This is the quick sanity check investors perform to see if your SaaS business is healthy or just burning cash. The principle is simple. Your annual revenue growth rate percentage plus your profit margin percentage (usually EBITDA) should equal 40 or higher.
It is a sliding scale. If you are growing at 100% year over year, investors will tolerate a -60% profit margin because you are capturing massive market share. However, if your growth slows to 10%, you better be generating a 30% profit margin to compensate.
If your combined number is below 40 it usually signals that your business is stuck in the "dead zone" where you are burning too much cash relative to your growth speed. Consistently hitting this metric is the single most effective way to unlock significant valuation premiums during a fundraise or exit.
