The Rule of 20+20

Imagine you get better acquisition offers for your SaaS company by growing less. Can’t be true? Read on..

Growth rates in the SaaS sector have come down across the board. The latest benchmarks from ChartMogul prove this (Median of 23.58% in Q1/24).

Public SaaS companies have adapted to the changed market conditions and worked on their efficiency, which is reflected in an improved bottom line.

The fact that the market has turned is nothing new. However, in my experience, (too) many SaaS founders are still hoping to get back to previous growth rates and invest everything they have.

There is nothing wrong with that per se. If you can grow quickly, you should!

But if it comes at the expense of profitability, you should be aware that you risk making your company less attractive to buyers.

The question buyers will always ask: Can this business ever make money?

A risk that they will price in. Whether you have a good answer or not.

Worst case scenario: Your attempts to grow faster are in vain and you end up with both growth and profits being close to 0.

If you are aiming for a liquidity event in the near future, there might be an easier / faster / less risky path that leads to a similar or better outcome:

→ Growing less and improving bottom line instead.

Hence my version of the Rule of 40 that you should strive for:

The Rule of 20+20

If Bessemer can introduce new rules, I can do it too ;-)

Mine is probably more applicable to small, bootstrapped (= non-hypergrowth) SaaS sub $5M ARR though.

As you can see from my non-scientific research via LI poll, I’m not alone.

75% prefer companies with moderate growth of 20-30% and a profit margin of 10-20% over “grow at any cost” companies or "cash cows".

The “Rule of 20+20" is the most popular constellation and was chosen by 2/5, twice as often as the 40+0 option.

It’s also what we would prefer at saas.group and what I hear from other acquirers in my network.

If you can show moderate growth with a decent profit margin, you have a big advantage in the current SaaS M&A market.

Incidentally, this balance is also what investors have come to appreciate about public SaaS: