The Dominance of X: Approaching Growth and Profit in the Cloud Industry
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Businesses are working hard to conform to traditional heuristics like Rule of 40 (i.e., the idea that the sum of revenue growth and profit margin should equal 40%+, a metric that Bessemer helped popularize).
The world has over-rotated into an FCF margin mindset over a growth mindset, which is backward for growing efficient businesses.
Long-term models show that even in tight markets, growth should be valued at least ~2x to 3x more than FCF margin.
While a margin increase has a linear impact on value, a growth rate increase can have a compounding impact on value.
We show the detailed math below, and it’s confirmed by public market valuation correlations when you backtest the relative importance of growth versus FCF margin.