The "Rule of 40" is Broken

Wouldn’t it be nice if there were a simple, magic number that told you whether a company qualifies for venture debt? You know, like how some VCs require a minimum Rule of 40 to justify investing?

Well, we got curious.

Quick Refresher: The Rule of 40

The Rule of 40 is a succinct metric for SaaS companies: growth rate + EBITDA margin should be > 40%. It’s an easy way to separate the “fund-this-now” companies from the “circle back next year."

But What About Venture Debt?

We combed through the 100+ closed debt financings we’ve done since 2016. Then we cleaned things up:

• Out went D2C, life sciences, and anyone with a one-time revenue model

• We nixed cash flow loans and asset-based deals (so long AR-backed loans, equipment debt, and warehouse lines)

• And we ditched venture debt toppers — you know, the “we just raised equity so let’s borrow against our VCs/runway” crowd

That left us with ~70 “pure play” recurring or re-occurring revenue enterprise value financings, where fundamentals rule.

Introducing the Rule of "20(ish)"

Turns out, venture debt doesn’t need Rule of 40. We found our own: a Rule of 18, which we rounded up to Venture Debt’s Rule of 20.

We also included leverage attach points, using ARR/revenue and run rate gross profit, “GP”.

Boom. You’re welcome, Mr. Venture Lender. Copy, paste into your favorite ChatGPT wrapper, and tell your underwriting team to take a long lunch.

Observations

1. Rule of 40 not required. Don’t need to be on the unicorn path here.  And sure, lenders care about growth — but they don’t live for it.  Often 10% annual growth works.

2. Bigger companies burn less. As companies scale, they stop lighting money on fire. Late-stage companies not positioned for an IPO (often our client profile) tend to prioritize profits.

3. The Rule of XX% grows with you. Mature companies have better combined growth + margins. If you’re still standing at $10M+ ARR, you’re probably doing something right.

4. Leverage multiples stay surprisingly flat. Regardless of size, leverage attach points don’t scale. BUT — real breakpoints exist around $5M and $10M of ARR. Before $7.5M ARR (and especially before $5m), loan sizes max out at 0.6x revenue (and 0.25x is not unheard of).

The Fun Part: Outliers & the Rule of "0"

Medians are helpful, but they don’t tell the whole story — especially if you’ve got Spinta’s reach across the full lender universe. Keep in mind our practice often centers at the intersection of do-able and not do-able.

So we looked at our closed deals with the lowest Rule of XX scores by analyzing the bottom 20% Cohort.

1. Many successful growth debt deals have negative Rule scores. Yes, -13% combined growth and margin. Yes, <10% growth. Yes, good deals are still done in these ranges. And yes, these companies and their loans have performed post loan closing.

2. Scale matters. As companies mature, lenders become less forgiving. If you’re big and don’t have at least a positive Rule, you better have one hell of a story.

3. More risk = less money. Lenders de-risk by tightening attach points. You can still get a debt facility — just a smaller one.

The Real Rule

Metrics are helpful. But unlocking credit can require a story, especially when some metrics are lacking. That’s where we shine. We help founders use data to tease out credit quality, why a lender will get its money back.  We use cohort KPIs, look at new products/channels/customers/takeout value and trends to build a narrative.

So is there a clean, universal Rule of 20 for venture debt? Not exactly. But it’s a solid starting point. And even if you don’t hit it, there’s still hope.

The only real rule in venture debt is:

“If you have a problem... if no one else can help... and if you can find them... maybe you can hire... the Spint-A-Team.”