[This article was previously published in the Topline newsletter; see notes.]
The idea was always that, once at scale, software companies could print money.
With SaaS, revenue recurred. If you could buy a dollar of annual recurring revenue (ARR) for one, or even two, dollars, then why not buy a lot of them? You’d break even on customer acquisition costs in year one or two — and everything after that was gravy. Raise VC, invest in sales and marketing, and grow, grow, grow.
All the better if your market was greenfield and switching costs were high. When the music stopped, the company with the most market share would win. And for a long time, the music wasn’t stopping. So, for market share: grab, grab, grab.
Throw in cheap money — courtesy of low interest rates — and you get the Growth at All Costs (GAAC) era of SaaS. During GAAC, a (growth, profit) profile of (100%, -100%) was more attractive than (60%, -40%), which in turn beat (40%, 0%). Growth dominated everything.
Then the wind shifted.
Investors asked, “Why wait forever to print money?” Even if 40%+ mature margins weren’t required, why not produce some profit now?
Private equity (PE) became the most common exit path. And PE wants fixer-uppers, not teardowns. Improving margins in a profitable business is far easier than turning around an unprofitable one.
Moreover, PE enhances returns with leverage. Borrowing 1–2X ARR to finance a deal generates interest expense equal to 10–20% of revenue. If you’re not producing 20%+ margins, you won’t have the cash to service the debt. Losing money becomes a non-starter.
This spirit of balance crystallized in the Rule of 40: growth rate plus profit margin should equal at least 40. Grow as fast as you want — just don’t lose too much money (110%, -70%). Or grow more slowly and produce enough profit to compensate (20%, 20%).
The Rule of R40 (R40) didn’t replace GAAC overnight. It existed during the GAAC era as a disciplining metric — but it became more binding when capital tightened.
In the post-GAAC era, R40 “worked.” Companies that complied with R40 generally traded at higher revenue multiples than those that didn’t. Statistically, it outperformed growth or margin alone as a predictor of valuation. More nuanced metrics were proposed, like the Rule of X, to remind us that a point of growth carries more weight than a point of profit. Even so, R40 remained the headline metric.
Then the wind shifted again.
Investors began looking past NRR to GRR, exposing soft SaaS underbellies where expansion masked churn. Cohort analysis replaced year-over-year snapshots, and — because of lot of expansion often happens in year one — they generally showed a less pretty picture. Interest rates rose. Leverage became more expensive. Multiples compressed.
On top of all this, AI fears went viral, amplifying uncertainty across markets.
In short:
Ladies and gentlemen, we interrupt coverage of the SaaSacre to bring you live footage of the SaaSpocalypse.
PE is a demanding overlord, largely unsympathetic to the daily pressures of customers and markets. While VC sees itself as “partnering with founders” to build a business, PE sees itself as “underwriting a model” — that they fully expect to achieve.
When the prevailing price of SaaS companies falls from 30X to 15X EBITDA, the model doesn’t bend. It breaks.
Indulge me in an example and some arithmetic to make this concrete. Assume PE bought a company in 2023 for 30X EBITDA — $180M total — financing half with debt. That’s $90M of equity targeting a 3X return over four to six years. Under R40, the equity grows nicely in Years One and Two to 1.4X and 1.9X. Then multiples are cut in half, and the equity collapses to 0.7X.
What saves the deal? The Rule of 60. Maintain 20% growth while doubling EBITDA margins to 40%. Instead of 0.7X, the equity rebounds to 2.5X. The path to 3X+ reappears.
For the PE partner, switching to the Rule of 60 (R60) turns what would have been a 1.1X infield single into a 3.1X stand-up double. The trick, of course, is that management needs to figure out how expand EBITDA margins to 40% while preserving 20% growth. And here, unfortunately, “management” means you.
To summarize:
- Why the change to R60? Because the model fails without it.
- How do you double EBITDA while holding growth at 20%? That’s the hard part.
Nor is this some passing obsession. R60 isn’t PLG. It isn’t ABM. It isn’t a fad the board will tire of next quarter. It’s the financial model. That thing is out there. You can’t bargain with it. You can’t reason with it. It doesn’t feel pity or remorse or fear. And it absolutely will not stop. Ever. Until you are —
Okay, I know financial models aren’t Cyberdyne Series T-800 Terminators, though they sure can feel like them sometimes.
But enough warnings about the inevitability of this change. Let’s switch to what you can do about it.
Here are 12 ideas to help you drive increased productivity and remain sane while doing it:
1. Ignore macro whiplash.
Don’t get wound up by techno-optimists or doomers. Watching the narrative swing day to day is as unproductive as tracking your stock price tick by tick — it will drive you insane. You have a job to do. Focus on it.
