Rule of 40: 2026 Benchmark Report
The Rule of 40 has stopped sorting. 28 of 44 listed software companies clear it, a 64% pass rate against the 16% Bain measured in 2017, and the median score is 43.6. More importantly the rule adds a point of growth to a point of margin as equals, and the market does not: growth correlates with EV/Revenue at 0.59 and free cash flow margin at 0.08. A point of growth is worth 2.3 times a point of margin, so two companies with the same score can trade twice as far apart. Introduces The Growth Point Premium.
- Sector
- SaaS
- Focus
- Valuations
- Published
- August 17, 2026
- Length
- 21 slides
- Reading time
- 8 minutes
Slide deck
21-slide deck. Desktop readers can page through the embedded viewer below. Mobile readers can open the direct PDF link.
Open slide deck PDF Key findings
- 28 of 44 listed software companies clear the Rule of 40, a 64% pass rate, with a median score of 43.6.
- Bain measured a 16% clearance rate across 124 companies in 2017 and McKinsey found companies exceeded it only 16% of the time from 2011 to 2021; the threshold no longer discriminates.
- Revenue growth correlates with EV/Revenue at 0.59; free cash flow margin correlates at 0.08.
- On a two-variable fit a point of growth is worth 2.3 times a point of margin, despite the rule weighting them equally.
- Among companies scoring 50 to 70, growth-led businesses trade at a median 17.7x EV/Revenue against 9.1x for profit-led ones.
- The multiple inflects above 50, not at 40: bands run 4.6x for 30 to 40, 5.7x for 40 to 50, 10.0x for 50 to 60 and 21.4x above 60.
- The median constituent runs 25.5% free cash flow margin against 16.3% growth, having optimised the half of the equation the market pays least for.
- Clearing 40 offered no protection in the 2026 repricing: roughly $2 trillion of software market value was erased between October 2025 and February 2026 and median SaaS EV/Revenue fell from 6.2x to 3.3x.
Methodology
Framework: The Growth Point Premium. Every Rule of 40 score is Windsor Drake's own computation from reported company financials, not licensed from a data vendor. Growth is the most recent reported quarter against the same quarter a year prior; margin is trailing twelve month free cash flow over trailing twelve month revenue. Free cash flow was chosen over EBITDA because it is harder to present favourably and produces a conservative clearance rate. 48 companies screened, 44 included; four were excluded because they were acquired or taken private between January 2025 and June 2026. This is one cross-section on one day and the coefficients will move.
Frequently asked questions
What is the Rule of 40?
Revenue growth rate plus profit margin, expressed in percentage points, with 40 as the threshold for a healthy software business. It was first written up publicly by Brad Feld in February 2015 and institutionalised by venture and private equity investors thereafter. This report computes it from reported quarterly revenue and trailing twelve month free cash flow.
How many software companies actually clear the Rule of 40 in 2026?
In Windsor Drake's 44-company listed set, 28 clear it, a 64% pass rate, with a median score of 43.6. That is far above historical measurements: Bain found 16% of 124 companies cleared it in 2017 and McKinsey found companies exceeded it only 16% of the time between 2011 and 2021.
Does clearing the Rule of 40 still earn a valuation premium?
Yes, but a smaller one than its reputation suggests. Companies clearing 40 in this set carry a median 7.0x EV/Revenue against 4.1x for those below, a 1.7x premium. PitchBook reports a wider 6.6x against 2.3x across its own larger universe as of July 2026.
Is growth or margin more valuable inside the score?
Growth, by a wide margin. Across this set revenue growth correlates with EV/Revenue at 0.59 while free cash flow margin correlates at 0.08. On a two-variable fit a point of growth is worth roughly 2.3 times a point of margin, despite the rule weighting them equally.
Can two companies with the same Rule of 40 score be worth different amounts?
Substantially different. Among companies scoring between 50 and 70, growth-led businesses trade at a median 17.7x EV/Revenue and profit-led businesses at 9.1x. The composite score hides the composition, and the composition is what moves the price.
Has the Rule of 40 threshold moved?
The evidence points that way. BCG framed AI-era software winners against a Rule of 60 in April 2026. In this set the multiple inflects above 50 rather than at 40: companies scoring 40 to 50 carry a median 5.7x, those at 50 to 60 carry 10.0x, and the three above 60 carry 21.4x.
Did clearing the Rule of 40 protect software valuations in the 2026 sell-off?
No. Morgan Stanley recorded roughly $2 trillion of software market value erased between October 2025 and February 2026, the worst non-recessionary decline in over thirty years, and PitchBook put median SaaS EV/Revenue at 3.3x by March 2026 against 6.2x at the end of 2024. The repricing was about AI displacement risk, which the rule does not measure.
Companies covered
Public and private companies referenced in this report.
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Cite this report
Rule of 40: 2026 Benchmark Report. Windsor Drake Market Intelligence, 2026. windsordrake.com/market-intelligence/reports/rule-of-40-2026-benchmark-report. Windsor Drake Market Intelligence data is free to use with attribution to Windsor Drake (windsordrake.com).