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The Eternal Quest for 25% Profit Margins

The goal of business is to make money. That ultimately means generating Profits. Net Income. EBITDA. Free Cash Flows. Dope on the table.

Every pitch deck has a slide where the company shows their cost structure today, tomorrow, and at some hypothetical long term place in the future. This is typically called your “target operating model.”

We’ve all seen it… Gross Margin, S&M, R&D, G&A, and Operating Margin, all as a percentage of revenue.

A tip for all operators: Make sure your target model shows “+25%” bottom line at scale.

It’s kind of like the magic number investors are looking for you to print, whether it’s credible to claim today or not.

Why 25%?

  • It demonstrates a sustainable business model that does not require outside capital (i.e., dilution) to control its destiny

  • You can still plow 30% of revenue into sales and marketing each year to power future growth

  • At 25% operating margins, you only need to grow 15% per year to achieve the Rule of 40%.

To help make this real, I’ve cherry picked three logos within varying ranges of profitability below (figures represent adjusted net income margins):

Still in the Red - Companies losing money

  • Rubrik: -73%

  • C3.ai: -18%

  • SentinelOne: -6%

Head Above Water - Between 0% and 10% margins

  • Toast: 4%

  • Samsara: 6%

  • Confluent: 9%

En Route - Between 11% and 25% margins

  • Snowflake: 12%

  • Bill.com: 20%

  • Docusign: 23%

Highly Profitable - Between 25% and 35% margins

  • DataDog: 26%

  • ZoomInfo: 30%

  • Palantir: 31%

Drowning in Cash - More than 35% margins

  • Adobe: 36%

  • Zoom Video: 37%

  • Doximity: 43%

So even if you aren’t there today (to be fair, most companies looking to make the leap from private to public are not), show that you “get it” by including 25% at the bottom of your slide. IYKYK.

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