  # The Hypergrowth Rule

## The Hypergrowth Rule

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.

### 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, 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 to how we think about the trade-off between growth and profitability.

Our model target is our long term profitability target.

### 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%.

#### 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 equal to 1.5.

#### Model Percent

Our model percent is our long term profitability target for each division.

### Example of the Hypergrowth Formula

Below is an illustrative example, using the hypothetical case of revenue growth being 150%:

Factor Formula
Revenue growth 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%