The 'Rule of X'

To earn money, you have to spend it!

The 'Rule of X' shifts how we perceive growth versus profitability. 

This rule, equating the sum of revenue growth and profit margin to at least 40%, is being questioned, especially for late-stage businesses where growth and profitability are weighted equally. 

Growth should be the primary focus for businesses with sufficient FCF margins.

Why the shift? 

Because growth impacts value more significantly than margin increases. 

In the long term, growth is approximately 2 - 3x more than the FCF margin. 

This insight has led to the introduction of the 'Rule of X.’ 

Which places greater emphasis on growth, especially for public companies with efficient growth and lower capital costs. 

This rule suggests that the growth rate should be heavily weighted in valuation calculations.

The Rule of X is particularly relevant in cloud business valuation.

However, the Rule of X, like any metric, cannot be used in isolation. 

It's important to consider other factors like 

• Market size

• Economic moat

• Unit economics 

• Customer quality 

For early-stage ventures, the Rule of X is less relevant, but it's a powerful tool for mature companies, especially in periods of lower cost of capital.

Thank you, @Bessemer Venture Partners, for the informative article. 

Article link: https://www.bvp.com/atlas/the-rule-of-x