The Rule of 40 is not uniformly applied at every ARR stage. Investors have different expectations depending on where you are in your growth journey.
Rule of 40 expectations by ARR
| ARR stage | Growth rate expectation | Margin expectation | Rule of 40 |
|---|---|---|---|
| $0–1M | 100–300% YoY | −50% to −100% | N/A (too early) |
| $1–5M | 80–150% YoY | −30% to −60% | 20–80+ (growth trumps) |
| $5–10M | 50–100% YoY | −20% to −40% | 30+ expected |
| $10–30M | 40–60% YoY | −15% to −30% | 40+ expected |
| $30–100M | 25–40% YoY | −10% to 0% | 40–50 |
| $100M+ / pre-IPO | 20–35% YoY | 0–20% | 50–70+ for premium multiple |
Why growth matters more early on
Below $10M ARR, investors almost universally prioritize growth rate over profitability. A company growing at 200% with a −60% margin scores +140 on the Rule of 40 — but the score is almost irrelevant. What matters is the growth velocity.
Above $10M ARR, the margin component starts to matter. VCs and growth equity firms start asking: is this business capital-efficient? Can it be profitable at scale?
The Rule of 40 and public market valuations
In the 2021 SaaS bull market, companies trading above 20× ARR almost universally had Rule of 40 scores above 60. Post-correction (2022–2024), the Rule of 40 remains important but the threshold for premium multiples has shifted: - Score 40–60: 8–14× ARR multiple (healthy) - Score 60+: 14–20× ARR multiple (top-quartile) - Score < 40: 4–8× ARR (requires clear path to improvement)