Rule of 40 - What determines a healthy SAAS company
In this excellent blog post the famous software startup and angel investor Brad Feld popularized “The Rule of 40”.
In Feld’s words:
If you are growing at 20% (sales), you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.
This means that if you are a fast growing (>40%) saas startup, its okay if you are not profitable. Since that can be achieved in the future.
Since I have tentatively started to build my own startup/indie project, this seems intriguing. Ideally I would love to make profit on each sale.
What are your thoughts on the above statement?
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From a financial perspective, I always believe that you should always aim to have profit at a gross profit (i.e. revenue minus direct expense related to that sale), then on a net profit level (which basically means adding other expenses, like rent, indirect salaries) it is okay to incur a loss at the beginning, while, always understanding the volume of sales to start breaking even.