It means Tarsnap isn't spending enough on growth.

The only way Tarsnap could have growth rate + profit margin equal to 40% is if it was losing money. Given that Tarsnap is bootstrapped, that's not an option for me.

>Given that Tarsnap is bootstrapped, that's not an option for me.

Indeed. I think the advice is for VC funded companies. Whole different ballgame. In the ideal case, VC funding lets you grow faster and ultimately make more money. Whereas bootstrapped companies are constrained by the requirement to make at least some money from the getgo.

On the flipside, this constraint of bootstrapping ensures that we actually do make money. Whereas in the less than ideal case for VC the outcome is zero for the founder.

(Bootstrapping can result in zero too, but you usually find this out faster than in a startup.)

There are tradeoffs to either method. I prefer the bootstrapped way. But you can apply that rule to a bootstrapped business to some extent: if your budget allows it, then it can make sense to trim margins if your growth rate is high and you can increase growth by spending.

They key is this applies for mature companies. He quotes $50mm or higher in revenue. It breaks down earlier.

I wondered that as well as I'm in the same situation, but then I wondered if it works as a target if it means we should be spending more on staff and reinvestment to grow even more? But that'd mean the %age gets even higher so.. maybe not ;-)

I also don't really understand why having a higher margin is useful in a declining business. It's either a lost cause or one should be reinvesting in reversing the growth problem, no..?

In a declining business, either you want to extract as much as possible before the market disappears, or you want to invest in turning the decline into growth.

Either can be valid answers. Consider a business that is in decline because the market it is serving is disappearing. In that case this guideline tells you that if you try to invest money into getting it back into growth, and you fail, then you should instead focus on minimizing cost and maximizing price to extract as much value as possible (to e.g. reinvest in another business).

Alternatively if you find investing more leads the growth rates to increase accordingly to keep matching this guideline, it indicates that you have untapped market potential that is worth exploiting in order to put you in a position to extract far higher earnings (in absolute terms) down the road.

You can reformulate it pretty much as: Invest in growth when growth is cheap, and extract profit when it is not.

Not necessarily. Might just be a shrinking target audience, but if you can keep a good margin there's no reason not to keep serving a non-growth market.

From the original article: "If you are doing better than the 40% rule, that’s awesome."

Tarsnap is doing awesome. Keep up the good work!

He means "should equal or exceed":

> If you are doing better than the 40% rule, that’s awesome.

Yeah, that's on the Brad Feld's blog. But not on the submitted post, unfortunately.

Or I think he means you should be spending more on R&D and marketing.

It means there is more room for growth that you are missing. So you should spend more, but not much so that you keep at the 40% rule.