SaaS Business Models: Evolution Beyond the Rule of 40 | LeverVenture

Two SaaS companies can post the same Rule of 40 score — growth rate plus profit margin summing to the same number — and be worth very different amounts. One grew through expansion inside its existing customer base, at high gross margin, with a sales motion that pays back in months. The other grew through logo acquisition it is actively at risk of losing, at compressed margin from a services-heavy delivery model, with a payback period long enough that the growth is being financed rather than earned. The Rule of 40 cannot tell these two companies apart, because it was built to flatten a business down to a single number. That is exactly what growth equity diligence should refuse to do.

The number's popularity is also its weakness: it is easy to compute from two line items and easy to compare across a spreadsheet of comparables, which makes it a convenient screen and a poor diligence tool. What a serious read requires is underneath the number — the composition of retention, the shape of payback by cohort, and where margin is actually going.

01What SaaS metrics are actually built to measure

Software-as-a-service metrics exist to answer one question: is growth being purchased or earned. The Rule of 40 became the default SaaS valuation shorthand because it is quick to compute and easy to rank across a set of comparables. What it cannot do is show which underlying component is doing the work, and in a market that has repriced growth relative to efficiency, that distinction now matters more than the headline score itself.

02Net revenue retention: read the composition, not the headline

Net revenue retention nets expansion against contraction and churn into one figure, which means an identical headline number can describe two structurally different businesses. A company retaining its base through genuine expansion — more seats adopted, more modules used, usage growing inside accounts that are healthy — has a repeatable growth engine. A company holding the same headline number through price increases on a shrinking, unhappy base has a number that is about to turn. The diligence question is not "what is net revenue retention" but "what is it made of": expansion from usage growth, expansion from price, contraction from downsell, and logo churn each tell a different story, and a single blended figure hides all four.

03CAC payback by cohort and channel, not blended

A blended customer acquisition cost payback period averages together a channel that is working and a channel that is not, and a cohort acquired before a pricing change with one acquired after it. That average can look healthy while concealing a specific channel whose payback has quietly moved into territory the business cannot sustain. Reading payback by cohort and by channel separately is the only way to see whether growth is coming from a repeatable, improving motion or from a shrinking set of efficient channels being propped up by less efficient ones that have not yet been cut.

This matters more, not less, in healthcare software, where the buyer is frequently a health system rather than an individual department. A long, multi-stakeholder sales cycle with a health system produces acquisition costs that look poor on a same-quarter basis and can look entirely different once measured against the multi-year retention health systems typically provide once a system is actually integrated into clinical or administrative workflow. A payback metric built for a short-cycle, self-serve SaaS motion will misread a health-system sales motion as inefficient when it may simply be slow.

04Gross margin as workloads shift

Gross margin in software is not static, and the direction it moves says as much about the business as its current level. Implementation-heavy healthcare software — anything that requires integration with an electronic health record, custom workflow configuration, or ongoing clinical support — carries a services cost structure that pure self-serve software does not. The relevant diligence question is whether that services load is trending down as the product matures and implementation standardizes, or whether it is structural: a workload the company will be carrying at the same intensity at twice its current scale. A gross margin that looks acceptable today but depends on services intensity declining, without evidence that it actually is declining, is a margin built on an assumption rather than a trend.

05Seat-based and usage-based revenue are different quality claims

The two models are not just different pricing mechanics — they carry different revenue-quality claims, and healthcare buyers complicate both.

A seat count is a contract. Usage is a fact. Diligence that only reads the contract is reading the more comfortable of the two numbers.

06Burn multiple as the summary check

Burn multiple — net cash burned divided by net new annual recurring revenue in the same period, a framing popularized by investor David Sacks — is useful precisely because it resists the Rule of 40's flattening instinct in the opposite direction: rather than adding growth and margin together, it asks directly how much capital a dollar of new revenue actually cost to generate. Two companies with the same growth rate can have very different burn multiples, and the gap is frequently explained by exactly the factors above — retention quality, payback efficiency by channel, and margin trajectory. Used as a final cross-check after those components have been read individually, burn multiple is a genuinely useful single number. Used as a substitute for reading them, it fails for the same reason the Rule of 40 does.

07What a diligence read should actually look like

The practical implication is sequencing: decompose net revenue retention before trusting it, segment payback before averaging it, track margin direction rather than margin level, and treat seat-based and usage-based revenue as different claims requiring different evidence. Only after that work is done does a single summary metric — burn multiple, or anything else — earn the right to be trusted as a shorthand. A number computed correctly from a business that was never actually understood is still a number a diligence process should not rely on.

Related reading: the market reset and growth equity discipline covers how this shift in metrics literacy followed the broader repricing of growth. AI and diagnostics in digital health and the AI healthcare growth equity playbook extend these unit-economics questions to AI-native healthcare software specifically.

Nothing in this piece is investment, legal, tax or accounting advice, and nothing in it is an offer to sell or a solicitation of an offer to buy any security.