I talk to a lot of CFOs, and one thing we all have in common - we love real paper. I’m a sticky note guy. In a world gone digital, I’m still scribbling notes and to-dos like it’s 1999.
But one thing we all hate? Managing reimbursements that live on sticky notes, screenshots, or Slack threads. Even the “Did you get my receipt?” messages feel like chewing glass.
That’s why I like what Mercury’s doing. They believe business banking should do more… like making reimbursements actually tolerable. Their free expense reimbursement template lets your team track, submit, and approve expenses without the back-and-forth.
In a few minutes, your crew can log mileage, categorize receipts, and generate a clean PDF ready for approval. No login. No commitment. Just a smarter way to handle what used to be a spreadsheet mess.
*Mercury is a financial technology company, not a bank. Banking services provided through Choice Financial Group, Column N.A., and Evolve Bank & Trust; Members FDIC.
Rule of IDK Anymore
I’m going to be straight with you.
I don’t know the “right” way to calculate Rule of 40.
I’m a metrics sensei by many standards, but this one sparks religious debates with CFOs, FP&A directors, and VC friends across stages. It’s the financial version of “Is a hot dog a sandwich?” except people get way more heated and there are no hot dogs.
Rule of 40 is a combination of Revenue growth % + [Insert profitability margin %].
The first part of the equation is easy. If you don’t know that one, go back to bed.
The second part?
That’s where the boo birds come out.
FCF? EBITDA? Adjusted EBITDA? GAAP Net Income (for the sickos)?
Every version produces swings because companies have different financial structures underneath the hood.
Across the 148 companies we track as of 12/6/25
Oh, before we begin. Many of you will immediately email me to say something along the lines of:
“OF COURSE IT’S [insert your pet profitability measure]. DUH”
Just know: there is someone sitting one email over who is equally passionate and thinks you’re a dope.
I am not here to judge (nor defend any one position). So I’ve outsourced these complaint emails to my two-year-old.
Ok, now that I got that off my chest…
I ran all 148 companies we track through Rule of 40 using both EBITDA-based and FCF-based lenses.
For now I’m going to exclude Adjusted EBITDA Margin because we know there are some crimes that are just better left buried in there. (Dale, I see you adding back the salaries for ramping sales reps, you dirty dog Dale.)
Let’s take a look:
Top 25 Rule of 40 Using EBITDA
CoreWeave (CRWV) breaks the Y axis at #1, putting up a mind boggling 286%.
If you give them credit for the capital intensity the business requires, they are a shining star. Also, if you want to learn more about their business check out the interview I just dropped with their CFO Nitin Agrawal (Apple | Spotify | YouTube).
Top 25 Using FCF
This is a pretty different list.
Adyen is #1 at 192%.
Robinhood, Sezzle, Palantir… all top-tier again.
Wait, where did CRWV go?
They won’t show up in the FCF measurement because they are:
capex heavy
GPU heavy
depreciation heavy
interest expense heavy
did I mention they are heavy?
If I fed my dog EBITDA he’d die.
On the other hand, if I fed CoreWeave EBITDA they’d build the fastest growing publicly traded company over a billion in revenue… ever?
Also, you’ll notice that fewer traditional SaaS names break the top 25 on EBITDA despite showing great FCF. They don’t have much structural overhead to add back and benefit from, and many times they are burdened by Share Based Comp. Keep that last part in mind as we advance through the motions here. Again… financial structure matters.
Bottom 25 Using FCF
LendingClub (-149%) and SoFi (-66%) drop straight into the basement.
One of Vince Gilligan’s best scenes IMO
Why the whiplash?
These businesses consume cash by design.
They fund loans.
They carry huge changes in loan receivables.
They operate under capital requirements.
Their business is their balance sheet.
Their EBITDA looks fine-ish because it ignores all of that. But their FCF looks like they spent the summer funding an expensive rap album that didn’t pan out.
Bottom 25 Using EBITDA
Gemini and C3 dot ai, old friends, we meet again!
Oddly enough, SNOW shows up on this list. To save you the math, they score 46% on a FCF basis… but 0% on an EBITDA basis. What gives?
EBITDA sags under the weight of Snowflake’s robust stock-based comp.
