Here’s what nobody tells you about selling your SaaS company: the spreadsheet you obsess over every Monday morning probably isn’t the one your buyer cares about.
You’re tracking MRR as if it were oxygen. Revenue’s climbing. Your board deck looks beautiful. Then you sit down with a serious acquirer and they open Excel, type two formulas, and suddenly your $10M ARR company is worth half what you thought it was.
The formulas? Rule of 40 and Burn Multiple.
Founders walk into M&A conversations selling growth. Buyers are asking a different question: can you grow without lighting money on fire? The gap between those perspectives costs millions in valuation. Sometimes it kills deals entirely.
The good news: both metrics are fixable without slashing growth or gutting your team. This guide shows you what they actually measure, why buyers obsess over them, and which levers move the numbers that move offers.
Revenue is vanity. Profit is sanity. Cash is reality.
The Current State: What Actually Drives SaaS Valuations in 2025
SaaS valuations depend on two distinct evaluations running simultaneously. The growth and profitability balance determines your revenue multiple. Your capital efficiency determines whether deals happen at all.
The Rule of 40 correlates with premium valuations. Across public SaaS, the overall median EV/Revenue was ~6.1× as of September 2025, but companies scoring >40% on (Weighted) Rule of 40 have traded at materially higher medians and in the low double digits (~12–15×). Private companies that clear that threshold also command higher multiples within their growth bands.
Burn Multiple functions as a screening mechanism. Most Series A investors target Burn Multiple at or below 2.0×, and many now push for ≤1.5× to stand out. Companies burning $3 for every dollar of net new ARR face serious questions about unit economics and runway.
The market environment explains the shift. Policy rates remain far above 2021’s near-zero levels (the Fed’s target range was cut to ~4.0–4.25% in Sept 2025), which keeps capital efficiency in sharper focus. Capital efficiency metrics that were secondary considerations during the zero-rate environment now gate funding decisions and acquisition offers.
Both metrics matter, but timing determines which one carries more weight. Early-stage companies get screened first on capital efficiency. Growth stage companies get judged heavily on balanced growth. The metrics work together to tell your efficiency story.
Rule of 40: The Growth and Profitability Balance
The Rule of 40 adds your revenue growth percentage to your profit margin percentage. The target is 40% or higher. A company growing 35% with a 10% EBITDA margin scores 45%.
Most SaaS companies calculate this using ARR growth plus EBITDA margin. Some use free cash flow margin instead of EBITDA. The formula stays consistent: growth percentage plus margin percentage equals your score. For a wider primer on how Rule of 40 interacts with EV/Revenue bands, see “Understanding SaaS Valuation: Metrics, Multiples, and Market Trends That Drive 2025 Valuations.”
The metric emerged from observations about high-performing SaaS companies. Research shows companies above 40% command higher enterprise value to revenue multiples. The correlation holds across public and private markets, though individual deals vary based on revenue quality and competitive positioning.
How Buyers Use the Rule of 40
Buyers treat the Rule of 40 as a health check rather than a formula. We break down recent comps and why efficient growth earns a premium in “SaaS Valuation Multiples 2025: ‘Boring’ vs. Flashy.” It signals whether you understand the tradeoff between growth and margins. Companies consistently above 40% demonstrate they can grow efficiently without destroying profitability.
The metric influences valuation multiples in measurable ways. Companies scoring 50% or higher often earn premium multiples. Those below 30% face questions about whether they can scale profitably. In today’s market, Rule-of-40 leaders often trade at materially higher multiples, frequently about double the broad median and not just ‘one or two turns.’
Public market data confirms the pattern. In 2025, public SaaS cohorts scoring >40% on a Weighted Rule of 40 basis have traded around ~12–15× EV/Revenue, versus ~6× for the broad median, showing a sizable premium for balanced growth and profitability. Private M&A follows similar patterns with adjustments for size and stage.
Where the Rule of 40 Misleads
The metric breaks down into three scenarios. First, it favors mature companies over early-stage businesses. Startups burning cash to capture market share score poorly, even when building valuable businesses.
Second, the formula misses revenue quality completely. Companies with 40% churn and negative net revenue retention can still score well if they grow fast enough. That masks fundamental problems buyers care about deeply.
Third, one-time events distort the calculation. A company that cuts 20% of staff artificially inflates its margin percentage for that period. Buyers adjust for these items during diligence, but headline scores can mislead.
AI-enabled products add complexity. Productivity gains from AI tools can shift margin baselines while creating wide valuation dispersion. Buyers scrutinize whether efficiency improvements represent sustainable advantages or temporary cost reductions.
