Is the Rule of 40 Still the Benchmark in 2026

Yep, the Rule of 40 is still the benchmark. Add your revenue growth rate to your profit margin, and 40 or better is the target. Two things have changed. Which margin you use swings the answer by thirty points or more, and investors now weigh a point of growth at two to three times a point of profit.

So the rule is alive, and it is also doing less work than the founders quoting it seem to think. I sit in a lot of conversations where somebody says "we are at forty two" the way you would state your blood pressure, as though the number arrived from a lab. It did not. It arrived from whichever profit line the person building the deck happened to pick, and there are at least six honest candidates for that line. Pick a different one and the same company misses.

That is the real story in 2026, and it is not that the rule broke. The rule was always a compression of two things into one, and the market has since gotten much more specific about how it wants them weighted. So let me walk you through it the way I would on a call. Where the number came from, the profit input nobody agrees on, what a passing score looks like by where you sit, whether the rule still predicts anything, where it stops being the right shape, what AI is doing to it, and what I would put in front of a board.

A number somebody overheard in a board meeting

The Rule of 40 has the feel of an accounting standard, so it is worth knowing it started as hallway wisdom. Brad Feld wrote it up in February 2015 after hearing a late stage investor describe it, and his post is admirably plain: "The 40% rule is that your growth rate + your profit should add up to 40%."¹ Fred Wilson was in the same board meeting and posted his own version days later, and between them the idea spread.² Feld confirmed that origin again this June, calling it "now gospel in SaaS."³ It was written as a counterweight to Neeraj Agrawal's T2D3 growth framing, published two days earlier.²⁷

Two details from that original post get dropped almost every time the rule gets quoted, and both of them matter. The first is scope. Feld was explicit that the rule was meant for SaaS companies at scale, and he put a floor on it of roughly fifty million dollars in revenue. The second is the honest shrug he attached to the profit side. His words: "Profit is harder to define."¹ He then listed EBITDA, operating income, net income, free cash flow and cash flow as candidates, said he preferred EBITDA, and told readers to back test the others.

Bain described the origin the same way in 2018, noting that "Venture capital investors initially came up with the Rule of 40 as a way to quickly assess the performance of small, fast-growing companies."⁴ So: a heuristic built for fast triage, floored at fifty million in revenue, with a deliberately unresolved profit input. That is the thing that became gospel, and it gets misused constantly for what it is not.

The word nobody agrees on is profit

This is where most Rule of 40 conversations quietly go wrong. Scale Venture Partners put the problem cleanly in 2020: "there is no generally agreed upon measure of profitability."⁵ They then calculated six of them for one company in one quarter. Against DocuSign's 39.9 percent revenue growth, three of the six margins cleared forty and three missed. As they put it, "the choice here can shift the RO40 profitability contribution from +13.7% (Cash from Operations) to -17.6% (Operating Income)."⁵ A thirty one point spread, and every one of those margins is legitimate.

The disagreement runs right through the institutional research, which is why benchmark reports so often refuse to reconcile. Fred Wilson's 2015 version used operating margin.² McKinsey defines the rule on free cash flow.⁶ Bain and BCG use EBITDA margin.⁴⁷ Meritech uses next twelve months free cash flow and subtracts capitalized software costs, a quiet but real editorial choice.⁸ Nobody here is being sloppy. They are answering slightly different questions.

Aventis Advisors put a number on the gap this May across fifty five listed SaaS companies: "The disagreement starts with what to put into the second term."⁹ On their data the EBITDA and free cash flow versions sit roughly sixteen percentage points apart at the median, almost entirely because stock based compensation depresses EBITDA and barely touches cash flow. CrowdStrike is the clean illustration: about twenty one on EBITDA, fifty five on free cash flow. One company, one filing date, thirty four points, and as Aventis says of both answers, both numbers are "right."⁹

Two accounting choices do most of that work, and both are ordinary policy. Stock based compensation is the larger, and there is still no standard industry treatment of it here.²⁴ Capitalizing development costs is the other, because it lifts the depreciation add-back and flatters EBITDA, which is why Aventis suggests operating margin as a cross-check.²⁰ Neither is a scandal. Both move the score.

The practical consequence is small, annoying, and completely within your control. Never state a Rule of 40 score without naming the margin that produced it, and never let a board deck report it two ways across two quarters. My first task at a specialty pharmacy was a three year lookback restating improperly stated books to GAAP, and the lesson that stuck is how far a reported number can drift from the underlying business without anybody lying about anything. Definitional drift is not a metrics problem. It is a controls problem wearing a metrics costume.

