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The 40% Rule

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Re: The 40% Rule

#31

Post by mmastrac »

michaelochurch wrote: post #29

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.

It's not user growth -- it is revenue growth.

If you've got a hockey-stick curve for revenue and you're losing money, that's not necessarily a problem (within reason). At some point you can start spending less on user acquisition/marketing and you'll go from losing money/growing fast to profitable/growing slower.

Re: The 40% Rule

#33

Post by michaelochurch »

mmastrac wrote: post #31
michaelochurch wrote: post #29

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.

It's not user growth -- it is revenue growth. If you've got a hockey-stick curve for revenue and you're losing money, that's not necessarily a problem (within reason). At some point you can start spending less on user acquisition/marketing and you'll go from losing money/growing fast to profitable/growing slower.

This explains even more.

I've noticed that a lot of startups delay making any revenue, and that this might not be for bad reasons, because plenty of companies start to really suffer once they start making revenues (but fall short of what they "should" be seeing and how has they "should" be growing) not because there is anything wrong with them as businesses, but because their ADD investors lose faith and interest.

So now it makes sense that companies would delay revenue until they have enough of a free-tier footprint that they can control revenue growth for a few years and ensure exponential growth (this may involve intentionally tamping down early-year revenue in order to have a sharp upward trend).

Re: The 40% Rule

#35

Post by jsprogrammer »

nostrademons wrote: post #7
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…

This is exactly what people do when they go to school: they take on huge amounts of debt in order to make their income grow by >100% YoY for a few years. Very few incoming college students know enough about finance or exactly what different choices will payout to make smart trade-offs in this area, but this reasoning is pretty common with MBA and Law School students. Occasionally it even works; I've known a few young…

Some go to school to learn.

Re: The 40% Rule

#36

Post by GICodeWarrior »

fragsworth wrote: post #32

Maybe I'm missing something important, but I don't see any rationale behind this. What makes 35% or 45% worse than 40%?

I would guess he is suggesting that less than 40% means you are over-spending or under-performing and more than 40% means you are under-spending (eg. you should invest more in growth).

Re: The 40% Rule

#37

Post by mc32 »

GICodeWarrior wrote: post #36
fragsworth wrote: post #32

Maybe I'm missing something important, but I don't see any rationale behind this. What makes 35% or 45% worse than 40%?

I would guess he is suggesting that less than 40% means you are over-spending or under-performing and more than 40% means you are under-spending (eg. you should invest more in growth).

The way I read it, it was more like a rough guideline rather than a strict rule... but when you put something forth as a guideline, it does not sound as crisp and presentable. I mean, there is no basis put forward, simply said someone uses that figure when they want to get a rough idea bout a company. I imagine once something passes that filter, they would do a more thorough analysis.

Re: The 40% Rule

#38

Post by cperciva »

garrettlarson wrote: post #30
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.

Yeah, that's on the Brad Feld's blog. But not on the submitted post, unfortunately.

Re: The 40% Rule

#39

Post by Anderkent »

jsprogrammer wrote: post #35
nostrademons wrote: post #7

Earlier quoted context omitted.

This is exactly what people do when they go to school: they take on huge amounts of debt in order to make their income grow by >100% YoY for a few years. Very few incoming college students know enough about finance or exactly what different choices will payout to make smart trade-offs in this area, but this reasoning is pretty common with MBA and Law School students. Occasionally it even works; I've known a few young…

Some go to school to learn.

You don't need to go to school to learn, so if it's just learning you're interested in school isn't a very good investment.

Re: The 40% Rule

#40

Post by vidarh »

petercooper wrote: post #12
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".

I wondered that as well as I'm in the same situation, but then I wondered if it works as a target if it means we should be spending more on staff and reinvestment to grow even more? But that'd mean the %age gets even higher so.. maybe not ;-) I also don't really understand why having a higher margin is useful in a declining business. It's either a lost cause or one should be reinvesting in reversing the growth proble…

In a declining business, either you want to extract as much as possible before the market disappears, or you want to invest in turning the decline into growth.

Either can be valid answers. Consider a business that is in decline because the market it is serving is disappearing. In that case this guideline tells you that if you try to invest money into getting it back into growth, and you fail, then you should instead focus on minimizing cost and maximizing price to extract as much value as possible (to e.g. reinvest in another business).

Alternatively if you find investing more leads the growth rates to increase accordingly to keep matching this guideline, it indicates that you have untapped market potential that is worth exploiting in order to put you in a position to extract far higher earnings (in absolute terms) down the road.

You can reformulate it pretty much as: Invest in growth when growth is cheap, and extract profit when it is not.

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