The Rule of 40 Is Half-Dead: Kroll's 2026 Data Shows Category Beats Both Growth and Margins

The Rule of 40 has been B2B software’s go-to valuation benchmark for a decade. Kroll’s Summer 2026 Global Software Sector Update, surfaced via SaaStr, just put a significant dent in its explanatory power — not because the math is wrong, but because the market has moved on to something else entirely.

The Number

The headline finding: companies growing above 20% are receiving 7.2x revenue multiples. Companies that are shrinking are receiving 2.4x. That gap alone is not surprising. What is striking is the margin data that sits underneath it.

The companies earning 7.2x have median EBITDA margins of 25.1%. The companies earning 2.4x have median EBITDA margins of 28.9%. The shrinking companies are more profitable — and still trading at a 66% discount. That is the data point that undermines the Rule of 40 as a composite predictor: the profitability component is not carrying the weight it once did.

How the Math Works

Kroll’s analysis breaks down how much of the valuation difference is attributable to growth versus margins. The market pays roughly 3x more for the difference between 8% and 21% growth than for a comparable improvement in EBITDA margin.

The practical implication: once you cross approximately 25% EBITDA margin, the data says you are optimizing for a metric the market has already priced in. Kroll’s language is direct — “Stop optimizing margin past 25%. The market pays nothing for the difference between 25% and 32% EBITDA margins.” Profitability has moved from differentiator to table stakes.

The Rule of 40 was designed for a market where both levers — growth and margin — were roughly equally weighted. The 2026 data suggests the weights are now approximately 3:1 in favor of growth. A company scoring 40 through 30% growth and 10% margins is not being valued the same as one scoring 40 through 15% growth and 25% margins. They weren’t in 2022 either, but the divergence is wider now.

What It Signals

The more disruptive finding in the Kroll data is not the growth-versus-margin split. It is the category effect.

Engineering software and HCM software both score 46% on the Rule of 40 in Kroll’s dataset. Engineering trades at 5.2x revenue. HCM trades at 3.0x — a 73% valuation premium for identical Rule of 40 fundamentals. The composite score tells you nothing about which of those two companies will command a higher multiple, because the most important variable is the market category, not the operating metrics.

This has real implications for how founders and boards should think about positioning. Investors are not just buying your current growth rate or your current margins — they are buying an exposure to a category. Categories have different TAM trajectories, different competitive dynamics, and different rates of AI-driven disruption. In 2026, “engineering software” reads as an AI-adjacent category with compounding tailwinds. HCM reads as stable and defensible but not compounding. Same Rule of 40. Very different story.

For investors, the category effect complicates cross-sector comparisons. A portfolio company scoring 35% in a high-premium category may be a better hold than one scoring 50% in a low-premium category — the Rule of 40 alone will not surface that distinction.

For founders, the signal is to think carefully about how you describe your category to investors. If your product sits at the boundary between engineering tooling and something less premium, the framing you choose for pitch materials may have more valuation impact than the next point of EBITDA improvement. Related SaaStr analysis on AI agents reshaping the B2B software market and AI VP of Finance tools underscores the point — category positioning in AI-adjacent spaces is commanding structurally different multiples.

Content created with AI assistance and reviewed for accuracy.