Unveiling the 'Rule of 40' : Exploring the Influence of Growth and Profitability on Valuation in the Nordic B2B SaaS Industry

Sammanfattning: Amidst the growth of the global Software-as-a-Service (SaaS) industry, researchers have begun to scrutinize current valuation methods when applied to SaaS firms, and investors have widely embraced and adopted their own rules of thumb for SaaS company valuation. One of which is the 'Rule of 40', which is characterized by growth and profitability. This study employs an explanatory approach, and applies a cross-sectional multivariate regression model, to analyze the influence of growth and profitability on the valuation of 36 public SaaS companies operating in the Nordic B2B market. This study seeks to complement the present body of literature with insights on the synergy between growth and profitability in valuation, in the context of public SaaS companies. The resulting regression model yields two key findings: (1) EBITDA and EBIT have a negative relationship to the valuation multiple (EV/Sales); (2) Revenue growth maintains a positive relationship to the valuation multiple. These key findings indicate that Nordic SaaS investors accord higher valuation multiples to companies with higher growth rates and lower profitability margins. More importantly, the results indicate a significant disparity between the two metrics, where growth significantly outweighs profitability, as opposed to the equal weight implied in the 'Rule of 40'.