Take, for example, the so-called “Rule of 40”. This is a guideline for software companies which states that the growth rate and profit margin combined of a top-performing company should be greater than 40%.

The Rule of 40 is specific to software companies, but the lesson applies more broadly. High-value, publicly-traded companies rarely drop below a certain floor of combined profitability and growth.

As shown above, public companies tend to have the highest revenue multiples when they are high growth while still remaining profitable, whereas public companies growing more modestly with high EBITDA margins have relatively lower revenue multiples. Startup Founders should design their businesses with this in mind.

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