2. Reframe your job around efficiency.
Don’t measure success by team size or budget — if you ever did. Your job is to hit the ARR target while increasing ARR per seller and ARR per S&M dollar. Growing faster than your costs is the mandate now — and the skill your next employer will pay for.
3. Allocate the efficiency burden intelligently.
Work with your CEO to distribute the margin expansion burden intelligently across R&D, G&A, COGS, and S&M. Pro rata allocation is easy but rarely optimal. Don’t default to cutting S&M simply because it benchmarks high — or because the product-oriented founder won’t touch R&D and the CF-No refuses to trim G&A. Get in a room and have a hard conversation.
4. Operate as one revenue team.
Sales, Marketing, and Success must build the plan together and share accountability. Align on pipeline quality, win rate, churn, and NRR. While most teams think they’re aligned, few actually are. If you’re not answering each other’s calls on the first ring — or reallocating budget across departmental lines when needed — it’s not tight enough.
5. Increase street prices.
Raise list prices or discount less. If your category is PE-backed, your competitors face the same margin pressure and are likely doing the same. No one should be racing to the bottom right now. Show pricing discipline — and expand margins in the process.
6. Try “heretical” moves in your sales model.
Let reps run their own demos. Charge for POCs. Push SDRs into real discovery — or eliminate inbound SDRs altogether. Disqualify aggressively and walk away from bad-fit segments. If PLG applies, feed sales only PQLs. Go back to the ideas you once dismissed as crazy in brainstorming meetings and reconsider them. Let new constraints force new behavior.
Growing faster than your costs is the mandate now — and the skill your next employer will pay for.
7. Build a partner channel.
Start with partners as a lead source, then develop real channel leverage. Hire channel managers with meaningful quotas — effectively running partners as a leveraged sales force. If you need to improve GTM productivity, the channel isn’t “extra.” It’s structural leverage.
8. Improve deal mechanics.
Go back to basics with the sales velocity formula: opportunities × ASP × win rate ÷ sales cycle. Improve any variable and revenue per day increases. The most overlooked levers are win rate — start with rigorous win/loss analysis — and sales cycle length. Identify where deals stall and systematically accelerate them from discovery to demo to POC to legal. Time kills all deals.
9. Lean into AI for real work.
Move beyond experiments. Embed AI into workflows — content, analytics, segmentation, attribution, automation. It may take longer at first, but production use is the goal. Charter your Ops leader to know the leading AI tools in the GTM stack, educate the GTM leadership team on them, and develop a clear adoption roadmap.
10. Automate — but protect trust while you’re doing it.
Many companies will successfully automate with AI but will quietly erode customer trust in the process. Keep humans accessible in your workflows; escalation out of a chatbot should be effortless. Automate content generation, but don’t flood customers with slop. Never forget: There may be a human on the other side of your AI — even if sometimes it’s just another agent.
11. Engage with peer groups.
The fastest way to learn what’s working is by talking to operators doing the same job elsewhere. Shared intelligence compounds, which is exactly why communities like Pavilion and Exit 5 matter. Sometimes you want timeless wisdom; sometimes you need to talk to someone doing the exact same job as you at another company. Do both.
12. Protect your job by evolving it.
AI will eliminate some roles and create others. Be on the right side of that shift. Redesign your workflows, raise the productivity bar, and position yourself as the person who knows how to get leverage from the new tools. Then bring your team with you.
Adjusting to the New Reality
In this article, we’ve traced the path from GAAC to the Rule of 40 — and why capital markets are now pointing us toward the Rule of 60. Unless multiples suddenly double, hope is not a strategy, and margin pressure isn’t temporary but structural.
The 12 ideas above are about regaining control. Tune out the noise, redefine the mission around productivity, distribute the burden intelligently, and try the things you once thought were off-limits.
Use the new constraints to change behavior. And behavior change is where real performance improvement begins.
You can wait for multiples to bail you out or you can build a business that works at today’s multiples. The companies that figure this out won’t just endure this cycle, they’ll outperform in it. And the market will reward them — and the people who built them — accordingly.
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Notes
This article was originally published in the Topline newsletter, a spin-off from the Pavilion go-to-market community. Since then, I’ve applied a few edits and style changes, but it’s largely the same content. Because Topline is a GTM newsletter, I wrote actions for the GTM executive, notably omitting AI product strategy. Because I often write for founders, not just about GTM but the whole company, this omission generated some confusion.
