First get big, then get profitable

The Rule of 40 was popularized as Brad Feld wrote about in 2015 (I would have guessed it was at least five years older, given how popular it is). He ends his post with:

I often hear – from sub-scale SaaS companies, “we can get profitable right away if we slow down our growth rate.” And – that’s often a true statement, but you will end up being sub-scale for a much longer time when you end up with a 20% growth rate and a 20% profit. So – if you are going to raise VC money, get focused on the T2D3 approach to get to scale, then start focusing on the 40% rule.

Brad Feld

T2D3 means annual revenue growth of 3x, 3x, 2x, 2x, 2x. A company with 1 million euro in revenue today would have 72 million euro in revenue after five years.

When taking VC money the strategy is to first get to scale, then get efficient (which the rule of 40 is a crude proxy for, and should be complemented with other metrics). The reason is that a high gross margin company at scale should be able to become very profitable. But a profitable company doesn’t necessarily become very big.

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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