An interesting article (from people at Bain & Co.) on the rule of thumb approach which is being used to evaluate the value and performance of the SaaS companies based on growth rate (%) and growth margin (%).
In a nutshell, a quick way to gauge the performance and the value of the SaaS company is to look into growth rate (%) and growth margin (%) and if the combined value exceeds 40% then it’s a quick but good indicator of the company’s performance.
The article also touches upon several important points such as ways to beat the Rule of 40 and ways to increase the efficiency and effectiveness of a maturing business.
Some highlights:
“The Rule of 40 – the principle that a software company’s combined growth rate and profit margin should exceed 40% – has gained momentum as a high-level gauge of performance for software businesses in recent years, especially in the realms of venture capital and growth equity.“
“The metric neatly captures the fundamental trade-off between investing in growth (including new products and customer acquisition) and short-term profitability. Analysts have differed on which measure of profitability to use—most use EBITDA, but some have proposed free cash flow, EBIT, or net income as alternatives. We use EBITDA, a publicly available profitability metric that excludes the effect of taxes and accounting policies.”
ieraj.blog 