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Prepping for Exit - a Founder’s Perspective on M&A - Issue #27

Is the Rule of 40 becoming the Rule of 50?
Issue #27  •  August 5  •  View online  •  Suggest a link
Prepping for Exit - a Founder’s Perspective on M&A
Prepping for Exit - a Founder’s Perspective on M&A
Is it time to consider selling your startup? Looking for a founder’s perspective? Dave Parker is a five-time founder with >10 exits. This reading list is practical advice on prepping for exit, pricing and the process.
Is the Rule of 40 becoming the Rule of 50?
Did the Rule of 40 just become the Rule of 50
How do you value your company at time of transaction? Many founders I talk to are looking for the definitive formula. But that just doesn’t exist. There are some valuable heuristics for valuations, especially things like your annual 409A valuations. But when it comes time to sell, you’ll want to maximize your enterprise valued.
The Rule of 40the principle that a software company’s combined growth rate and profit margin should exceed 40%—has gained momentum as a high-level gauge of performance for software businesses in recent years, especially in the realms of venture capital and growth equity. Bain & Co. <see below>.
As we see deals maturing in this current market, buyers and growth investors are leaning toward higher growth and profit numbers. I’m not sure if that is based on simply a negotiating stance (likely) or actual market comparable data.
Hacking Software’s Rule of 40 | Bain & Company

In “The Rule of 40% for a Healthy SaaS Company,“ Brad Feld shared a simple rule of thumb growth investors often apply to judge the attractiveness of a $50M business. “The 40% rule is that your growth rate + your profit should add up to 40%.”
I was curious if this theory were broadly true, applicable for growth stage companies Brad mentioned, but also early stage companies. So, I calculated this metric, which I’ll call the GP metric in this post, for all the publicly traded SaaS companies over their lifetimes.   •   Share

The Rule of 50 | Razorhorse

2020 is on track to see the fewest startup exits since 2011, which could spell trouble for the VC ecosystem

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