Rule of 40: Only 11% of Private SaaS Firms Meet It

The Rule of 40 says a software company’s revenue growth rate plus its profit margin should add up to more than 40, and in KeyBanc Capital Markets and Sapphire Ventures’ 2024 survey of private SaaS companies only 11% of the 46 companies that reported a score cleared it [1][2].

Bain & Company, which measured the rule across public software, found a higher share: 40% of 124 listed software companies beat it in 2017, but only 25% of the 86 it tracked across five years beat it in three or more of them [1]. You’ll find both datasets in full below.

So 40 is not the normal standard. It's a stretch target a minority of companies reach, and a smaller minority hold.

Two primary datasets carry this post. Bain’s 2018 brief covers public software companies from 2013 to 2017 [1]. The KeyBanc and Sapphire survey covers 104 private SaaS companies, with 46 to 53 answering any single metric, and its 2024 column holds company estimates rather than results [2].

What you get below that neither source prints: the two datasets in one attainment table, the valuation premium per band priced against a real revenue line, and the score three company sizes would post if they sat on the survey medians. Every step of arithmetic is shown, so you can redo it on paper.

What is the Rule of 40?

The Rule of 40 is the principle that a software company’s combined revenue growth rate and profit margin should exceed 40% [1]. Add the two percentages. Above 40 you're over the line, below it you're not. That's the whole of the arithmetic.

The catch sits in the second input. Bain states that analysts have differed on which measure of profitability to use, with most using EBITDA and others proposing free cash flow, EBIT or net income [1]. Bain uses EBITDA, which it describes as a publicly available profitability metric that excludes the effect of taxes and accounting policies [1].

So there is no single Rule of 40, just a formula with one slot that the person reading your deck gets to fill. Ask which margin they use before you put a score on your slide.

How do I calculate the Rule of 40?

Add your revenue growth rate for the last twelve months to your profit margin over the same period, both as percentages. Growth of 30% with an EBITDA margin of 5% gives a score of 35, which is under the line. The same growth with a 12% margin gives 42, which is over it.

Negative margins subtract, which is why an unprofitable company always scores below its own growth rate. At 35% growth and a margin of minus 10%, your score is 25.

What is the Rule of 40 for EBITDA?

For EBITDA the rule reads: revenue growth rate plus EBITDA margin above 40. That's Bain’s version and the one most analysts use [1]. KeyBanc builds its public-company chart the same way, with the axis defined as next-twelve-months revenue growth rate plus next-twelve-months EBITDA margin [2][3].

Use EBITDA when an investor or a bank is reading, because that's the convention both of those sources follow [1][2]. If you report free cash flow or net income instead, say so on the slide. The same company can print two different scores depending on which line goes in, so the definition belongs under the number, where your reader can't miss it.

Where does the Rule of 40 come from?

Bain’s brief says venture capitalists began to popularize the Rule of 40 in 2015 as a high-level health check for SaaS companies, and that it's broadly applicable to most software companies [1]. That sentence is the oldest attribution we could stand up.

Pages ranking for this term name an individual inventor and a year. They disagree. We went looking for a primary source behind those attributions and found none, so this post names no inventor. If you need the origin for a footnote, cite the Bain line and the year 2015.

How many SaaS companies meet the Rule of 40?

About one in ten private SaaS companies and about three in ten public software companies met the Rule of 40 in the latest primary data: 11% of the KeyBanc and Sapphire survey group for 2024, against roughly 30% of public software companies on Capital IQ estimates as of 4 October 2024 [2][3]. Private companies were further from the line than public ones.

Sources: Bain & Company [1], the KeyBanc and Sapphire 2024 SaaS Survey [2] and S&P Capital IQ medians printed inside that deck [3]. Neither publisher prints this comparison. Cluma analysis, 27.10.2026.

Bain’s multi-year rows are the ones worth doing by hand. Of 86 public software companies with data for 2013 to 2017, 53 beat the Rule of 40 in at least one year, and 22 of those 53 beat it in three years or more [1]. So 53 of 86 is 61.6%, 22 of 53 is 41.5%, and 22 of 86 is 25.6%, which reproduces Bain’s published 25%.

One row doesn't reconcile, and we'd rather show it than smooth it. Bain’s figure 2 splits those 53 into 17 companies with one good year, 14 with two, 7 with three or four and 15 with all five [1].

