Rule of X - with the co-author, Sam Bondy, Bessemer Venture Partners

**Ray Rike** (0:00)
This episode of the Metrics that Measure Up podcast is from a session at SAS Metrics Palooza 24 If you'd like to listen to other speakers and gain access to your presentations from SAS Metrics Palooza, please visit benchmarkit.ai, that's benchmarkit, that's with an it.ai, and go to events and select SAS Metrics Palooza 24 Hello, I'm Ray Reich, Founder and CEO of Benchmarkit, and your host of the Metrics That Measure Up podcast. We talked to a wide variety of the top B2B SAS and Cloud thought leaders, CEOs, executives, investors and people just like you to discuss the metrics and benchmarks they use to make metrics informed and benchmark validated decisions. Now, on to today's show. I am so excited to be introducing this session, because everyone's been asking me, what's more important to SaaS company valuations? Is it growth? Is it operating profitability? And the answer is, yes, it is. It's a balancer to do. So, earlier this year, Bessemer Ventures put out their new rule of X. It was authored by Byron Deter, last year's speaker here at SaaS Metrics Cloudera, and this year's speaker, Sam Bondy. So, with that, Sam, I'm going to just ask you a few questions, and we'll walk through the slides at the same time, okay?

**Sam Bondy** (1:38)
That sounds great, right.

**Ray Rike** (1:40)
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**Sam Bondy** (2:29)
Absolutely, and thanks for having me on. I, at Bessemer, I do all things early stage and growth stage investing in primarily B2B software, cloud and AI, and originally started off my career in investment banking and private equity. So have, you know, a different lens ahead of joining the world of venture and growth.

**Ray Rike** (2:54)
Got you. Okay, let's dig in real quick here. So first of all, this is a slide that talks a little bit about company valuations, and this is the basket of companies that you use to determine the world of venture that we're going to talk about. I don't know if there's anything you wanted to share on company valuations other than they finally look like they've normalized?

**Sam Bondy** (3:17)
Yeah, that's right.
I think just taking a step back and looking at SaaS company valuations over the last few years, and really why we came up with the metric in the first place is we think about valuations both for our net new investments that we're going to make, and then also we have a number of companies in our portfolio that are thinking about the public markets and actually doing IPOs. And so, just taking a step back, we thought about how should we help them think about their own internal valuations. And we realized that a lot of bankers and CFOs thought about themselves in terms of the Rule of 40, which gives a one-to-one trade-off between growth rate and profitability. And what we realized was that it's really not a one-to-one trade-off, it's a different trade-off. And so we came up with the Rule of X to quantify that. And we can get into that more, but that just sets the stage.

**Ray Rike** (4:22)
Well, that's the perfect stage. So because we have a virtual audience here, thank you so much for having these slides, but why don't you introduce the Rule of X and what it is?

**Sam Bondy** (4:34)
Absolutely. So maybe we'll just start with the Rule of 40 up top. And the Rule of 40 was a metric kind of popularized by, you know, Fred Wilson and Brad Feldman in call it 2015 and also popularized by Bessemer thereafter. And it was a way for companies to evaluate their operating metrics and the attractiveness of their operating metrics in a simplified way, which was growth rate plus free cash flow margin. And, you know, over the years in, you know, before kind of the Zerp time and growth at all costs, companies would think about it in terms of one-to-one tradeoff. What we realized over the last couple of years was that the tradeoff was no longer one-to-one when you're evaluating valuation metrics instead of operating metrics. And so we invented something called the Rule of X, which effectively takes the Rule of 40 and modifies it by adding a multiplier to the growth rate portion of the formula and still adds the same free cash flow margin to get a new metric. And this is a lot more predictive of valuation.