By: John S. Morlu II, CPA
Ah, the startup world—a surreal, caffeine-fueled universe where every idea, no matter how trivial or outlandish, is hailed as the next great disruption. It’s a land where founders truly believe their app for finding vegan cat sitters will revolutionize not just the pet care industry, but society itself. In this glittering mirage of boundless optimism, venture capital (VC) flows like a never-ending fountain of cold brew at WeWork, where the line between ‘profitable’ and ‘burning through cash’ is as blurry as the valuation figures scribbled on the back of a napkin.
In this ecosystem, where buzzwords are thrown around with the same reckless abandon as startup names that drop vowels for no apparent reason (hello, Lyft and Tumblr), there’s a new phrase that’s driving investors wild: the Rule of 40. It’s whispered about in boardrooms, mentioned with a knowing nod at networking events, and treated like some mythical golden ratio by every startup founder who abandoned their Stanford degree to build “the next big thing.”
But what exactly is the Rule of 40? Why do founders toss it around as though they were born with it encoded in their DNA? And, most importantly, how is it that companies that can’t even figure out how to send a basic invoice without a series of smoke signals are acting like they’ve mastered this financial calculus?
Fear not, dear reader. This isn’t just another jargon-filled lecture from the gods of Silicon Valley. We’re about to embark on a wild, irreverent journey through the land of startups—a place where logic takes a back seat to hype and where everyone acts like their inevitable TED Talk is just one investor pitch away. Along the way, we’ll peel back the layers of absurdity, meet some delightfully fictional companies, and, of course, unravel the mystery of the Rule of 40—all while sipping overpriced kombucha and pretending that this is the next big insight that’ll finally get us on Forbes’ 30 Under 30 list.
So grab your hoodies, your buzzwords, and your token ‘disruptive’ idea. We’re about to dive into the twisted and hilarious logic of startup land. Let’s get started.
Chapter 1: What Is the Rule of 40?
Let’s start with the basics. The Rule of 40 is a magical formula in the mystical land of SaaS (Software as a Service), where reality and finance take a little vacation, and unicorns—those mythical billion-dollar startups—frolic freely. The formula itself is deceptively simple, and it goes like this:
Growth Rate + Profit Margin = 40%
That’s it. Forty. Not 39.5%, not 41%. A beautiful, round, arbitrary 40%. The kind of number that seems so perfect that it probably shows up on angelic stock portfolios when investors dream at night.
Here’s the kicker: the Rule of 40 is shockingly flexible, a bit like startup founders explaining why their app needs yet another infusion of VC cash. If your SaaS company is growing like a weed in spring—say, at 25%—then, theoretically, your profit margin should sit at a modest 15%. Great! Everyone high-fives, and you post on LinkedIn about “record-breaking performance.”
But let’s say you’re on a rocket ship, soaring through the stratosphere with a 50% growth rate. Well, you could actually lose 10% of your margins, but that’s perfectly fine! Why? Because the Rule of 40 doesn’t care about details like “logic” or “sustainability.” It’s like that friend who tells you it’s fine to order another round of cocktails because technically, you saved money by not eating dinner first.
The Rule of 40 is, in essence, the investor’s way of feeling better about throwing millions at a company that’s growing fast but might not be profitable anytime before the next ice age. It says to investors, “Hey, we know this company is spending cash like a toddler with a credit card, but look how fast they’re growing! If we squint just right, it almost looks like a healthy business.”
Why Do Investors Love It?
In the real world, businesses have to worry about pesky things like cash flow, balance sheets, and this tiny concept known as “not going bankrupt.” But here in startup land, as long as your growth rate and profit margin somehow add up to that magic 40%, investors are like, “Yes, please, take my money and disrupt the world!”
The Rule of 40 allows startups to straddle that fine line between being a VC’s darling and a “burn rate dumpster fire.” On one hand, it shows you’re either growing so fast that profits will arrive eventually (trust us, someday), or you’re profitable enough to slow down your frantic growth and buy yourself some time before you need to beg for more funding on the steps of Sand Hill Road. Either way, you can keep the dream alive and pretend you’ve got everything under control when, in reality, your business model is one failed round of funding away from being another WeWork.
Meet Flopify: An Exemplary Rule of 40 Hero
Take, for example, our fictional company Flopify. This brilliant startup is revolutionizing the way people interact with their refrigerators—because of course, your fridge should remind you to buy oat milk and schedule a yoga class. Flopify is growing at a staggering 45% annually. It’s a media darling. Investors throw money at it like it’s the last craft brewery on Earth.
The catch? Flopify’s profit margins are… well, minus 5%. They’re losing money faster than they can burn through their endless supply of investor-funded beanbags and office snacks. And yet, Flopify stands proud, a shining example of the Rule of 40 at work. Because 45% growth minus 5% profit margin still equals 40%. Math, baby. That’s what investors love: the pure beauty of numbers that somehow validate irrational spending sprees.