Fifteen of 86 is 17.4%, while the text says 16%, adjusted for mergers and acquisitions [1]. Both numbers are printed above and the stated adjustment is the only explanation the brief offers.

For private companies the direction is down. The share meeting the rule ran 13% in 2022, 13% in 2023 and 11% in 2024, while the median score climbed from minus 7% to 15% across the same three years [2]. The middle of that market got healthier and the top of it got thinner.

Clearing the Rule of 40 once is common. Holding it is rare. And the companies that hold it don't all look alike: among Bain’s five-year outperformers, one-third did it with revenue growth above 30%, half with growth between 10% and 30%, and 18% with organic growth below 10% [1].

One source you'd expect here is missing. McKinsey has published an article on SaaS and the Rule of 40, but it could not be accessed when this post was written, so no figure of theirs appears anywhere in this post.

We have read other McKinsey work in full, including the McKinsey Design Index, and when a page won't open we leave the number out instead of quoting someone's summary of it.

What is a good Rule of 40 score?

In the 2024 private SaaS cohort a good Rule of 40 score was 31, because that's where the 75th percentile sat, and the median was 15 [2]. Forty was better than top quartile. The survey publishes the full distribution across three years for 46 respondents [2]:

Source: the KeyBanc and Sapphire 2024 SaaS Survey, 46 respondents [2]. That 75th percentile row matches the deck’s own top-quartile table, which also reads 31% for 2024, so the two pages agree [2].

Read the bottom row again before you benchmark yourself against 40. A top-quartile private SaaS company in 2024 posted 31, nine points short of it. Measure yourself against 40 as the norm and you're measuring against the exception, which isn't a useful place to set your own target.

Read as bands, the 2024 estimates say this: a quarter of the group scored minus 4% or worse, half scored 15% or less, and a quarter scored 31% or better [2]. Above 40 is a smaller group again, the 11% in the table above. Put your own score against those three rows to see which quarter it sits in.

Why investors check the Rule of 40

Investors check the Rule of 40 because it tracks valuation. Bain found that software companies which outperform the rule carry enterprise-value-to-revenue valuations double those of companies below the line, and achieve returns as much as 15% higher than the S&P 500 [1].

The 2024 version of that finding is far more precise, because KeyBanc sorts public software companies into Rule of 40 bands and prints the median revenue multiple for each [2][3]. Put a revenue line against those multiples and the premium stops being abstract.

Assumption, with its value: next-twelve-months revenue of $30M, a round number picked so you can scale it. Double your revenue and every figure in the last column doubles.

Multiples are S&P Capital IQ medians of next-twelve-months consensus estimates as of market close on 4 October 2024, printed in the KeyBanc and Sapphire deck [2][3]. The last column is each multiple times $30M. Cluma analysis, 27.10.2026.

Bottom band to top band is $78M against $231M, a gap of $153M on identical revenue, because 7.7 divided by 2.6 is 2.96. That gap is why a board cares about one point of margin.

Two warnings ride on the table. These are public-market medians at a single data date and they do not price a private round.

And a band step is an association, not a payout: moving from 3.6x to 5.2x doesn't hand you $48M, it describes where companies with those scores traded. Long-run links between design and shareholder returns read the same way, which is the point we made working through the Design Value Index.

The metrics investors read next to the Rule of 40

The Rule of 40 never travels alone. The two metrics that sit beside it in a diligence pack are net revenue retention and CAC payback, and the same survey prints both against the median and the top quartile [2].

All eight rows come from one source, the KeyBanc and Sapphire 2024 SaaS Survey, so the columns are comparable [2].

Net dollar retention answers what the Rule of 40 can't: whether your growth comes from the customers you already have. At a median of 101% the group barely expanded its existing base, while the top quartile at 109% banked nine points of growth before selling anything new [2].

CAC payback answers how expensive that growth was. The survey defines the fully loaded version as sales and marketing spend divided by new logo plus expansion ARR, multiplied by gross margin and divided by twelve, and the median took 20 months to pay back in 2024 against 25 months in 2022 [2].

Expect to be asked for the stricter cut as well. New-logo-only CAC payback, which drops expansion revenue out of the denominator, ran 29 months in 2022, 24 in 2023 and 23 in 2024 [2]. That's three months longer than the fully loaded figure for the same year, and it's the one that shows what a new customer actually costs you. Set your own figure beside the 20-month median before anyone else does.