Remember, we are using EBITDA, which isn’t a gaap metric, but also isn’t supposed to remove SBC unless you “adjust” it.
However, FCF isnt’ impacted by SBC bc it’s a non cash expense.
And Snowflake is actually a cash-generating machine once you look at:
recurring contracts
upfront cash collection
manageable capex
strong working capital tailwinds
So EBITDA says they’re cooked.
FCF says they’re disciplined.
Adjusted EBITDA (weighing in at a trim and ready 43%) says they’re fine (again)…
Snowflake is basically the poster child for why Rule of 40 is as much a metric as a perspective.
Taking a Step Back:
1. The companies that look better on EBITDA
These are your:
AI hyperscalers
infra-heavy compute shops
capex boogie men
aggressive depreciation pariahs and lease arbitrage artists
EBITDA politely ignores the real-world cash they incinerate.
2. The companies that look better on FCF
These tend to be:
high-SBC tech companies
pure play SaaS
low-capex, upfront payment, high-deferred revenue models
businesses with minimal working-capital drag
FCF rewards actual cash discipline, not accounting skillZ.
3. The companies that look rough no matter what
The overlap list: GEMI, AI, SAIL, NEGG, LAW, NAVN, ONTF, RXT, CHYM, VMEO, UDMY, OPEN, CRCL
These are the ones stuck in what I’ll call growth purgatory. They’re not young enough to justify not making money (double negative, sorry), yet for a multitude of reasons not mature enough to generate cash. Many had a COVID boost, then hit a wall before scale efficiencies could kick in like the plan called for.
Something both measurements agree on - when growth decelerates and you haven’t built a profit flywheel, both versions of Rule-of-40 catch a body.
Failing Rule of 40 under both EBITDA and FCF isn’t just a bad quarter or a tough macro. It means the business is struggling in the operating model and the cash model. Companies can survive one. But you’re playing on hard mode trying to solve both.
Also, I’m a Hypocrite
Here’s the part where I eat my own words:
When I compare companies week to week, Adjusted EBITDA ends up being the least worst baseline. Raw EBITDA swings too wildly. SBC, amortization, and old depreciation schedules can turn it into a quarter to quarter coin flip. And FCF is not any better. It is held hostage by capex timing, loan books, collections, and deferred revenue seasonality, so a great business can look awful in Q1 and heroic in Q4.
So you land on this weird truth: Adjusted EBITDA is not cleaner or truer (is that a word?). It is simply the only thing that does not blow up when you try to rank 148 companies with completely different financial plumbing.
It is the most portable metric in a very imperfect toolkit.
Is there some shady stuff in there? Of course. A few companies are burying recurring legal bills below the line or adjusting earnings because the oranges did not grow in Florida. But if everyone is juicing their metrics in different ways, the only fair comparison is to create an equally juiced up field. Adjusted EBITDA introduces the least penalization across the board, which is what keeps comparability intact.
Top 25 Using Adjusted EBITDA
Bottom 25 Using Adjusted EBITDA
It is the Mark McGwire era. If everyone is taking steroids, at least the playing field is level.
And if we stop trying to adjudicate purity, it can be kinda fun to see who can hit the ball the furthest.
BALCO is code for Adjusted EBITDA
This Week’s Benchmarks
TL;DR: Multiples are DOWN a little bit week over week.
Top 10 Medians:
EV / NTM Revenue = 15.4x (DOWN 0.3x w/w)
CAC Payback = 27 months
Rule of 40 = 47%
Revenue per Employee = $463k
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 146
Recent changes
Added: Bullish, Figure, Gemini, Stubhub, Klarna
Removed: Olo, Couchbase
Population Sizes:
Security & Identity = 17
Data Infrastructure & Dev Tools = 13
Cloud Platforms & Infra = 15
Horizontal SaaS & Back office = 19
GTM (MarTech & SalesTech) = 19
Marketplaces & Consumer Platforms = 18
FinTech & Payments = 28
Vertical SaaS = 17
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
OPEX
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business in the cloud, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools.
Research & Development: Product and Engineering employees, development expenses, tools.
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead.”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
Please check out our data partner, Koyfin. It’s dope.
Wishing you stock based compensation that is easy to calculate,
CJ
