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The 40% Rule

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Re: The 40% Rule

#21

Post by avn2109 »

msellout wrote: post #4
brd wrote: post #3

Earlier quoted context omitted.

I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt. This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result. For personal finances I think its better to tease out a bas…

Banks invest in individuals by offering loans.

* With Federally guaranteed profits

Re: The 40% Rule

#22

Post by [deleted] »

applecore wrote: post #17
cperciva wrote: post #11

Your annual revenue growth rate + your operating margin should equal 40% My immediate reaction: So I guess I need to cut Tarsnap's prices and slow its growth rate? On further thought, I suspect "should equal" should be "should equal or exceed".

It means Tarsnap isn't spending enough on growth.

[deleted]

Re: The 40% Rule

#23

Post by norenjr »

applecore wrote: post #17
cperciva wrote: post #11

Your annual revenue growth rate + your operating margin should equal 40% My immediate reaction: So I guess I need to cut Tarsnap's prices and slow its growth rate? On further thought, I suspect "should equal" should be "should equal or exceed".

It means Tarsnap isn't spending enough on growth.

Did someone mention Tarsnap? :)

Re: The 40% Rule

#24

Post by cperciva »

applecore wrote: post #17
cperciva wrote: post #11

Your annual revenue growth rate + your operating margin should equal 40% My immediate reaction: So I guess I need to cut Tarsnap's prices and slow its growth rate? On further thought, I suspect "should equal" should be "should equal or exceed".

It means Tarsnap isn't spending enough on growth.

The only way Tarsnap could have growth rate + profit margin equal to 40% is if it was losing money. Given that Tarsnap is bootstrapped, that's not an option for me.

Re: The 40% Rule

#25

Post by graeme »

cperciva wrote: post #24
applecore wrote: post #17

Earlier quoted context omitted.

It means Tarsnap isn't spending enough on growth.

The only way Tarsnap could have growth rate + profit margin equal to 40% is if it was losing money. Given that Tarsnap is bootstrapped, that's not an option for me.

>Given that Tarsnap is bootstrapped, that's not an option for me.

Indeed. I think the advice is for VC funded companies. Whole different ballgame. In the ideal case, VC funding lets you grow faster and ultimately make more money. Whereas bootstrapped companies are constrained by the requirement to make at least some money from the getgo.

On the flipside, this constraint of bootstrapping ensures that we actually do make money. Whereas in the less than ideal case for VC the outcome is zero for the founder.

(Bootstrapping can result in zero too, but you usually find this out faster than in a startup.)

There are tradeoffs to either method. I prefer the bootstrapped way. But you can apply that rule to a bootstrapped business to some extent: if your budget allows it, then it can make sense to trim margins if your growth rate is high and you can increase growth by spending.

Re: The 40% Rule

#26

Post by toast76 »

I'd never heard of this rule, so I can't say it was planned but I've just done the maths on our startup (http://macropod.com) and we're exactly on 40%.

I certainly didn't use this equation, but our monthly expenditure is controlled quite heavily by our growth rate. So maybe there's something in that....I think I'll go work out whether this hold true for various growth rates using our method...

FWIW:

- I have a spreadsheet which maps out our revenue and expenses over the past 2 years.

- It estimates our future growth

- It combines that with our bank balance and our expenses to work out an "optimum burn rate".

- We use this number as a guide to how much we should be spending.

The "optimum burn rate" is the spend that will see us use as much of our cash as possible without us dropping below a certain threshold (which at the moment 3x our monthly burn).

Re: The 40% Rule

#27

Post by [deleted] »

sanderjd wrote: post #19
learnstats2 wrote: post #9

Earlier quoted context omitted.

Not sure why this won't still work in theory. 100% YoY increase: Salary Year 1: $100 - you are allowed to go $60 into debt Salary Year 2: $200 - you are allowed a further $120 Salary Year 3: $400 - you are allowed a further $240 Salary Year 4: $800 - your total debts are still around half a year's salary, which is only modestly troubling - banks would most likely be happy to service your debt at a competitive rate. I…

This is a good analogy if the debt is invested in your personal financial growth somehow, for instance through education or perhaps actual investments, but a terrible analogy for the kind of deficit-spending most people do, like on cars and high living expenses.

[deleted]

Re: The 40% Rule

#28

Post by chucksmart »

When I was in school the professor said something about interest rates and opportunity costs that was more algebraic than arithmetic; but I guess that is all academic.

Re: The 40% Rule

#29

Post by michaelochurch »

This literally means that you can lose as much money as you want as long as you grow at a stupid-fast rate. It doesn't matter what you're building or whether anyone wants to pay for it, as long as you get what the monkeys call a "hockey-stick curve".

You're OK even if you literally win at losing. Good to know.

This explains so much.

Re: The 40% Rule

#30

Post by garrettlarson »

cperciva wrote: post #11

Your annual revenue growth rate + your operating margin should equal 40% My immediate reaction: So I guess I need to cut Tarsnap's prices and slow its growth rate? On further thought, I suspect "should equal" should be "should equal or exceed".

He means "should equal or exceed":

> If you are doing better than the 40% rule, that’s awesome.

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