Brad Feld – Does the Rule of 40 Work for Hardware?

2 days ago

The Rule of 40 is a metric for SaaS companies combining growth rate and profit margin, requiring a sum of at least 40%.
It originated in 2015 and has become a standard benchmark, balancing growth and profitability in a single number.
For hardware companies, the Rule of 40 should be applied over time, not as a single-quarter snapshot, due to different business dynamics.
Hardware involves longer development cycles, upfront costs, and delayed margins, making early negative scores misleading if growth is on track.
Key indicators for hardware include improving gross margin trajectory, profitable product generations, and strategic timing of profitability.
Formlabs exemplifies successful hardware growth, initially failing the Rule of 40 but later achieving profitability and market leadership.
The metric must align with business models: SaaS allows snapshot readings, while hardware requires analyzing long-term trends.

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