Rule of 40

[01]What It Means

Growth and margin are traded against each other: 60% growth at minus 20% margin and 25% growth at 15% margin both score 40, with very different risk profiles. Below 20% the company is neither taking territory fast enough to justify the burn nor efficient enough to fund itself.

[02]Why It Matters

It is the shorthand investors use for whether growth is worth its price, and it is the number a European expansion has to survive. An entry that adds cost without near-term revenue moves this metric before it moves the pipeline, which is why the sequencing of spend matters.

[03]Where It Goes Wrong

Hitting the number by starving the very market entry that would sustain growth.Mixing EBITDA definitions between periods so the score is not comparable.Applying it to a company too early, where growth rate alone is the signal.

[04]Related Terms

All glossary terms ➔

Apply This to Your Market.