In the eyes of venture capitalists, Flopify is crushing it. Who cares if they don’t actually know how to make money? With growth like that, one day, when fridges inevitably become the cornerstone of society, they’ll figure it out! Investors can confidently say, “Hey, they’re losing money, but look how fast they’re growing!” and feel good about their next round of funding.
The Problem with Real-World Problems
Of course, in the non-startup world—where unicorns are creatures of legend, and cold brew isn’t a breakfast replacement—people tend to care about things like cash flow and staying afloat. But in startup land, problems like that are just hurdles to jump over with enough VC money and lofty “disruption” plans.
Imagine explaining the Rule of 40 to the owner of Betty’s Bakery, a quaint little shop that’s been serving fresh pastries for 20 years. Betty doesn’t know what “growth rate” even means. She’s more concerned with making sure her bread doesn’t burn and that she has enough to pay her rent next month. If you told her she should aim for a Rule of 40, she’d probably think it was a new kind of whole wheat flour. Meanwhile, in startup land, founders like Steve (who can’t cook but somehow runs Flopify) laugh all the way to the bank—or at least until the funding dries up.
What Happens When the Rule of 40 Goes Wrong
Let’s not pretend every startup that worships at the altar of the Rule of 40 is bound for success. No, no. In fact, some end up spectacularly missing the mark. Take Yogify, a now-defunct app that was supposed to help you find yoga classes at all hours of the day, while simultaneously delivering kale smoothies directly to your door.
Yogify boasted a jaw-dropping 70% growth rate at one point, but with a catch: they were hemorrhaging money at a profit margin of negative 30%. That’s right, their loss was so impressive it would have made Titanic look like a successful voyage. Their numbers didn’t add up, even in the distorted calculus of the Rule of 40. Yogify became a cautionary tale about what happens when growth becomes a runaway train without any revenue to balance it out.
Investors who bought into the vision of “disrupting yoga with smoothies” were left holding the bag—and that bag was full of unsold yoga mats and unused promo codes. Yogify serves as a reminder that while the Rule of 40 may be a handy guide, it’s not a foolproof guarantee that your next quirky startup idea will make it to the IPO promised land.
The Bottom Line
At the end of the day, the Rule of 40 is less of a rule and more of a whimsical suggestion—a guideline that gives investors a way to rationalize the often irrational world of startups. It’s a useful tool for sifting through which companies might actually survive long enough to deliver on their lofty promises and which ones are just charismatic money pits.
But as we’ll explore in the next chapter, not every startup cares about rules, even magical ones like the Rule of 40. After all, what fun is disrupting an industry if you can’t play fast and loose with the numbers while doing it?
For now, just remember: If your startup’s growth rate and profit margin add up to 40%, congratulations, you’re living the dream. But if you’re still trying to explain how your vegan cat sitter app will change the world, maybe it’s time to re-examine your priorities. Or at least get some better kombucha.
Chapter 2: Meet the Characters: The Rule of 40 in Action
Welcome to the world of SaaS startups, where any idea, no matter how absurd, can somehow turn into a multi-million-dollar venture as long as it’s paired with enough jargon, a slick pitch deck, and, of course, a creative application of the Rule of 40. In this chapter, we meet three of these brave pioneers who are bending the rules of finance (and sometimes reality) to chase their dreams—and your investment dollars.
Company 1: Unicornia
CEO: Chad “Disruption” McKale
Unicornia is the kind of company that makes you think, “Wait, are we really doing this?” And yes, Chad “Disruption” McKale, the founder and CEO, is really doing this: a blockchain-powered, artisanal juice delivery service… for dogs. Because why should humans have all the cold-pressed kale and celery detox fun?
Chad’s entrepreneurial journey began, as many do, after dropping out of Harvard. One semester of Intro to Psychology was all he needed to realize that his true calling was to “disrupt the pet beverage market.” While the rest of us were trying to figure out how to pay rent, Chad was busy convincing Silicon Valley that dogs across America were just begging for organic, gluten-free juice cleanses.
The best part? Investors are eating it up. Not the juice, of course—that stuff is an acquired taste even for humans—but the idea. Chad has all the key ingredients: he wears Patagonia vests like they’re going out of style, uses “synergy” in casual conversation, and loves to sprinkle in phrases like “blockchain revolution” and “pet wellness ecosystem.” It’s no wonder the VC money keeps rolling in.
Unicornia is growing at an eye-popping rate of 70%. Profit margins, though, are another story. With a shocking -30% margin, they’re hemorrhaging money like a leaky faucet in a forgotten bathroom. But Chad is unfazed. “Profitability is a construct designed by legacy businesses,” he says, sipping on what we can only assume is dog-friendly kombucha. According to Chad, focusing on profit is for old-school thinkers—he’s here to create a movement.