Despite limitations, the Rule of 40 remains relevant across SaaS markets. It provides a starting framework for evaluating growth and profitability balance. Companies consistently above 40% send signals that buyers reward with higher multiples.
Burn Multiple: Capital Efficiency Per Dollar of Growth
Burn Multiple divides your Net Burn by your Net New ARR. The formula measures how many dollars you consume to generate one dollar of recurring revenue growth.
Calculate it quarterly. Take your cash burn for the quarter and divide by the net new ARR added that same quarter. A company burning $300K while adding $150K in net new ARR has a Burn Multiple of 2.0x.
David Sacks introduced this metric through Craft Ventures as a more precise efficiency measure. It focuses specifically on the relationship between cash consumption and ARR growth, cutting through noise from other metrics.
Current Market Benchmarks
Venture stage companies should target Burn Multiples at or below 2.0×, and many investors now push for ≤1.5× to stand out. Companies above ~2.5× face tough questions from investors about capital discipline.
More mature businesses aim for 1.0x or negative. A negative Burn Multiple means you add ARR while generating positive cash flow. That signals you reached the efficiency levels buyers prize most.
The benchmarks tightened considerably after 2021. Companies that would have raised easily at 3.0x Burn Multiples in 2020 now struggle to find investors. The shift reflects sustained focus on capital efficiency across venture and growth equity markets.
Why Investors Screen for Burn Multiple
Capital-constrained markets prioritize companies that demonstrate efficient growth. High Burn Multiples signal you overspend relative to results. That raises immediate concerns about runway, unit economics, and whether growth rates are sustainable.
The metric complements the Rule of 40 by adding a capital lens. A company with a strong Rule of 40 but deteriorating Burn Multiple might be buying growth through unsustainable spending. Investors want proof that both metrics work together.
Burn Multiple also reveals operational discipline. Companies with low burn multiples typically run tighter sales and marketing operations. They understand their unit economics. They make deliberate tradeoffs between growth speed and capital efficiency.
Common Pitfalls
Two warnings about Burn Multiple. First, companies can game it short-term by underinvesting in growth. Slashing marketing spend drops your burn while temporarily inflating the ratio. That creates an illusion of efficiency that collapses under scrutiny.
Second, lumpy ARR quarters create misleading spikes. Enterprise sales cycles mean some quarters show big ARR additions while others show less. Always evaluate trends over multiple periods rather than single data points.
Even AI companies with elevated revenue multiples face scrutiny on capital efficiency. The technology category matters less than the fundamentals. Buyers want proof that unit economics work regardless of whether you use AI, automation, or manual processes.
When Each Metric Determines Your Valuation
The metrics serve different purposes across the company lifecycle stages. Understanding when each one dominates helps prioritize improvements and set realistic expectations.
Venture and Early Stage
Burn Multiple functions as the primary screening metric for venture-stage companies. Investors at this stage care most about capital efficiency and whether you can reach meaningful scale without excessive dilution.
Rule of 40 scores fluctuate too much with volatile margins and rapid growth rate changes. A seed stage company might score 20% one quarter and 60% the next based on timing of hires or one-time revenue events.
Most Series A investors aim for Burn Multiple ≤2.0×; ≤1.5× is increasingly the bar to stand out. Companies above 2.5x face tough questions. Those above 3.0x typically need to show clear paths to improvement before closing rounds.
Growth to Pre-Exit Stage
Rule of 40 correlates most strongly with revenue multiples once companies reach the growth stage. Buyers evaluate whether you achieved the growth and profitability balance that justifies premium pricing.
Capital efficiency still matters at this stage. A company with a strong Rule of 40 but Burn Multiple above 2.0x raises questions about whether margins are real or artificially inflated. Buyers want both metrics working together.
Companies above 40% on the Rule of 40 with Burn Multiples below 1.5x represent the sweet spot. They demonstrate balanced growth, real margins, and capital discipline. These companies consistently command top-quartile revenue multiples in M&A transactions.
AI and High-Growth Categories
AI-enabled products often command higher revenue multiples in 2025, but the widely cited 25–30× EV/Revenue range refers to fundraising round medians, not public-company medians. Public AI comps are lower and vary widely by sub-sector. Private AI M&A multiples are typically below fundraising levels (often single-digit to low-teens for standout assets).
Elevated multiples do not excuse poor efficiency. Buyers scrutinize whether AI productivity gains represent durable advantages. They examine gross margins closely. They want proof that unit economics work at scale.
