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Rule of 40 Glideslope Planning

Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

The Plan

Year 5 Year 6 Year 7 Year 8 Year 9
Revenue 30.0 48.0 74.4 111.6 161.8
YoY growth 70% 60% 55% 50% 45%
Opex + COGS 60.0 86.4 122.8 167.4 226.5
Operating profit (loss) (30.0) (38.4) (48.4) (55.8) (64.7)
Operating margin -100% -80% -65% -50% -40%

Rule of 40 glideslope
Rule of 40 score -30% -20% -10% 0% 5%

Incemental efficiency analysis
Incremental expense 26.4 36.4 44.6 59.1
Incremental revenue 18.0 26.4 37.2 50.2
Incremental exp/rev 147% 138% 120% 118%

Cumulative operating profit (loss) (30.0) (68.4) (116.8) (172.6) (237.3)
Total compared to the Plan

Notes
A fun model for top-down planning your Rule of 40 trajectory or "glideslope"
Starting in "year 5" (with $30M in ARR) because per KeyBanc median time to $25M in ARR is 5.5 years
High-growth SaaS companies tend to generating large operating losses already -- because they're often paying $1.5 to $2.0
With such large operating losses, most CFOs fear building up expense like you're going to hit plan, coming up short, and th
While it's nice to think you can hold the R40 glideslope in the face of top-line shortages, it will often be unrealistic -- note
Line 20 (incremental exp/rev) is kind of like an incremental revenue CAC -- it shows how much in incremental expense you

Driver cells
Bad cells
ial 4.0 International License.

Miss Y6/Y7, No Expense Correction Miss Y6/Y7, Hold R40 Glideslope

Year 5 Year 6 Year 7 Year 8 Year 9 Year 5 Year 6 Year 7 Year 8 Year 9
30.0 48.0 74.4 100.4 130.6 30.0 48.0 74.4 100.4 130.6
70% 60% 55% 35% 30% 70% 60% 55% 35% 30%
60.0 86.4 122.8 167.4 226.5 60.0 86.4 122.8 135.6 163.2
(30.0) (38.4) (48.4) (67.0) (96.0) (30.0) (38.4) (48.4) (35.2) (32.6)
-100% -80% -65% -67% -74% -100% -80% -65% -35% -25%

Rule of 40 glideslope Rule of 40 glideslope
-30% -20% -10% -32% -44% -30% -20% -10% 0% 5%

26.4 36.4 44.6 59.1 26.4 36.4 12.8 27.6
18.0 26.4 26.0 30.1 18.0 26.4 26.0 30.1
147% 138% 171% 196% 147% 138% 49% 92%

(30.0) (68.4) (116.8) (183.7) (279.7) (30.0) (68.4) (116.8) (151.9) (184.6)
42.4 (52.7)

R is 5.5 years
e they're often paying $1.5 to $2.0 to acquire $1.0 of ARR
hit plan, coming up short, and then not adjusting expenses down -- look how the R40 score goes off rails in second block
t will often be unrealistic -- note that incredible improvement required in incremental exp/rev effficiency in red (third block)
much in incremental expense you need to get $1 of incremental revenue

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