Rule of 40

A quality gate for subscription software: revenue growth in percent plus free cash flow margin in percent should total at least 40.

A company growing 28% with a 14% cash margin scores 42 and passes.

The idea is that growth and profitability are exchangeable at this stage of a business, and a company should be delivering one or the other. Growing 60% while burning 20% is acceptable; growing 12% while burning 20% is not.

Below 20 the business is neither growing fast nough to justify the burn nor profitable enough to fund itself.

Two numbers, one line, and it survives contact with reality better than most heuristics.

It works best as a triage tool across a peer set rather than as a target for one company. A business scoring 55 through hypergrowth and heavy burn is a different investment from one scoring 55 through moderate growth and real cash generation, and the composition matters more than the total once the total clears the bar.