And here’s where the Rule of 40 works its magic. Unicornia’s 70% growth minus a 30% profit margin still equals the mystical 40%. So, despite the fact that they’re spending more money than a dog can lap up in a lifetime, Chad gets to keep living his VC-funded dream for another six months. Dogs can’t bark back about financials, after all.
Company 2: Fintechfaux
CFO: Brenda “Blockchain” Albright
Next up is Fintechfaux, a startup that, on paper, makes even less sense than it does in real life. Their mission? To “decentralize financial transactions for millennial avocado farmers.” If you’re scratching your head, you’re not alone—nobody really knows what that means, not even Brenda Albright, their CFO. But it doesn’t matter because Brenda speaks the one language that matters in the tech world: buzzwords.
Brenda is a former Goldman Sachs banker who ditched the traditional finance world to make a “real difference” by throwing around phrases like “decentralized finance,” “blockchain for agriculture,” and “avocado-led growth.” And while her old colleagues at Goldman are still trying to figure out what she’s talking about, Brenda has positioned Fintechfaux as the go-to platform for avocado-obsessed millennials looking for—well, something.
Fintechfaux’s growth rate? A modest 5%. But here’s the kicker: they’ve managed to squeeze out a 35% profit margin. How? By charging transaction fees so high they could make a Wall Street hedge fund blush and praying that no one actually reads the fine print. The platform has about 12 users, including Brenda’s cousins and Doug, a particularly enthusiastic avocado farmer who swears by blockchain for tracking his crops.
Brenda’s a big fan of the Rule of 40 because it’s the only reason her job title doesn’t come with a side of panic. A 5% growth rate paired with a 35% profit margin equals a solid 40%. Investors, meanwhile, see that magic number and nod approvingly, ignoring the fact that Fintechfaux’s user base is smaller than a neighborhood lemonade stand. But hey, who cares? With numbers like these, Brenda can keep bragging that they’re “crushing it” while Doug keeps reaping the benefits of decentralizing his avocados.
Company 3: StreamMyDream
Founder: Zoe “Zen” Kravinsky
Then there’s StreamMyDream, a company so deeply rooted in existential woo-woo that even its founder, Zoe Kravinsky, sometimes struggles to explain what it does. StreamMyDream lets you livestream your dreams to your therapist, your friends, or even that barista who never spells your name right. It’s a SaaS platform built on the belief that human consciousness deserves a subscription model.
Zoe, of course, didn’t come to this idea lightly. She spent six months in Bali “finding herself,” which, in startup terms, means “coming up with a wild idea while practicing yoga on the beach.” She believes that profit is a relic of capitalism’s past. “We’re in the experience economy now,” she explains during an all-hands meeting, while doing a perfect headstand to really drive the point home. Her investors are mesmerized—not by her financial projections, but by her yoga poses and her sheer conviction that someday, everyone will be paying to share their nighttime visions.
StreamMyDream is growing at an impressive 100%. Investors love the growth—who wouldn’t want a piece of a company that promises to redefine human consciousness? The small detail that they’re losing money at a breathtaking rate—say, with a -60% profit margin—isn’t a problem as long as they keep growing. At least that’s what Zoe’s been telling her board while holding a downward dog.
Luckily for Zoe, the Rule of 40 is here to save the day. 100% growth minus a 60% profit margin still adds up to—you guessed it—40%. Never mind that StreamMyDream is burning through cash faster than the dreamers themselves can conjure up wild ideas; in the magical world of startup math, the numbers check out. Zoe can keep livestreaming her dream of a profitable future, while investors continue to ride the high of her disruptive energy (and maybe her guided meditation sessions).
The Rule of 40: The Great Enabler
If there’s one thing these companies have in common, it’s their ability to use the Rule of 40 like a mystical cheat code. Whether you’re juicing dogs, monetizing avocado farmers, or livestreaming your subconscious to strangers, the Rule of 40 can make your business model seem almost legit. Growth is the golden ticket, and as long as you can find enough users, hype, or yoga studios to back you up, investors will continue to nod along, pretending that “profit” is some vague concept for lesser beings.
In startup land, reality has always been a bit… optional. And thanks to the Rule of 40, that tradition continues. So buckle up, because the ride isn’t over yet. In the next chapter, we’ll explore what happens when reality finally decides to knock on the door—or if it ever will. Spoiler alert: Unicornia’s dogs may not be the only ones whining when it all comes crashing down.
Chapter 3: Why Investors Love the Rule of 40
Let’s take a moment to appreciate why investors, particularly venture capitalists (VCs), are completely obsessed with the Rule of 40. It’s the investment world’s version of a magic trick—poof, suddenly a company that’s burning money faster than you can say “Series B” looks like a solid bet. It’s like giving a participation trophy to startups that can’t decide whether they want to grow or make money, but hey, they’re trying!
