2x

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.