Best-in-class companies have achieved scale (reached a minimum of $100M ARR) and growth (after reaching $50M ARR, the company maintains above median YoY ARR growth) or efficiency (after reaching $50M ARR, the company maintains above median Rule of 40). Of the 50 companies we included in our analysis, 16 companies qualified as “best-in-class” based on the following criteria.
ICONIQ GROWTH SOFTWARE
This analysis is based on 50 of the ~75 enterprise software investments ICONIQ Growth has made to date, based on quarterly data through 1Q 2021. Had ICONIQ Strategic Partners funds existed at the time of investment, this investment would have been offered and allocated to ICONIQ Strategic Partners funds. ICONIQ advised funds invested in SurveyMonkey prior to the existence of ICONIQ Strategic Partners funds. This includes current or former ICONIQ Growth portfolio companies that have been included on the Forbes Cloud 100 list from 2016–2021. Notably, over 60% of the Enterprise SaaS companies in our dataset meet and exceed the Rule of 40, compared to ~30% of global private SaaS companies⁶. Rule of 40 for the best-in-class companies we examined averages 72% after reaching $25M ARR, driven higher in early stages due to high ARR growth. When analyzed in concert with growth and retention, we believe Rule of 40 provides great insight in a company’s efficiency.ĭue to the inherent volatility of ARR growth and FCF margin at early stages of growth, we typically only begin to place real weight against Rule of 40 for companies with at least ~$25M ARR, and believe it is most applicable to companies with >$50M ARR.
Simply put, Rule of 40 says that growth and profitability should be considered in tandem: a company growing at 40% should target at least breaking even. “Rule of 40” is the principle that a high-performing SaaS company’s combined YoY growth rate and FCF margin should generally meet or exceed 40%. Rule of 40 (%) = ARR Growth (YoY, %) + FCF Margin (%)⁵
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