Should companies target an idealized growth-efficiency benchmark like rule of 40, or evaluate spend through unit-economics test budgets?

Thomas Plantenga · Feb 12, 2024

The rule of 40 is at best a filter that selects a high density of good companies, not a causal law that produces them, so treating it as a rule to follow is nonsense

A declining business being milked for cash can hit rule of 40 while obviously being a bad company; the real fundamental is how fast you can recycle cash to grow the machine

Scope: accepts a scatter plot of growth and profitability does select good companies

52:58 20VC: The Ultimate Guide to Scaling Marketplaces, Why Rule of 40 and EBITDA Optimisation is BS, How Founders & VCs Should Approach Market Sizing and Outcome Scenario Planning and Why Europe is Failing with Vinted CEO, Thomas Plantenga & Alex Taussig

Alex Taussig · Feb 12, 2024

The rule of 40 is an output metric and the danger of such frameworks is confusing outputs with inputs; operators should work on the input metrics that define their efficient frontier of investment and let growth follow

Rule of 40 is a number the business spits out after you do a bunch of things; what an operator actually controls is the value-maximising allocation of balance sheet, management team and their own bandwidth

Scope: irrelevant for operators specifically

54:32 20VC: The Ultimate Guide to Scaling Marketplaces, Why Rule of 40 and EBITDA Optimisation is BS, How Founders & VCs Should Approach Market Sizing and Outcome Scenario Planning and Why Europe is Failing with Vinted CEO, Thomas Plantenga & Alex Taussig

Thomas Plantenga · Feb 12, 2024

Deciding in a board meeting to optimise the company toward the rule of 40 is actively stupid; you should instead make investments justified by the future cash flow they generate and treat healthy growth and profitability as a downstream output

Working from input metrics is what actually produces the result; targeting the output directly is dangerous

56:07 20VC: The Ultimate Guide to Scaling Marketplaces, Why Rule of 40 and EBITDA Optimisation is BS, How Founders & VCs Should Approach Market Sizing and Outcome Scenario Planning and Why Europe is Failing with Vinted CEO, Thomas Plantenga & Alex Taussig

Akshay Kothari · Sep 18, 2024

Rather than targeting an ideal rule of 40, you should set test budgets for everything you want to try and evaluate each part of the business through a unit-economics lens

A CFO he consulted argued that if a channel's unit economics prove out, the payback justifies ignoring rule of 40 in that quarter; Akshay adopts this as Notion's current theory on being aggressive versus defensive.

24:30 20VC: Notion's Founder on "Founder Mode": When it Works & When it Doesn't | Why The Way Startups Fundraise & Construct Boards is Broken | Raising at a $10BN Valuation in Peak Bubble Times and How Notion Has More Money Than Ever Before with Akshay Kothari

Akshay Kothari · Sep 18, 2024

Test budgets can be small — you only need enough spend to get a signal that a channel works — though sales tests require a longer window to see payback than performance marketing or partnerships.

26:49 Sales tests need longer payback windows than marketing channels