GitLab aspires to using The Hypergrowth Rule by November 18, 2023. 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. We believe this investment will result in higher growth rates compared to similar companies.
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, 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.
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:
The below hypergrowth rule can help answer the questions that the Rule of 40 doesn't answer.
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 to how we think about the trade-off between growth and profitability.
Our model target is our long term profitability target.
Division expense target = ((Revenue Delta * Growth Lever ) * Model Percent ) + Model Percent)
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 is the difference between Revenue Growth and Eventual Profit Margin. For GitLab the Eventual Profit Margin is 20% because our target costs are 80%.
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 equal to 1.5.
Our model percent is our long term profitability target for each division.
Below is an illustrative example, using the hypothetical case of revenue growth being 150%:
|Revenue growth - 20%||130% = 1.3|
|(Revenue growth - 20%) * 1.5||1.3 * 1.5 = 1.95|
|((Revenue growth - 20%) * 1.5 ) * model % )||1.95*0.23=0.4485|
|((Revenue growth - 20%) * 1.5 ) * model % ) + model %||0.4485+0.23=0.6785|
|Optimal % of revenue for a division||0.6785 = 67.85%|