Why, you ask, does the Rule of 40 inspire such blind faith? Simple: it allows investors to ignore all the red flags waving in their faces, and instead focus on one convenient number that sums up the company’s entire existence in a way that sounds scientific but is actually as flexible as a Cirque du Soleil contortionist. Forget asking tough questions like, “Hey, will this company ever turn a profit?” Instead, just hit them with, “But they’ve got a combined score of 40%!” and watch everyone in the room nod in agreement, as if they’ve unlocked some ancient secret to startup success.
It’s the ultimate cop-out.
The Great Illusion: Flashy Growth > Profitability
Here’s the real beauty of the Rule of 40: It lets investors pretend they’re being responsible with their money. You know that awkward moment in a board meeting where someone should ask, “So, um, when do we actually start making money?” With the Rule of 40, that moment never has to happen. It’s like skipping the broccoli and going straight for dessert—why deal with the messy details of profitability when you can just marvel at those shiny growth numbers?
Take Unicornia, for instance. If we were living in a world that made sense, someone would have stood up by now and asked Chad McKale, “Hey, Chad, is there really a future in blockchain-powered dog juice?” Instead, investors look at that 70% growth and think, “Wow, we’re onto something here!” And then they glance at the -30% profit margin, shrug their shoulders, and move on. Because in the universe of the Rule of 40, those two numbers add up to 40%, which means everything’s going great!
This rule is particularly helpful for investors who love the adrenaline rush of “disruptive” startups but secretly fear those boring little details like cash flow or sustainability. You know, the kind of investors who’d rather bet on a startup that promises to revolutionize how we order lunch (using AI and blockchain, obviously) than one that makes… actual money.
The Flexibility of the Rule: Cake, Anyone?
Another reason VCs adore the Rule of 40? It’s flexible enough to make any company look good—as long as you squint hard enough. If your company is growing at breakneck speed but hemorrhaging cash faster than a Vegas gambler, the Rule of 40 steps in to reassure everyone, “It’s fine, we’re still in the game.” Or, if you’re making money but growing at the speed of your grandma’s dial-up internet, it’s no big deal.
Take Fintechfaux. Brenda “Blockchain” Albright’s company grows at a snail’s pace (5%!), but they rake in 35% profit margins by charging avocado farmers a fortune in transaction fees. Anyone else might say, “That’s not a tech company, it’s a glorified toll booth!” But thanks to the Rule of 40, Brenda can sleep easy knowing her combined score is just right. And as long as that magic number adds up to 40%, Fintechfaux can keep pretending it’s the next Apple instead of the world’s most expensive way to buy guacamole.
The Rule of 40 doesn’t judge. It accepts both growth and profitability with open arms, allowing investors to have their cake and eat it too. It’s like a financial buffet where you can load your plate with as many carbs (growth) or as much kale (profitability) as you like, and it’s all good as long as the calories balance out.
Faking It ‘Til You Make It
Let’s not forget one of the most powerful reasons VCs are smitten with this magical rule: It lets startups fake it until they (hopefully) make it. Sure, your profit margins are deeply in the red, but you’re growing at 100%, so who cares, right? Or maybe you’ve got profits coming out of your ears, but your growth curve is flatter than a pancake—still no worries, because the Rule of 40’s got your back.
StreamMyDream is a prime example. Zoe “Zen” Kravinsky is losing money so fast it’s like her bank account has a hole in it, but the company’s growth is through the roof. Sure, no one really understands why people would want to livestream their dreams, but with 100% growth, why even ask that question? Just pull out the Rule of 40 calculator and watch the investors’ eyes light up like they’ve seen the future of tech. Add the -60% profit margin and, bam, 40%. Suddenly, StreamMyDream is a viable business, and Zoe can keep her investors hypnotized with headstands and high-concept ideas about “redefining human consciousness.”
The Rule of 40 is like giving startups a free pass to keep the dream alive, even when the numbers don’t quite make sense. It’s the ultimate “fake it ‘til you make it” formula, and as long as investors are willing to squint past the profit-loss statements and focus on the growth, the game continues. Or, at the very least, the next funding round is secured before anyone has to talk about actual revenue.
The “Go Public” Escape Hatch
Here’s the real kicker: The Rule of 40 gives startups and investors alike a kind of safety net—an escape hatch, if you will. You don’t actually have to be successful; you just have to look successful long enough to go public.
Once you hit that magic 40% score, the IPO hype machine kicks in, and suddenly all those years of losses and mind-bogglingly optimistic projections can be swept under the rug. By the time the company hits the stock market, the founders are rich, the VCs are richer, and everyone else is left wondering how a company that loses $1.50 for every dollar it makes is worth billions.
