"I have never seen growth and profitability so nicely tied together in a simple rule like this. I’ve always felt intuitively that it’s OK to lose money if you are growing fast, and you must make money and increasing amounts of it as your growth slows. Now there’s a formula for that instinct. And I like that very much."
That's an interesting rule, but doesn't account for companies running at negative gross profit. SaaS companies can have non-negligible COGS since they have (virtual or otherwise) server costs. If (for example) your AWS bill is higher than your revenue, no amount of growth is likely to make that healthy.
Your AWS rates will go down with increased usage and at any time you could switch your engineering goals from features to performance. If you are growing fast then the savings you can make this quarter will be negligible in a year but the added features won’t.
It often makes lots of sense putting tech cost efficiency near the bottom of your priorities when you are growing fast and human time is your limiting resource.
COGS typically includes payroll for employees whose labor is directly tied to production but doesn't include 'overhead' employees and other categories like rent / legal / sales / marketing.
The best way to think about it: "If we had 0 sales, would this expense still exist?" If it wouldn't exist, it's COGS.
If (for example) your AWS bill is higher than your revenue, no amount of growth is likely to make that healthy.
This is almost exactly untrue. Take an old school SAAS company with a few EC2 servers, paying say $500/month. If they have one customer paying $30/month they'll make a loss, but if they grow that customer base above 17 customers they'll be in profit.
That depends how resource utilization (really, AWS/cloud costs) scale with customer growth. Often it scales poorly when your SaaS is really a bunch of prototype-isp "MVP" code.
"I have never seen growth and profitability so nicely tied together in a simple rule like this. I’ve always felt intuitively that it’s OK to lose money if you are growing fast, and you must make money and increasing amounts of it as your growth slows. Now there’s a formula for that instinct. And I like that very much."
[0] https://avc.com/2015/02/the-40-rule/