The Rule of 40 remains relevant for AI companies, though baseline expectations may shift. A company scoring 50% through AI leverage might justify higher multiples than a traditional SaaS company at the same score. Context matters, but fundamentals still drive valuations.
| Metric | What It Measures | When It Decides Price | Common Pitfalls | Fast Improvements |
| Rule of 40 | Growth percentage plus profit margin percentage | Growth to pre-exit stages correlates with revenue multiples | Masks churn, ignore revenue quality, distorted by one-time events | Pricing changes, margin improvements, expansion revenue, and cost pacing |
| Burn Multiple | Net Burn divided by Net New ARR | Venture and early scale; screens capital efficiency | Can be gamed by underinvesting, lumpy quarters create noise | ICP focus, payback improvements, PLG motions, vendor consolidation |
What Buyers Actually Pay in Today’s Market
Valuation ranges vary by stage, business model, and buyer type. Understanding current benchmarks helps set realistic expectations and avoid wasted diligence time.
Private SaaS Exit Ranges
In private M&A, SaaS companies are typically priced on ARR (EV/Revenue) or EV/EBITDA, not MRR. The Rule of 40 serves as a quality signal within those frameworks: companies above 40% tend to land at the higher end of their growth band.
A company with $200K MRR (i.e., ~$2.4M ARR) growing 30% annually might trade at ~4–6× ARR depending on the Rule of 40, churn rates, and gross margins. Strong Rule of 40 scores push toward the high end. Weak scores compress multiples toward the low end.
Middle market M&A shows similar patterns. Private equity buyers evaluate the Rule of 40 alongside EBITDA multiples. Companies clearing 40% while generating meaningful EBITDA often see multiple expansion compared to pure growth plays.
Public and AI Market Context
Public SaaS companies trade at ~6.1× median EV/Revenue as of September 2025. Cohorts scoring >40% on a (Weighted) Rule of 40 basis have traded around ~12–15× EV/Revenue, roughly double the broad median, while the rest cluster near ~6×.
AI deals do show wider dispersion. The widely cited 25–30× EV/Revenue figure refers to AI *fundraising* round medians in 2025, not public-company medians. Public AI comps are lower and vary by sub-sector. Private AI M&A multiples are typically below fundraising levels (often single-digit to low-teens for standout assets).
The dispersion reflects uncertainty about the durability of AI advantages. Buyers pay premiums for companies with defensible moats and proven unit economics. They discount heavily for companies riding hype without fundamental advantages.
Correlation Versus Causation
Studies show companies above 40% on the Rule of 40 earn higher multiples on average. The correlation does not guarantee premium pricing. Individual deals depend on revenue quality, market position, competitive dynamics, and strategic fit.
A company scoring 45% with 60% gross margins and 5% monthly churn commands different multiples than one scoring 45% with 85% gross margins and 2% annual churn. The details matter enormously during diligence.
Buyers use the Rule of 40 as a starting screen. They adjust based on deeper analysis of unit economics, customer concentration, technology moat, and competitive positioning. The metric opens doors, but fundamentals determine final prices.
| Stage | Rule of 40 Guideline | Burn Multiple Guidelines | Market Notes |
| Seed to Series A | Track trendline; score is less reliable | 2.0x or better; medians near 1.6x | Efficiency dominates screening; lumpy metrics are common |
| Series B to C | Approach or clear 40% sustainably | 1.0x to 1.5x range | The path to cash flow positive becomes critical |
| Late Stage to Exit | 40% or higher strengthens comps | 1.0x or negative preferred | Strong correlation with premium multiples when fundamentals are solid |
Seven Ways to Lift Rule of 40 Without Killing Growth
Improving the Rule of 40 requires attacking both sides of the equation. Revenue quality improvements lift growth rates. Margin expansion comes from cost discipline and pricing power.
Tighten pricing and packaging. Add value-based tiers that capture more from high usage customers. Move customers from monthly to annual contracts to improve cash flow and reduce churn. Reduce standard discounting below 15% without executive approval.
Drive expansion revenue systematically. Implement usage-based add-ons tied to customer value metrics. Set seat minimums that grow with customer employee counts. Build upgrade paths directly into product roadmaps and success motions.
Improve gross margins through infrastructure. Optimize cloud costs through reserved instances and spot pricing. Retire low-margin features that few customers actually use. Renegotiate vendor contracts annually as usage scales.
Shorten CAC payback periods. Focus sales resources on the highest fit ICP segments where conversion rates run highest. Develop partner channels that generate qualified leads at lower costs. Reduce sales cycle friction through better qualification and faster proof of value.
Reduce logo churn systematically. Build onboarding playbooks with clear success milestones in the first 90 days. Implement health scores that predict churn risk before renewal cycles. Intervene early when engagement metrics decline.
Pace hiring to milestones. Tie headcount increases to specific ARR thresholds rather than calendar quarters. Automate repetitive tasks using AI tools to reduce hiring needs. AI productivity gains allow teams to scale revenue with less proportional headcount growth.