Benchmarks for what SaaS teams spend on design sit in our SaaS design investment statistics, and the rest of our sourced data is on the Cluma reports page.

Your Rule of 40 at three company stages

A company sitting exactly on the 2024 survey medians would score 20 under $10M ARR, 11 between $10M and $25M, and 11 above $50M [2]. None of the three clears 40, and the reason is identical at every stage.

The survey publishes median ARR growth by ARR segment plus one survey-wide median EBITDA margin, so the score is the first number plus the second [2]. Four assumptions carry the table, each with its value:

• Growth: the median ARR growth for that ARR segment, 2024 estimate, 53 respondents [2].
• Margin: minus 6%, the survey-wide median EBITDA margin for 2024 [2]. The deck publishes no margin by segment, so the same margin is applied at every stage. That's a real limitation. Margins usually improve with scale, so this flatters the smallest company and understates the largest.
• Formula: score equals growth rate plus EBITDA margin, Bain’s definition [1].
• The two back-solved columns: margin needed equals 40 minus growth, and growth needed equals 40 minus margin. That's algebra, and it says nothing about whether either figure is reachable.

Growth and margin are KeyBanc and Sapphire medians for 2024 [2]. The last three columns are arithmetic: 26 minus 6 is 20, 40 minus 26 is 14, and 40 plus 6 is 46. Cluma analysis, 27.10.2026.

The $25M to $50M segment sits between the others at 21% growth, giving a score of 15 and needing a 19% margin [2]. We kept it out of the table so the three stages you recognise stay readable.

Now look down the last column. It reads 46% at every stage, because the margin is identical at every stage and 40 minus minus 6 is 46. No median or quartile in the 2024 survey grows that fast: the top quartile managed 27%, although that same top quartile did grow 46% back in 2022 [2].

That's the finding. At the 2024 median margin, growth alone cannot reach 40 at any size, which is why the companies clearing the line are clearing it on margin. The under-$10M row has the shortest path, because it needs 14 points of margin rather than 23.

Where this breaks

Four limits sit on the table above, and the second one moves the numbers most.

A median is not a forecast. These rows describe the middle of a survey group, never your company. Your own growth and margin go in the formula, and the table is only the backdrop you read your score against.

The two medians come from different cuts. Segment growth is published by ARR band while the margin is published for the whole group, so the combination describes no single real company [2]. We used it because the deck publishes nothing better, and we'd rather say that than invent a segment margin.

The 2024 column holds estimates. The survey collects those figures as company estimates for the year in progress, which makes them management forecasts rather than audited outcomes [2].

The valuation bands are public and dated. They are public-market medians at one market close, 4 October 2024 [3]. A private round prices on different evidence, and multiples move, so read the table as a record of how public investors paid for a score rather than as a quote for your own equity.

Rule of 40 questions investors also ask

What is the rule of 40 in stocks?

Investors use it to screen software companies: add revenue growth to profit margin, and a total of 40% or more passes. A company growing 30% a year with a 10% margin scores exactly 40.

It is a quick check on whether growth is being bought at too high a cost. The tables above show how often private and public SaaS companies clear it.

How to calculate 40% gross profit margin?

Gross profit margin is revenue minus cost of revenue, divided by revenue. On $30M of revenue and $18M of cost of revenue, gross profit is $12M and the margin is 40%, because 12 divided by 30 is 0.40.

That 40 has nothing to do with the Rule of 40. The rule adds growth to an operating margin, usually EBITDA, and SaaS gross margins sit far above 40: the survey median was 72% and the top quartile 81% [2]. A SaaS company at a 40% gross margin sits 32 points under that median.

How to put these numbers on one slide

Four numbers earn a slide in a raise: your Rule of 40 score, the growth and margin that make it up, net dollar retention and CAC payback.

Set the score large, the two components under it, retention and payback beside it with the survey median next to each, and the period and margin definition in the footnote. Then nobody has to ask which margin you used.

Who builds that slide is a budget question, and there are two monthly figures we can source.

The in-house figure comes from two BLS series. The median annual wage for US graphic designers is $62,960 [4], and employer costs across private industry ran $46.89 an hour worked against $32.82 in wages in the second quarter of 2026, a ratio of 1.4287 [5].