What a passing score actually looks like, by where you sit

Here is the part worth lifting into your own board pack. These are the current published attainment rates, and what they show is that the answer depends far more on your size and your margin definition than on anything you did last quarter.

1. Under $30 million in revenue. Only 9 percent of companies beat the rule, in BCG's 2025 benchmark of private SaaS companies held by seven growth equity funds.⁷
2. $30 million to $80 million in revenue. 22 percent beat it, same benchmark.⁷
3. Above $80 million in revenue. 26 percent beat it, same benchmark.⁷
4. Public SaaS, measured on EBITDA. 8 of 55 companies, or 15 percent, as of May 2026.⁹
5. Public SaaS, measured on free cash flow. 25 of 55, or 46 percent, on the same date and the same companies.⁹
6. Private SaaS at roughly $26 million median ARR. None expected to reach it, per KeyBanc and Sapphire Ventures in October 2024.¹⁰

High Alpha's 2025 survey of more than eight hundred companies lands in the same territory, reporting medians in the twenties and thirties by ARR band under a definition that permits either free cash flow or EBITDA.²² Battery Ventures had roughly a third of its public comp set clearing the line in late 2024.²³ Read them together and the scope point Feld made in 2015 reappears as measured fact. BCG says it directly: "Clearly, companies need to reach some level of scale before the growth and profitability tradeoff can be appropriately managed."⁷

Failing the Rule of 40 at eight million in revenue tells you almost nothing about your company and quite a lot about your revenue. Scale Venture Partners went further and said outright that "Scale doesn't use the Rule of 40 to evaluate prospective investment opportunities" at early stage, because "looking too closely at the Rule of 40 may drive entrepreneurs toward misleading conclusions."⁵

One number deserves a correction, because it circulates in a mangled form. KeyBanc's 2021 survey found 29 percent of respondents above five million in ARR met or beat the rule, 50 of 173.¹¹ That gets paired with a claim it fell from 40 percent in 2017, which conflates two studies. KeyBanc's own 2017 release reported roughly one in four, so the direction was up.¹² The 40 percent is Bain's, from 124 public software companies on an EBITDA definition.⁴ Not a trend line. Ask who was in the sample before you ask what changed. KeyBanc's November 2025 edition drops the measure entirely.²⁶

So does it still predict anything? Mostly yes

It does, and this is the part the "Rule of 40 is dead" headlines tend to skip. Aventis found that companies clearing forty on a cash flow basis trade at a median 4.8 times revenue against 2.7 times for those that miss, a seventy four percent premium.⁹ Bain measured the same effect earlier, finding that consistent outperformers carried valuations double those below the line.⁴ ICONIQ's 2025 work goes furthest, describing the Rule of 40 as the strongest single predictor of public software valuation in their analysis, ahead of growth alone and ahead of net revenue retention.¹³

The harder finding is how rarely anyone sustains it. McKinsey put it bluntly: "barely one-third of software companies achieve the Rule of 40," and across more than two hundred companies from 2011 to 2021 they found that "businesses exceeded Rule of 40 performance only 16 percent of the time."⁶ Bain's five year look at 86 companies landed on the same sixteen percent for sustained outperformance.⁴ Two firms, different samples, different decades, same answer. Clearing forty in one good year is ordinary. Clearing it five years running is close to rare.

And the direction of travel right now is down. SaaS Capital's 2025 survey of private companies found that "Rule of 40 scores have contracted noticeably over the past two years, regardless of company size or funding source," driven mainly by slowing growth rather than worsening margins.¹⁴ KeyBanc's blunter version, from October 2024: "While none of our surveyed companies are expected to achieve or exceed the Rule of 40 this year."¹⁰ If your score has drifted since 2023, you have company, and the cause is more likely to be the market than your execution.

