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

Thomas Plantenga · published 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 · published 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 · published 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 · published 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 · published 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