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Rule of 40 Spotlight: Persistence in Product-Led Growth Companies

“Happy families are all alike; every unhappy family is unhappy in its own way.”

–Tolstoy’s first sentence of Anna Karenina

At Horizon Partners, our clients tend to be strikingly similar. We wouldn’t say they are all happy families — as Netflix’s famed culture deck describes, they are more like high performance sports teams — but they are all high-growth, bootstrapped, product-led technology businesses. They are exceptions to the rule that the best technology products require the fuel of venture capital. They are exceptional.

We think a lot about these “rare birds” of the technology industry. How do you find them? If you think you might have found one, how do you know for sure?

One helpful heuristic is the Rule of 40. It turns out that our clients score unusually high on this metric that summarizes a company’s level of capital-efficient growth. While a score of 40 is commonly viewed as a sign of good health, we believe that the higher the score, the better. Recently, we pulled historical data from our last 10+ clients and found some interesting data points:

  • Average R40 at 1st contact: 109
  • Average R40 at Transaction: 115
  • Average Time from 1st contact to Transaction: 2.9 yrs*
  • Average R40 “Persistence:” 111%

*Our engagement model is very long-term so we view this duration as a feature, not a bug!

The “persistence” of high R40 scores is striking. This contradicts core tenets of economics and finance that competition will drive regression to the mean. Great product-led bootstrappers defy the “gravity” of mean reversion. Our view is that these businesses have structural advantages centered around exceptional product execution that manifest in the R40 heuristic.

The public markets have also seemed to realize the remarkable nature of high growth, efficient software businesses in the past few years as multiples have significantly expanded. To the public equities analyst, this R40 persistence is framed as a public company repeatedly “beating and raising” ie exceeding their forecast and then raising their future guidance.

How can these technology businesses, both private ones that comprise our clients as well as public ones with much greater scale, create their own financial gravity? We’ll take a look at defining persistence and analyzing it in both our private and public comp set in a future post. The financial dimension is useful to highlight these exceptional performers, but the dimensions of product and team are also very interesting. To be discussed in a future blog post.



Horizon Partners is a boutique M&A advisory firm for bootstrapped technology businesses. To learn more, subscribe to the Horizon Partners blog.

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