over profitability, but not at unlimited cost. A company burning 40% of revenue to grow at 80% is passing (80 + (-40) = 40). A company growing at 10% with 15% margins is also passing (10 + 15 = 25... actually failing). This is why profitable but slow-growing companies often fail the rule.

Rule of 40 Examples

Scenario	Growth	EBITDA Margin	Score	Result
Hyper-growth startup	80%	-40%	40	Passes
Growth + efficiency	50%	-5%	45	Passes
Profitable, slow growth	20%	25%	45	Passes
Sluggish + marginally profitable	10%	15%	25	Fails
High burn, low growth	15%	-30%	-15	Fails badly

Rule of 40 Score to Multiple Table

Based on KeyBanc KBCM survey data, every 10-point improvement above the 40 threshold is worth approximately 1.0-1.5x additional ARR multiple. The table below shows the typical EV/ARR premium or discount associated with each score band.

Rule of 40 Score	EV/ARR Impact	Investor Framing	Typical ARR Multiple
70+	+3.0 to +5.0x above baseline	Top decile; rarely seen	12-18x+
60-70	+2.0 to +3.0x above baseline	Premium tier	9-12x
50-60	+1.0 to +2.0x above baseline	Above average; investor interest	7-9x
40-50	Baseline (0 adjustment)	Meets the rule	5-7x
30-40	-0.5 to -1.0x below baseline	Below expectation	4-6x
Below 30	-1.0 to -2.0x below baseline	Concern; requires explanation	2-4x

Source: KeyBanc KBCM Annual SaaS Survey 2025. Multiples assume median growth rate (40-60% YoY).

Why Rule of 40 Replaced Growth at All Costs

From 2015 to 2021, pure growth rate was the dominant SaaS valuation driver. Companies could burn at 3x burn multiples and still command premium multiples because cheap capital was abundant and investors priced in future profitability at near-zero discount rates.

The 2022 rate-hiking cycle changed the math permanently. With risk-free rates above 5%, the opportunity cost of capital became real. Investors started penalising companies that burned heavily without a clear path to profitability. The Rule of 40 became the dominant screening metric because it explicitly rewards capital efficiency alongside growth.

In 2024-2026, EBITDA-positive SaaS companies command a 20-40% premium over cash-burning peers at the same growth rate in private M&A processes. The Rule of 40 has evolved from a screening benchmark to a direct multiple driver.

Rule of 40 vs Rule of X

Some investors and analysts have proposed a “Rule of X” that weights profitability more heavily than growth. The argument is that in a higher-rate environment, profitable revenue should be worth more than growth. Rule of X proposals typically use a formula like Growth + (2 x EBITDA Margin), effectively doubling the weight of margin.

As of Q1 2026, Rule of X remains an emerging framework used by a subset of growth equity and PE investors, particularly those focused on late-stage, cash-generative businesses. The Rule of 40 remains the standard benchmark for growth-stage SaaS (Series A through pre-IPO). Use Rule of X as a supplementary lens if you are a profitable company with moderate growth.

Rule of 40 Benchmarks by ARR Size

ARR Range	Median Rule of 40	P75 Score
Under $10M ARR	28-35	45+
$10M-$25M ARR	33-40	52+
$25M-$50M ARR	36-42	55+
$50M-$100M ARR	38-45	58+
$100M+ ARR	40-48	62+

Source: KeyBanc KBCM Annual SaaS Survey 2025. Note: smaller companies often struggle to pass Rule of 40 because early growth investments create margin pressure.

Calculate Your Score

Revenue Growth Rate40%

0%150%

EBITDA Margin-5%

-80%+50%

Key Stat

1.0-1.5x

Multiple uplift per 10-point Rule of 40 improvement

Source: KeyBanc KBCM 2025

Frequently Asked Questions

What is the Rule of 40 in SaaS?

The Rule of 40 states that Revenue Growth Rate (%) + EBITDA Margin (%) should equal or exceed 40. It was popularised by Brad Feld and Bessemer Venture Partners as a simple test of whether a SaaS company has a sustainable balance between growth and profitability. A company at 60% growth with -20% EBITDA margin scores exactly 40. A company at 20% growth with 25% EBITDA margin also scores 45.

How does Rule of 40 affect SaaS valuation?

Every 10-point improvement in Rule of 40 score above 40 is worth approximately 1.0-1.5x additional ARR multiple, according to KeyBanc KBCM survey data. A company scoring 60 commands roughly 2-3x premium over a company scoring 40 at the same growth rate. Companies below 40 face a multiple discount of 0.5-2.0x depending on how far below they fall.

What is a good Rule of 40 score?

40+ is the baseline. 50+ is above average and attracts premium investor interest. 60+ is top-tier. The median for publicly traded SaaS companies is approximately 38-45, meaning roughly half of public SaaS companies pass the rule. Private companies at growth stage often score below 40 because early growth investments create margin pressure. Context matters: a company aggressively investing in a large market opportunity is expected to score below 40 temporarily.