Assumption, with its value: that economy-wide 1.4287 load applies to a design hire, because BLS publishes no benefits split for a single occupation code. So 62,960 times 1.4287 is $89,951 a year, or $7,496 a month, which leaves $4,001 a month between the two rows.

Scope matters too: that BLS code covers graphic designers generally rather than deck specialists [4], and the same arithmetic is worked at length in how much a graphic designer costs.

Hire in-house when the work never stops. If investor comms, product marketing and sales material run all year, and you want someone in every internal meeting carrying your product context, the seat is the better buy, and once the round closes that person designs everything else.

If you need one deck once and won't touch it again for a year, neither row fits you: price that as a one-off project and read the quote against a single month of either column. The subscription wins the case in between, a raise that runs for months behind a deck that keeps changing.

One thing a slide cannot do is move your score. Not one point. Your Rule of 40 is set by growth and margin, and no amount of design shifts either one. What design changes is whether the number gets read correctly in the few seconds it gets.

If you want that deck built around your own numbers instead of a template, our pitch deck design service covers the deck, the demo video, the one-pager and the charts for a flat $3,495 a month, with progress roughly every 48 hours [6].

References

1. Bain & Company, Hacking Software’s Rule of 40, Thierry Depeyrot and Simon Heap, 2018. 124 publicly traded software companies for the single-year figure and 86 with full data for 2013 to 2017 for the multi-year figures, Read 27.10.2026. Source of the definition, the EBITDA choice, the 2015 popularization line, the 40% / 25% / 16% attainment figures, the 53 and 22 counts with the figure 2 breakdown, the valuation and return comparison, and the three paths to five-year outperformance. Limitations: public-company data only, and the newest data year is 2017. One internal gap, flagged in the post rather than smoothed: the text gives 16% for five straight years while figure 2 prints 15 of 86, or 17.4%, with an M&A adjustment as the stated reason.
2. KeyBanc Capital Markets and Sapphire Ventures, 2024 SaaS Survey, 15th Annual. 104 private SaaS companies, with 53 reporting by ARR segment and 46 reporting Rule of 40 performance. Read 27.10.2026. Source of every private-company benchmark in this post, including the 13% / 13% / 11% share meeting the rule, the percentile bands, the median and top-quartile table, the CAC payback definition and both CAC payback cuts, and the ARR growth medians by segment. Limitations: the figures are self-reported by a self-selected group, and the 2024 column holds company estimates for a year still in progress rather than audited outcomes.
3. S&P Capital IQ, median next-twelve-months consensus estimates as of market close on 4 October 2024, as printed in the KeyBanc and Sapphire deck above (pages 33 and 34). Source of the roughly 30% public-company attainment share, the EV / NTM revenue bands of 2.6x, 3.6x, 5.2x and 7.7x, and the 5.7x and 4.9x software and SaaS multiples with their medians since 2005. Limitations: medians only, at one market close, and read from the deck rather than from Capital IQ directly.
4. US Bureau of Labor Statistics, Occupational Employment and Wage Statistics, Graphic Designers SOC 27-1024, national and cross-industry, reference period May 2025. Median annual wage $62,960, series OEUN000000000000027102413, read from the LABSTAT public data file oe.data.0.Current on 27.10.2026. Limitation: BLS excludes Web and Digital Interface Designers (15-1255) from this code, so it prices graphic designers generally and not deck specialists.
5. US Bureau of Labor Statistics, Employer Costs for Employee Compensation, private industry workers, all occupations, second quarter of 2026. Total compensation $46.89 per hour worked and wages and salaries $32.82 per hour worked, both read 27.10.2026. Source of the 1.4287 load multiplier. Main limitation: BLS publishes this series for all private-industry occupations together, so the ratio is economy-wide while the wage it multiplies is design-specific.
6. Cluma, pitch deck design service, read 27.10.2026. Source of the flat $3,495 a month price for the Fund module, the scope of deck, demo video, one-pager and charts, and the cadence of progress roughly every 48 hours. Disclosure: Cluma publishes this post and is one of the two options in the table above, on the same basis as the other one.

One source is named in this post and deliberately not cited. McKinsey has published an article on SaaS and the Rule of 40, but it could not be accessed when this post was written (27.10.2026). No McKinsey figure appears anywhere above, and widely circulated paraphrases of that article are not used as a substitute.