Clean up accounting treatments. Maintain consistent capitalization policies across periods. Strip one-time items from recurring metrics. Avoid revenue recognition games that inflate near-term numbers but create problems during diligence.
These levers work because they address root causes rather than cosmetic changes. Pricing improvements that stick require proving additional value. Margin gains that survive scrutiny come from real efficiency improvements, not accounting tricks.
Real Example: Two Quarter Transformation
Consider a $3M ARR company growing 40% annually with a negative 8% EBITDA margin. Rule of 40 score: 32%. Quarterly burn runs $240K while net new ARR adds $100K. Burn Multiple: 2.4x.
The company implements four changes over two quarters. They raise prices by 12% for new customers while grandfathering existing accounts. They cut discretionary spending by $30K monthly through vendor consolidation. They focus sales exclusively on enterprise customers with better unit economics. They automate customer onboarding to reduce support costs.
Two quarters later, the company grows 44% annually with breakeven EBITDA. Rule of 40 score: 44%. Quarterly burn drops to $150K while net new ARR holds at $100K. Burn Multiple: 1.5x.
The math tells a better valuation story. The company cleared the Rule of 40 threshold that buyers use for screening. The improved Burn Multiple eliminated concerns about runway and capital needs. In 2025 public comps, companies above 40% on a (Weighted) Rule of 40 basis often trade at roughly double the broad median (≈12–15× vs ~6×).
Taking Action on What Actually Moves Price
Revenue is vanity. Profit is sanity. Cash is reality. Your valuation depends on proving all three work together.
The Rule of 40 shows you balance growth and profitability. Buyers use it to assess whether you can scale efficiently over time. Companies consistently above 40% earn higher revenue multiples across public and private markets.
Burn Multiple demonstrates capital efficiency. Investors screen companies on how much cash they consume to generate growth. Venture stage targets sit at or below 2.0x. Growth stage companies aim for 1.0x or negative.
Both metrics matter at every stage. Neither tells the complete story alone. Buyers want durable growth, real margins, efficient capital deployment, and strong unit economics. The metrics provide frameworks for evaluation, not mechanical formulas.
Track both numbers monthly. Understand which operational levers move each metric. Build improvement targets into quarterly operating plans. When acquisition conversations start, you answer both questions confidently with trends that support premium valuations.
The market rewards companies that prove efficient growth. Start measuring what buyers measure. Move the metrics that move your price.
Frequently Asked Questions
Is the Rule of 40 still relevant in 2025?
Yes. Investors continue associating higher Rule of 40 scores with stronger revenue multiples across public and private SaaS markets. Dispersion has widened with AI dynamics and capital cost changes, but the correlation between scores above 40% and premium multiples persists. Treat it as a health check that opens doors rather than a valuation formula.
What’s a good Burn Multiple today?
Aim for ≤2.0× at venture stage; ≤1.5× is increasingly the bar to stand out. By mid-stage, many teams sit around ~1.5–2.0×, with best-in-class at ≤1.0×. Companies above ~2.5× face tough questions regardless of growth rate, so track trends over multiple quarters rather than single periods.
Which metric do acquirers care about more?
Both, but at different stages of evaluation. Burn Multiple screens for capital efficiency early, and can eliminate companies from consideration before serious diligence begins. The Rule of 40 supports premium multiples once companies clear efficiency screens. Weighting depends on your stage and buyer type, with venture buyers emphasizing burn and strategic buyers weighing both equally.
Do AI companies get a pass on efficiency?
No. AI companies command higher revenue multiples in 2025, with public medians between 25x and 30x enterprise value to revenue. Buyers still examine unit economics and capital efficiency closely. The technology category provides valuation uplift for companies with defensible advantages, but hype without efficiency compresses offers quickly. Fundamentals always matter.
Can I engineer a better Rule of 40 short-term?
Some levers help quickly: pricing adjustments, cost of goods optimization, and operating expense pacing. Buyers evaluate quality metrics like churn, net revenue retention, gross margin durability, and CAC payback alongside headline scores. Manipulation without fundamental improvements fails during diligence. Focus on sustainable changes that improve underlying economics.
Ready to Raise Your Multiple Without Raising Your Burn?
Preparing for funding rounds or exits means moving the metrics buyers actually evaluate. You need defensible numbers, improving trends, and a compelling efficiency story that survives diligence.
Bookman Capital helps founder-led SaaS teams sharpen pricing strategies, improve capital efficiency, and position companies for premium outcomes. We understand both metrics and how buyers weigh them across different stages.
Get a 30-minute review of your Rule of 40, Burn Multiple, and near-term improvement levers that move valuations.
Talk to Bookman Capital Today!
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