Where it stops being the right shape

The strongest live criticism is not that the rule fails, it is that it treats a point of growth and a point of margin as interchangeable, and the market plainly does not. Bessemer's Byron Deeter and Sam Bondy made that case in December 2023 and did not hedge it: "the traditional Rule of 40 math is dead wrong" as you approach breakeven, because "While a margin increase has a linear impact on value, a growth rate increase can have a compounding impact on value."¹⁵ Their fix, the Rule of X, multiplies the growth term by two to three before adding cash flow margin, and on their backtest it explained sixty two percent of the variation in revenue multiples against fifty percent for the flat rule.¹⁵¹⁶

The measured weighting has moved around since. Jamin Ball tested it independently in February 2024 and reported that "The data today suggests that the growth multiplier is 3.0x."¹⁷ Meritech's May 2026 regression puts it at 3.1, meaning a one point gain in growth moves the multiple about as much as a 3.1 point gain in cash flow margin, and their bucket analysis shows two groups with similar Rule of 40 scores trading at 10.1 times and 3.5 times depending on the mix. Their conclusion: "This shows the market rewards growth above all in the Rule of 40 calculation."⁸

Feld's own response, written this June, is the most honest sentence anyone has produced on the subject: "The moment you start weighting the inputs, you're admitting the flat number was never the whole story."³ SaaS Capital reaches for Goodhart's law, that "once a measure becomes a target, it ceases to be a good measure."¹⁴ Both describe the same drift: a number built for triage got promoted to an objective, and objectives get managed toward. Their earlier piece carries the obituary headline and then declines to write the obituary,²¹ which is about the right posture. Two related complaints are worth knowing: identical scores imply very different valuations,²⁵ and the rule is silent on dilution, so a score can improve while the per-share result erodes.²⁸

For companies below the scale the rule was built for, the more useful instrument is David Sacks's burn multiple, which is net burn divided by net new ARR.¹⁸ He rates roughly 2 as reasonable early and 5 as a signal to cut immediately, and his framing of why it works applies exactly to the gap the Rule of 40 leaves: "Too many startups report their growth without contextualizing it as a function of investment."¹⁸ A pre-scale company burning to build has no meaningful Rule of 40. It absolutely has a burn multiple.

What AI is doing to the number this year

This is the newest wrinkle and the one I would watch. Bain published in April 2026 that "Rising AI costs are squeezing margins at software companies, putting pressure on the Rule of 40," for two reasons.¹⁹ Market growth is slowing as software penetration tops out in mature categories, and the cost side is changing shape: "The need to invest in AI inference, infrastructure, and model access introduces real variable costs into previously high-margin businesses."¹⁹ Their case example is stark, a marketing technology company whose revenue rose 38 percent between the third quarters of 2024 and 2025 while its costs rose 349 percent.

Their conclusion is that some good companies will and should miss forty for a while. In their words, "SaaS leadership teams may need to risk spending some time with a less ambitious benchmark," which they name the Rule of 30.¹⁹ That is a consulting firm telling boards to lower a bar, which does not happen often, and it deserves to be read carefully rather than as permission. The distinction they draw is between financializing the business, meaning limiting AI investment and running for cash, and investing to grow and accepting the margin hit. Both are defensible. Only one of them is a decision, and the other is a drift.

Feld makes the parallel point from the hardware side, and it generalizes. "Point the Rule of 40 at a young hardware company and it looks broken," he writes, because development cycles run in years and margins arrive late, so the snapshot says unhealthy while the company is on track.³ His fix is not to discard the rule but to read the slope instead of the frame: "Just don't confuse the snapshot with the trajectory."³ If you are absorbing inference costs to keep a product competitive, that is the same shape of problem, and the same answer applies.

What I would actually put in front of a board

Four things, and none of them is a single score. First, the Rule of 40 with the margin input named on the face of the slide, calculated the same way every quarter, with the prior four quarters beside it. A score on its own invites an argument; a consistent series invites a decision. Second, the same score on a second margin definition, usually EBITDA alongside free cash flow, because the gap between them is your stock compensation and your capitalization policy showing up in daylight rather than in a diligence finding later.

Third, the composition, not just the sum. Thirty percent growth with ten points of margin and ten percent growth with thirty points of margin are the same forty and are not the same company, and every dataset above says the market pays materially more for the first. Fourth, below roughly fifty million in revenue, the burn multiple beside it, because that is the number that describes a company still buying its growth. McKinsey notes boards now writing Rule of 40 progress into executive incentive plans, and that "if the company is not doing its job with the Rule of 40, then leaders aren't doing their job as a management team."⁶ If a number carries that weight, it had better be defined the same way twice running.

So, is it still the benchmark? Yes, and I would not stop using it. SaaS Capital's summary is about right: "The Rule of 40 is not a perfect metric, but it remains a useful lens on SaaS company performance."¹⁴ Hold it the way Feld built it, as a quick check that you are not too far out over your skis in either direction, rather than as a verdict. Scale Venture Partners ended their piece with the line I would put on the wall: "Nothing is valid without context."⁵ The Rule of 40 is a good number. It is not an answer, and it was never supposed to be.