--- layout: handbook-page-toc title: "The Hypergrowth Rule" --- ## On this page {:.no_toc .hidden-md .hidden-lg} - TOC {:toc .hidden-md .hidden-lg} ## The Hypergrowth Rule GitLab aspires to using The Hypergrowth Rule by [November 18, 2023](/company/strategy/#sequence). Until that time as a percent of revenue, we are spending at a higher rate in all groups (except G&A and cost of sales) compared to companies at similar stages of growth. We do this to advance the product, increase our TAM, and increase market share through a new [channel strategy](/handbook/sales/channel/). We believe this investment will result in higher growth rates compared to similar companies. ### What is Hypergrowth and how it came about?
### Rule of 40 The hypergrowth rule is a standard for measuring and thinking about profitability at any growth rate. It's inspired, in part, by the [Rule of 40](https://feld.com/archives/2015/02/rule-40-healthy-saas-company.html), a SaaS rubric for growth that `Revenue Growth % + Free Cash Flow % = 40`. There is a high correlation between level of attainment of this combined metric and company valuation - although data suggests that current investor valuations models are more highly correlated with revenue growth rate. ### Importance We believe that strong correlation is a result of the importance of capturing market share. Using the Rule of 40 as an example, when Revenue growth is greater than 40%, there is an implication that negative profitability is encouraged, but this fails to answer key questions, such as: * How much should I be investing in different parts of the business? * How much should I be willing to lose today? * As growth slows because of market dominance, what is the path to profitability? The below hypergrowth rule can help answer the questions that the Rule of 40 doesn't answer. ### Rule of 50 We also believe that with our efficient business model that leverages a strong installed base of open source users and community contributions that we should achieve our long term profitability targets when our growth drops to 30%. In other words we have adopted a Rule of 50 approach instead of the [Rule of 40](#rule-of-40) to how we think about the trade-off between growth and profitability. Our model target is our [long term profitability target](/handbook/finance/financial-planning-and-analysis/#long-term-profitability-targets). ### Formula `Division expense target = (Revenue Delta * Growth Lever * Model Percent ) + Model Percent` #### Division Expense Targets Division Expense Targets are the optimal percent of revenue for each functional group in a given period, this is the output of this formula. #### Revenue Delta Revenue Delta is the difference between Revenue Growth and Eventual Profit Margin. For GitLab the Eventual Profit Margin is 20% because our [target costs are 80%](/handbook/finance/financial-planning-and-analysis/#long-term-profitability-targets). #### Growth Lever The growth lever is equal to `1 / (sum of target divisional % of revenue for divisions that should be variable based on growth)`. For GitLab, it is: `1 / (Sales + R&D + G&A + Marketing % of Rev)`, which would equal 1.25, but because cost of sales and hosting don’t increase with faster revenue growth, we can remove those (17%), and what's left is `1/(80%-17%)` which ~ 1.5. This makes the full formula for the growth lever: `1 / (Sales + R&D + G&A + Marketing % of Rev - Variable Non-Delayed Costs)`. The growth lever is about to 1.538. ### Example of the Hypergrowth Formula Below is an **illustrative** example, using the hypothetical case of revenue growth being 150%: | Factor | Formula| |--------|--------| |Revenue growth | 150% | |Eventual profit margin | 20% | |Revenue delta | 150% - 20% = 130% = 1.3 | |Growth lever| 1.538 | |Model percent | 0.23| | Division expense target as a % of revenue | (Revenue Delta * Growth Lever * Model Percent ) + Model Percent) | | Division expense target as a % of revenue | (1.3 * 1.538 * 0.23) + 0.23 = 68 % | #### Model Percent Our model percent is our [long term profitability target](/handbook/finance/financial-planning-and-analysis/#long-term-profitability-targets) for each division. <%= partial 'includes/hypergrowth_calculator_vue' %>