Remember the story of Unicornia and its blockchain dog juice? Chad “Disruption” McKale isn’t sweating that -30% profit margin, because as long as his growth keeps climbing, the IPO window will eventually open, and he can cash out before anyone realizes that dogs aren’t exactly clamoring for kale smoothies.
The Rule of 40: Making Mediocrity Look Like Genius
At the end of the day, the Rule of 40 is the perfect tool for making mediocrity look like genius. It allows investors to take a leap of faith on companies that are more sizzle than steak. As long as that sizzle is loud enough—whether it’s in the form of growth or profitability—everyone can sit back, relax, and believe they’re part of the next big thing.
It’s not about whether the company makes sense, or even if it makes money. It’s about the illusion of success. And in the world of venture capital, perception is reality. As long as the Rule of 40 keeps turning the improbable into the possible, the VC world will keep nodding along, raising a glass of artisanal dog juice, and toasting to “disruption.” Cheers to that.
Chapter 4: Fun Tidbits: Applying the Rule of 40 to Everyday Life
The beauty of the Rule of 40 isn’t just limited to boardrooms and investor pitches—it can apply to nearly every corner of life. Think of it as the ultimate life hack for balancing effort and chaos. If you’ve ever felt like you’re juggling too many things and wondering if you’re getting it right, fear not. The Rule of 40 has your back, ensuring that as long as things kind of add up, you’re doing just fine.
Let’s explore how this magical rule can transform your day-to-day activities. Spoiler: it makes everything seem way more successful than it actually is!
1. Dieting: The Ultimate Cheat Code
Ever tried to eat healthy but somehow found yourself face-first in a chocolate cake? We’ve all been there. Fortunately, the Rule of 40 swoops in to save the day.
Imagine you’ve eaten 40% of a salad and then, because you’re only human, devoured 60% of a chocolate cake. Instead of feeling guilty, just whip out your Rule of 40 scorecard. Salad (40%) + Cake (60%) = 100%! But if you think of it like this: 40% of your healthy choices plus a 60% indulgence, you’re technically still on track for balance. It’s the nutritional equivalent of saying, “I’m hitting my growth targets even if my profit margins (a.k.a. health benefits) are in the negative.”
Sure, some nutritionist somewhere is screaming into a void, but under the Rule of 40, you’re a health guru. Your overall health score is fine. In fact, it’s balanced. You can now smugly tell people that you live by “a principle that venture capitalists swear by.”
2. Parenting: Balancing Work and Screaming into Pillows
Parenting is one of those jobs where there’s no clear roadmap, no guidebook, and certainly no vacation days. But guess what? The Rule of 40 can help turn your daily chaos into what sounds like an efficient life strategy.
Picture this: You spend 60% of your day working hard to keep the household running—making lunches, checking homework, trying to decode your kids’ math problems that require a degree in rocket science. The other 40%? Screaming into a pillow because your child just announced their science project is due tomorrow, and they haven’t started. Under normal circumstances, you might feel like a failure, but with the Rule of 40, you’re absolutely winning.
The parenting Rule of 40 gives you permission to spend half your time succeeding and the other half wondering why you ever thought having kids was a good idea. As long as it adds up to a vague sense of balance, you’re good. You are crushing it, my friend. A solid 40% of your efforts are on point, and the rest? Well, that’s what wine and Netflix are for.
3. Dating: Emotional Growth Meets Avoiding Commitment
Dating, like startups, is tricky business. But with the Rule of 40, you can navigate the ups and downs of relationships with the same swagger that CEOs use to explain why they’re burning millions of dollars a month and still not making a profit.
Let’s say you and your significant other are growing 70% closer emotionally. You’ve shared deep conversations, maybe you’ve even been vulnerable. But that other 30%? Oh, that’s reserved for avoiding those super awkward talks about where this is all heading. No need to bring up the “Are we exclusive?” chat just yet—you’re hitting the Rule of 40.
It’s the perfect balance: You’re emotionally invested just enough, while still keeping things comfortably vague. A relationship that’s 70% open and honest but leaves 30% of the future undecided is basically the dating world’s equivalent of unicorn status. You’re practically IPO-ready.
4. Fitness: Half Marathon, Half Netflix
Fitness is where the Rule of 40 truly shines. Gone are the days when you had to either be a gym rat or a couch potato—now, you can be both!
Imagine you spent 40% of your week crushing it at the gym. You’re sweating, you’re lifting, you’re running—maybe even posting motivational quotes on Instagram. But the other 60%? Oh, that’s Netflix binging, with your feet propped up and your favorite snacks at hand. According to conventional wisdom, this might seem like a half-hearted effort. But according to the Rule of 40, you’re an athlete who understands balance.
