Raising Capital? Know the Rule of 40

Capital is crucial for every company. For cash-hungry SaaS and tech firms, capital can be existential.?

Raising capital has changed. It has escalated from usually hard to unusually hard due to headwinds in rates, returns, and risk.

Knowing the “Rule of 40” can help.

Many equity investors use it as a quick risk/result test used to rule you in or out of conversations and consideration.?

So, what is the Rule of 40?

It is a performance metric started?by Brad Feld, founder of TechStars and Foundry (FYI: TechStars has helped over 3000 companies raise $25B). Find yours by adding together your sales growth rate and profitability rate (use EBITDA). Seasoned investors are more likely to engage with you when you exceed 40; hence, the Rule of 40.??

Why?

The rule of 40:

-is a quick, comparative view of your financial health

-proves?traction?and operating results that investors trust

-can be weighted toward growth or profitability

Venture-stage companies should exceed 40%.?Private equity?investors want high growth and EBITDA results as well. They expect 40%. Or more.??

How to use the Rule of 40

First, know your numbers. Cold. And their trajectory.

If your combined sales growth and profitability rate exceed 40%, congrats. Say it. Show it. Improve on it.?

If you are under 40%, address it directly. Fix it. Head on.?It IS hard work. But you will be rewarded for that hard work.?

Be specific in your ask as you talk with prospective investors. Explain in detail how their funds will be applied to fix THEN accelerate your operating results. Explain your proposed actions, and the time lines for when results will happen.?

The Rule of 40 will make you a better operator, and?help you build a more durable and valuable company.?

Follow me here, or on Twitter (@rjanezic) for more tips on building stronger, more successful, and higher-value companies.?