Most Founders Misuse These 3 Metrics. Here's How to Get Them Right.
- gandhinath0
- Apr 25
- 6 min read
Growth and Profitability shape every SaaS company's journey. Most founders see these as competing forces, but the best companies never choose between them.
The real magic happens when you understand how growth and profit work together. Sure, you've heard of EBITDA, CAGR, and the Rule of 40. These aren't just buzzwords to throw around in investor meetings. They're your compass for building a sustainable SaaS business.
Let's break down why these three metrics, when used together, tell the complete story of your company's health - and why investors and operators alike need to pay attention.
What Are EBITDA, CAGR, and Rule of 40?
Definition | Formula | |
EBITDA | Earnings Before Interest, Taxes, Depreciation & Amortization is a measure of a company's operational profitability, excluding non-operational expenses and non-cash accounting charges. | EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization |
EBITDA Margin | Shows EBITDA as a percentage of its total revenue. | EBITDA Margin = (EBITDA ÷ Total Revenue) × 100 |
CAGR | Compound Annual Growth Rate is the smoothed annualized growth rate of a metric (e.g., revenue) over a multi-year period, assuming steady growth. | CAGR=[ (Final Value ÷ Initial Value) ^ (1 ÷ Years) ] - 1 |
Rule Of 40 | Combines EBITDA Margin + Revenue Growth Rate to evaluate the tradeoff between growth and profitability | Rule of 40 = EBITDA Margin + Revenue Growth Rate |
Analogy of the Startup Road Trip: Understanding EBITDA, CAGR & Rule of 40
Behind the Wheel: A Startup Journey EBITDA = Distance Covered
"The raw miles your car has traveled using the fuel in your tank (revenue)."
Think: You started with a full tank (revenue). After driving 50 miles, your odometer (EBITDA) shows how far that fuel actually took you, ignoring how you drove (financing), road taxes (actual taxes), or wear-and-tear (depreciation).
Limitation: Distance doesn’t tell you if you’re about to hit a mountain (CapEx) or run out of gas (cash flow).
EBITDA Margin = Fuel Efficiency (MPG)
"How many miles you get per gallon - the bang for your buck from every drop of fuel."
CAGR = Average Speed
"Your smoothed-out pace over the entire road trip, ignoring red lights (downturns) and detours (product pivots)."
Formula 1 (50% CAGR): Blazing past competitors, but risky - one crash (market shift) could total the car.
City Commuter (20% CAGR): Steady progress, predictable arrival time. Boring but safe.
Backroad Explorer (5% CAGR): Scenic route, but investors tap their watches impatiently.
Rule of 40 = Dashboard "Eco Mode"
Green Zone (Score ≥40):
Scenario 1: 60 mph (growth) + 20 MPG (margin) = 80 → "You’re crushing it!"
Scenario 2: 30 mph (growth) + 10 MPG (margin) = 40 → "Coasting, but barely."
Red Zone (Score <40):
Scenario 3: 80 mph (growth) + -50 MPG (margin) = 30 → "You’ll crash and burn."
Scenario 4: 10 mph (growth) + 25 MPG (margin) = 35 → "Stalling in the slow lane."
These metrics form a powerful trio similar to functions of GPS, fuel gauge, and speedometer for startup navigation journey!
Example Calculation (The Peloton Story)
Peloton's 2024 Numbers:
Net Income: -$551.9 million (loss)
2024 Revenue: $2,700M
2023 Revenue: $2,800M
2021 Revenue: $4,022M
Interest Expense: $112.5M
Taxes: -$0.2M (tax credits)
Depreciation & Amortization (D&A): $101M
Calculation | Remarks | |
EBITDA | −551.9 + 112.5 − 0.2 + 101 = −$338.6M | |
EBITDA Margin | −338.6 ÷ 2700 = −12.54% | Peloton loses $0.12 for every dollar of revenue. Improved from -23.16% in 2023. |
CAGR Over 3 Years | [ (2,700 ÷ 4,022) ^ (1 ÷ 3) ] - 1 = −12.44% | Peloton’s revenue shrank at an average annual rate of 12.44% from 2021 to 2024. |
CAGR Over 1 Year | [(2,700 ÷ 2800) ^ (1 ÷ 1) ] - 1 = −3.57% | |
Rule Of 40 | −3.57% + (−12.54%) = −16.11% | Peloton’s -16.11% score fails the Rule of 40 catastrophically and underscores systematic problems. |
Sources:
Why It Matters
Working at a fast-growing startup taught me an important lesson about how we look at numbers. Even though our revenue and user count were going up fast, investors started to care more about how efficiently we were growing when we tried to raise money.
We chose EBITDA as our main metric. That caused problems. EBITDA shows past results, not future growth. Because we wanted to show better EBITDA numbers every quarter, we made short-term decisions - like freezing hiring and cutting head count. These choices were made to hit the numbers, not because they were smart for the business.