After all, 40% of peak physical performance combined with 60% of well-deserved rest (and a few cookies) adds up to 100% of you living your best life. It’s fitness with a twist: why go all-in when you can go just enough and still feel great about it?
5. House Cleaning: The Dust Bunny Dilemma
Cleaning the house is one of those necessary evils where perfection feels elusive. But now, with the Rule of 40, there’s no need for perfection at all—just do enough to keep things from looking like a disaster.
Say you clean 40% of your house—maybe the kitchen is sparkling, the living room is tidy, and the bathrooms are decent. That remaining 60%, however, is a war zone. Laundry mountains, dusty corners, and that junk drawer you swear you’ll organize one day. You could feel bad about this, but not under the Rule of 40. In fact, you should celebrate! You’re maintaining a perfectly balanced approach to domestic bliss. After all, life’s too short to mop under the fridge.
As long as 40% of the house is clean, you can confidently invite guests over without a pang of guilt. They’ll never know about the chaos lurking upstairs, and thanks to the Rule of 40, neither should you.
6. Work-Life Balance: Office Hero by Day, PJs by Night
The Rule of 40 can also help you crush that elusive work-life balance everyone’s always talking about. You know the feeling—some days, you’re on fire at work, answering emails, leading meetings, and generally being a productivity machine. That’s your 40%.
Then comes the other 60%. That’s the part of the day where you’re wearing pajamas by 6 p.m., eating ice cream straight from the carton, and telling yourself that rewatching an entire season of your favorite show is self-care. Don’t worry—under the Rule of 40, this counts as perfect balance.
Anyone who judges you for clocking out mentally before sunset clearly doesn’t understand how the world works. By investing 40% of your energy in career brilliance and 60% in comfortable avoidance of adulthood, you’ve achieved the ultimate life hack. Congratulations, you’re thriving!
The Rule of 40: Life’s Best Kept Secret
In the end, the Rule of 40 isn’t just a magical formula for startups—it’s the ultimate cheat sheet for life. It’s a tool for making mediocrity look like mastery, for turning barely-good-enough into “I’ve got this,” and for allowing you to embrace your human imperfections with the smug satisfaction that you’re still succeeding—because, hey, the numbers add up.
So whether you’re navigating parenthood, relationships, or just trying to survive another day without losing your mind, remember this: as long as you’re giving it about 40%, the Rule of 40 declares you a winner. Who needs perfection when you can have balance? Or, at the very least, the appearance of it.
Chapter 5: When the Rule of 40 Becomes the Rule of Fiction
As much as we’d all love to believe in the mystical powers of the Rule of 40, let’s be real: some companies (and people) are so far off the mark that even the Rule of 40 can’t save them. Enter the Rule of Fiction—where the math doesn’t add up, the reality is warped beyond recognition, and everyone involved is either blissfully ignorant or doing some very creative accounting to keep the dream alive.
Let’s dive into some prime examples of how the Rule of 40 sometimes devolves into the Rule of “We’re Screwed.”
1. BurnRateBoiz: A Fintech Fiasco
Meet BurnRateBoiz, a fintech startup that talks a big game about disrupting the way people think about money. They have snazzy presentations, a mascot that’s way cooler than it has any right to be, and a growth rate that… well, let’s just say it’s modest. BurnRateBoiz is growing at 20%, which on its own isn’t terrible—until you look at the profit margin. It’s -80%. Yes, that’s right, a negative profit margin that’s so deep it’s digging for treasure at the earth’s core.
Now, if you apply the Rule of 40 here, you get a total score of -60%. That’s not just failing; that’s failing so spectacularly that it’s almost an art form. It’s the corporate equivalent of throwing a Hail Mary pass… backward.
But here’s the thing: BurnRateBoiz is still getting funded. Why? Because somewhere along the line, someone decided that negative numbers are cool. They’ve convinced themselves—and their investors—that maybe, just maybe, this is what disruption looks like. After all, isn’t it better to burn cash at an alarming rate than to make profits in a predictable, boring way? It’s all part of the fintech vibe, right?
Investors nod along, glasses of organic cold brew in hand, quietly hoping that BurnRateBoiz isn’t the next WeWork in disguise. Maybe negative is the new positive. Or maybe they’re all just bad at math. Either way, the Rule of Fiction prevails.
2. Tinder for Hedgehogs: Niche, Adorable, and Financially Hopeless
Next up is Tinder for Hedgehogs, a dating app so niche it hurts. And yet, it’s somehow gaining users—about 30% more hedgehog-loving romantics every month. That’s respectable growth for a company that most people would assume was born from a drunken conversation at a tech conference after too many craft beers.
Unfortunately, while the hedgehog market is booming, their profit margins are so abysmal they need a Hubble Space Telescope to locate them. We’re talking margins that are lower than a limbo champion at the Olympics. Somehow, their bottom line has managed to become a topological curiosity, bending space-time like a financial black hole.
Under the Rule of 40, Tinder for Hedgehogs gets a score of approximately… “Please send help.” Sure, the growth rate is there, but when your profits are shrinking so fast they could be measured in subatomic units, you’re in serious trouble. But again, the investors seem to love it. Maybe it’s the cute branding, or maybe they’re just banking on the future of hedgehog dating as the next billion-dollar opportunity. Either way, the Rule of Fiction reigns supreme, and as long as the app keeps growing—even if they have to start paying users to sign up—the dream stays alive.
3. The Rule of Fiction in Everyday Life
Of course, it’s not just startups that can fall prey to the Rule of Fiction. It happens in real life, too. We’ve all been there—telling ourselves little stories to make the numbers look better, whether we’re talking about our finances, diets, or productivity. Let’s take a look at a few examples:
The Budgeting Fantasy: You know you’re overspending, but instead of cutting back, you make a magical mental spreadsheet where the $200 you just spent on a “necessary” gadget somehow gets classified as an “investment.” You’re technically in the red, but in the world of Rule of Fiction accounting, you’ve convinced yourself it’s all part of your long-term financial strategy. A 10% growth in cool gadgets + an 80% decline in your bank balance = you’re thriving!
The “I’ll Be Productive Tomorrow” Plan: You’re behind on work, your to-do list looks like a novel, and your email inbox has more red flags than a reality TV relationship. But instead of tackling it head-on, you tell yourself that tomorrow is going to be the day you crush it. You schedule meetings, make plans to be up early, and then… you spend the rest of today rewatching that Netflix series “for inspiration.” That’s a -70% productivity rate combined with a 30% boost in motivational speeches you give yourself. Rule of 40? More like Rule of Delusion.
The DIY Home Renovation Fiasco: You’ve decided to renovate your kitchen yourself because you watched a YouTube video and how hard could it be, right? Fast forward six months, and the project is 15% complete while your budget has spiraled 85% over what you planned. Instead of admitting defeat, you justify it by saying, “It’s all about the learning process!” Rule of 40? Nope, more like the Rule of “I should’ve hired a professional.”
4. When Fiction Becomes Fact (At Least Temporarily)
The Rule of Fiction isn’t all bad—it has a way of keeping hope alive. In the startup world, it buys companies time. It gives them a chance to pivot, regroup, and maybe, just maybe, pull off a miracle. After all, today’s financial catastrophe could be tomorrow’s unicorn.
Take Pets.com, the infamous dot-com bust. It was the poster child for the Rule of Fiction—growing rapidly while losing money at an alarming rate. It flamed out in spectacular fashion, but guess what? Years later, online pet supply sales became a multi-billion-dollar industry. So maybe Pets.com wasn’t wrong—just ahead of its time. The Rule of Fiction, for all its flaws, sometimes gets the last laugh.
5. A Fine Line Between Genius and Chaos
The real magic of the Rule of 40—and by extension, the Rule of Fiction—is that it allows for a healthy dose of creative interpretation. Whether you’re a startup founder or just someone trying to justify your latest online shopping spree, it’s all about finding that fine line between genius and chaos. Some companies ride the line like pros, dancing along the edge of catastrophe while making it look like they’re nailing it. Others fall headfirst into the abyss, clutching their Rule of Fiction scorecards and wondering where it all went wrong.
In the end, the Rule of 40 is a game. Sometimes, you win. Sometimes, you invent a new rulebook on the fly to keep from losing. And sometimes, when all else fails, you just double down on the Rule of Fiction and hope no one notices.
So the next time you hear about a company with a growth rate of 40% and profit margins of “trust us, it’s fine,” remember: you’re witnessing the Rule of Fiction in action. And if they pull it off? Well, maybe there’s some magic in the madness after all.
Chapter 6: Conclusion: The Rule of 40—Masterpiece or Mirage?
And so, we arrive at the end of our whirlwind journey through the mystical, somewhat dubious land of the Rule of 40—a place where math and optimism hold hands and skip through the startup ecosystem like it’s a carefree day at the park.
The Rule of 40 is, as we’ve discovered, a bit of a paradox. It’s both a valuable tool and a convenient crutch, depending on how you use it—or abuse it. On paper, it sounds like a golden ticket: a neat little formula that lets you measure the health of a company without getting too bogged down in the messy realities of revenue models, cost structures, or whether your CEO actually understands the business they’re running. But in practice, it’s often used to justify decisions that, when you step back, feel more like you’re betting on a unicorn sighting in Times Square.
A Masterpiece for Storytellers
For founders and investors, the Rule of 40 is like a beautifully crafted illusion—a magic trick that, when performed well, gets everyone clapping in awe. It’s like an artful performance of “Look, we’re doing great!” without having to actually answer any pesky questions about profitability or sustainability.