The outcome was easy to see: We slowed down innovation. The team felt less motivated. More customers left. I’ve seen this happen at other startups too - chasing better EBITDA often leads to shot-term decisions such as layoffs, which ends up hurting team knowledge and product progress.
A balanced metric approach using EBITDA, CAGR, and Rule of 40 enables precise business analysis:
Low EBITDA + High CAGR: Investigate margin components - cloud costs, COGS, pricing strategy
High EBITDA + Low CAGR: Evaluate growth investments - demand generation, customer expansion
Rule of 40 below 30%: Address fundamental imbalances between growth rate and operational efficiency
These combined metrics provide clear diagnostics for optimization, beyond simple cost reduction measures.
Understand How Metrics Vary by Industry and Stage
Industry benchmarks vary because financial metrics like EBITDA margin, Rule of 40, and CAGR are shaped by sector-specific dynamics. Economic moats, capital intensity, revenue models, and regulatory environments all impact what "good" looks like.
Here’s a cross-industry snapshot to highlight how different the baselines can be:
Industry | EBITDA Margin | Rule of 40 | CAGR (5-Yr) | Key Drivers |
SaaS (B2B) | 25–35% | 45–60% | 20–30% | High margins from subscriptions |
Manufacturing | 10–15% | 15–25% | 3–5% | Capital intensity, supply chains |
Retail/E-commerce | 5–10% | 10–20% | 8–12% | Low margins, high volume |
Biotech (Pre-Revenue) | -50–100% | N/A | 15–25% | R&D burn, long product cycles |
Utilities | 30–40% | 20–30% | 1–3% | Regulated monopolies, stable demand |
Industry Context & Benchmarking
Economic moats create distinct sector dynamics: SaaS companies achieve margins through scalability, while commodity businesses compete on volume.
Metrics must be evaluated within industry context. SaaS founders should reference established benchmarking sources like PitchBook, SaaS Capital, OpenView, Bessemer.
These provide relevant median metrics for stage-appropriate comparison.
Use the following as a starting point - then tailor based on your GTM motion, ACV, and growth strategy.
Data Sourced from ProfitWell, OpenView, Bessemer Venture Partners (DTC SaaS benchmarks), KeyBanc SaaS Survey, SaaS Capital (hybrid model reports)
Growth Stage | Metric | B2C Benchmarks | B2B2C Benchmarks |
Validation Seekers ($1M-$2M ARR) | EBITDA Margin | -25% to -15% | -15% to -5% |
Rule of 40 | 50% (70% Growth + -20% Margin) | 40% (50% Growth + -10% Margin) | |
CAGR | 70–90% | 50–70% | |
Traction Builders ($2M-$4M ARR) | EBITDA Margin | -15% to -5% | 0% to +5% |
Rule of 40 | 40% (45% Growth + -5% Margin) | 45% (42% Growth + 3% Margin) | |
CAGR | 45–60% | 30–50% | |
Scale Preparers ($4M-$7M ARR) | EBITDA Margin | -5% to +5% | +5% to +15% |
Rule of 40 | 40% (38% Growth + 2% Margin) | 40% (30% Growth + 10% Margin) | |
CAGR | 30–40% | 20–35% | |
Growth Accelerators ($7M-$10M ARR) | EBITDA Margin | +5% to +15% | +15% to +25% |
Rule of 40 | 45% (35% Growth + 10% Margin) | 40% (20% Growth + 20% Margin) | |
CAGR | 25–35% | 15–25% |
Improvements For Metric Excellence
Pricing Strategy Refinement
Implement targeted price adjustments
Leverage stable COGS for EBITDA improvement
Drive margin expansion through pricing architecture
Growth Quality Measurement
Monitor Net Revenue Retention with CAGR
Focus on sustainable customer expansion
Validate growth sustainability
Cost Structure Optimization
Regular COGS evaluation
Eliminate infrastructure inefficiencies
Maintain operational discipline
Revenue Enhancement
Strategic feature bundling
ACV expansion through high-margin offerings
Maximize customer lifetime value
Growth-Margin Balance
Use Rule of 40 for spend decisions
Optimize resource allocation timing
Maintain strategic growth equilibrium
Resource Management
Strategic hiring from start
Focus on automation and infrastructure efficiency
Identify cost optimization beyond headcount
Build scalable operational foundation
Performance Tracking
Implement trend-based dashboards
Demonstrate systematic improvement
Enable data-driven decision making
Key Takeaways
EBITDA
Your operational reality check
Measures post-decision performance
Shows what you've actually earned
CAGR
Your growth truth-teller
Reveals real momentum
Validates business trajectory
Rule of 40
Your efficiency gauge
Balances growth and spend
Tests operational sustainability
Use all three to build alignment, unlock smarter tradeoffs, and lead the business like an operator, not just a storyteller.
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