Growing at 60% but losing 20% on profits? Hey, no worries! Rule of 40 says we’re still crushing it! Investors nod along like a group of connoisseurs at an avant-garde art exhibit, pretending to understand what’s happening even when, deep down, they’re not entirely sure if they’re looking at a masterpiece or a glorified paint spill.
In this sense, the Rule of 40 is perfect for the age of storytelling. It gives you the numbers to back up your pitch, and as long as the sum is 40 or higher, you’re basically halfway to sounding like the next big thing. It’s startup alchemy—turning questionable growth trajectories into gold, or at least into VC money.
A Mirage for Realists
But for the realists out there, the Rule of 40 can feel more like a mirage. Sure, it looks good from a distance, but the closer you get, the blurrier things become. That shimmering oasis of balanced growth and profitability? It might just be a reflection of creative accounting, wishful thinking, or worse—some combination of both.
Remember BurnRateBoiz from Chapter 5? Yeah, they’re the Rule of 40’s poster child for why this metric sometimes feels more like a mirage than a masterpiece. Negative profit margins that stretch into oblivion, yet growth numbers that keep the fantasy alive. It’s like those get-rich-quick infomercials—too good to be true, but with just enough polish to keep you wondering.
And that’s the thing about the Rule of 40—it doesn’t force you to confront the really hard stuff. It’s like going to the gym and spending 40% of your time on the treadmill but the other 60% eating pizza and calling it a “balanced lifestyle.” It’s great for optics, but at some point, you have to look in the mirror and ask, “Am I actually getting healthier, or just getting better at justifying bad habits?”
The Yoga Pants of Metrics
Let’s be honest: the Rule of 40 is basically the financial equivalent of wearing yoga pants. Is it athletic wear? Sure. But also, let’s not pretend you’re going to run a marathon just because you put them on. You can dress it up or down, make it seem like you’ve got everything under control, and everyone will nod approvingly because, hey, yoga pants are comfortable, and who’s really going to question your life choices when you look that relaxed?
For companies, it’s the same thing. As long as you’ve got a decent mix of growth and profitability—or at least one of the two—you can get away with a lot. Founders stroll into boardrooms armed with their Rule of 40 slides, and investors, like fashionistas admiring the latest athleisure trend, don’t dig too deep because, well, it looks right.
And let’s face it, sometimes looking like you’ve got it together is almost as important as actually having it together—especially when you’re trying to raise money.
The Power of Seeming Competent
At its core, the Rule of 40 isn’t really about numbers; it’s about confidence. In the chaotic world of startups, where risk is the name of the game, people are just looking for something—anything—that helps them believe everything will turn out okay. And that’s where the Rule of 40 shines. It’s not there to answer the tough questions about your business model, sustainability, or long-term strategy. No, its job is to provide just enough reassurance that, despite all the unknowns, you’re at least following some rule.
Because in startup land, sometimes the appearance of knowing what you’re doing is more important than actually knowing what you’re doing.
Masterpiece or Mirage? You Decide
So, what’s the final verdict on the Rule of 40? Is it a masterpiece of simplicity, offering a quick yet powerful insight into the balance between growth and profitability? Or is it a mirage—a convenient distraction that keeps investors focused on the wrong things while founders scramble to keep their businesses afloat?
The truth, as always, lies somewhere in between. For some companies, the Rule of 40 is a valuable benchmark that helps them stay on track and communicate their progress in a way that makes sense. For others, it’s a convenient excuse to avoid facing the harsh realities of an unsustainable business model.
But regardless of whether you view it as genius or gimmick, one thing’s for sure: the Rule of 40 isn’t going anywhere anytime soon. Like a trusted friend who gives great advice but is also down to help you justify your bad decisions, the Rule of 40 is here to stay. And why not? In the unpredictable, rollercoaster world of startups, it’s nice to have at least one rule that’s flexible enough to bend reality without breaking it entirely.
So, the next time someone casually drops the Rule of 40 in conversation, just smile, nod, and say, “Ah, yes. Very scalable.” Because in the end, knowing how to sound like you know what you’re doing is half the battle—and the Rule of 40 is the secret weapon that lets you win it.
Author: John S. Morlu II, CPA is the CEO and Chief Strategist of JS Morlu, leads a globally recognized public accounting and management consultancy firm. Under his visionary leadership, JS Morlu has become a pioneer in developing cutting-edge technologies across B2B, B2C, P2P, and B2G verticals. The firm’s groundbreaking innovations include AI-powered reconciliation software (ReckSoft.com) and advanced cloud accounting solutions (FinovatePro.com), setting new industry standards for efficiency, accuracy, and technological excellence.