Rule of 50 vs. Encore's 20/20: Which Growth Rule Fits Your MSP?

Every MSP owner eventually hits the same fork in the road: do I push for growth, or do I bank the profit? Software investors have a famous shortcut for that question, the Rule of 40, and David Cummings recently argued it should become a Rule of 50 that counts growth twice. At Encore Strategic we teach a different yardstick, the Rule of 20/20: at least 20% net profit and at least 20% year-over-year growth, at the same time.

This post puts the two side by side, asks whether our balanced approach survives a hard look, and names the situations where the Rule of 40 or Rule of 50 is the better tool. It also covers the difference that matters most: those rules were written for technology companies, and an MSP is a relationship company.

The Rule of 50: growth counts double

The classic Rule of 40 says a software company's growth rate plus its free cash flow (FCF) margin should total 40 or more. Grow 60% while burning 20% of revenue and you score 40. Grow 10% at a 30% margin and you also score 40. The rule treats a point of growth and a point of margin as equals.

David Cummings argues they are not equal. He leans on Bessemer Venture Partners' research, the Rule of X, which found that in public cloud companies one point of growth was worth roughly two points of FCF margin in valuation. Bessemer's logic: a margin gain adds value once, while a growth gain compounds, because each new recurring dollar keeps paying in future years.

Cummings' version weights growth 2x and raises the bar to match:

Rule of 50 = (2 × growth rate) + FCF margin ≥ 50

Under that test, 10% growth with a 20% margin scores 40 and falls short. 100% growth with a -100% margin scores 100 and looks excellent. His advice: startups with real revenue should grade themselves on the Rule of 50.

Encore's Rule of 20/20: two floors, not one sum

The Rule of 20/20 asks an MSP to clear two separate bars every year: 20% net profit and 20% revenue growth. It is not a sum. A shop at 35% profit and 5% growth does not pass, and neither does one at 40% growth and 2% profit.

We set it up this way on purpose. We want growth and profit held in balance, because in a services business each one protects the other:

Profit funds growth. Most MSPs are owner-funded. There is no venture round to cover the hires you make ahead of revenue, so the next tech, the next salesperson and the next tool come out of this year's profit.
Growth protects profit. A firm that stops growing slowly loses its best people, falls behind on pricing and lets its client base age. Margins erode quietly long before anyone notices.
Balance builds value. Buyers of MSPs pay for profit, then pay a better multiple when that profit is growing and recurring. A 20/20 business shows both.

Side by side: same numbers, different verdicts

The three rules agree on a balanced business and disagree sharply at the extremes. A 20/20 MSP scores exactly 40 on the Rule of 40 and 60 on the Rule of 50, so it passes all three. Push one lever hard and the verdicts split.

MSP profile	Growth	Net profit	Rule of 40 (pass ≥ 40)	Rule of 50 (pass ≥ 50)	Rule of 20/20
Balanced	20%	20%	40 · pass	60 · pass	Pass
Growth sprint	40%	5%	45 · pass	85 · pass	Fail (profit)
Burning for growth	50%	-15%	35 · fail	85 · pass	Fail (profit)
Harvesting for exit	12%	28%	40 · pass	52 · pass	Fail (growth)
Cash cow	8%	30%	38 · fail	46 · fail	Fail (growth)
Stalled	5%	10%	15 · fail	20 · fail	Fail (both)

Three differences matter:

Sum vs. floors. The Rules of 40 and 50 let you trade one metric for the other. The 20/20 rule does not allow the trade.
Weighting. The Rule of 50 rewards growth so heavily that an MSP losing 15% of revenue a year scores better than a 20/20 shop. For an owner-funded services firm, that is a path to a cash crisis.
What counts as profit. Cummings and Bessemer use free cash flow margin. We use net profit, with owner pay set at market rate and fully burdened service labor in COGS. The scores above treat the two as close enough to compare, but they are not identical.

The biggest difference: your MSP is not a technology company

The Rules of 40 and 50 were built by and for technology companies. That is the most important difference between them and 20/20, and it is easy to miss. As much as the engineer in every MSP owner wants to believe otherwise, an MSP is not a technology company. It is a relationship company that delivers technology.

A pure software company can push growth hard and let profit wait. Its product works the same whether the customer knows anyone at the company or not. An MSP has no such luxury. Clients stay because they trust the people who answer the phone, show up on site and know their business. Those people need to be paid well, kept and not burned out. That takes the profit that the Rule of 50 is happy to sacrifice. Balance is not optional in a relationship business. It is the business model.

What I saw when a tech company bought my MSP

I learned this the hard way. When I sold my MSP, the buyer was a large, technology-focused company backed by private equity. They understood technology very well. They did not understand relationships.

I watched the highly profitable, highly efficient company I had built start circling the drain. I tried to explain to their CEO what was happening and why. He did not want to hear it. Within 18 months they had lost almost every client and almost every employee. Not long after, that CEO was updating his CV.

The lesson for every MSP owner: the spreadsheet can tell you whether you are growing and profitable. It cannot tell you whether your clients trust you or your team wants to stay. The 20/20 rule keeps enough profit in the business to protect both.

Does balanced growth hold up to scrutiny?

Mostly yes, for the business it was built for: an owner-funded MSP. Interestingly, Bessemer's own research supports the case. It says the growth premium shrinks when the cost of capital rises. An MSP owner funding growth from their own profit has about the most expensive capital there is.

Where 20/20 is strong

It fits services economics. MSP gross margins run around 55–65%, well below the 75%+ typical of software. A dollar of MSP growth carries more delivery cost, so it deserves less of a premium than a software dollar.
It is self-funding. Twenty percent net profit can pay for twenty percent growth without debt or outside money. The two numbers are sized for each other.
It compounds. At 20% a year, revenue doubles about every 3.8 years. Profit grows with it, so the owner builds equity and cash flow at once.
It blocks the two classic failures. It stops "growth at any cost," which drives Anything for a Buck (AFAB) selling. It also stops the comfortable plateau where the owner harvests profit while the firm slowly loses its edge.

Where it needs honest caveats

The floors can be too rigid. A 30% profit, 12% growth MSP is healthy by most standards and still "fails." The rule should trigger a conversation, not a verdict.
Not all growth is equal. Ten points of new recurring revenue beat ten points of hardware or one-time projects. Acquired growth is not the same as organic growth. The headline number hides this.
20% gets harder with scale. Adding 20% to a $2M MSP means $400K of new revenue. Adding 20% to a $20M MSP means $4M a year, year after year.
It is a health check, not a valuation formula. The Rule of 50 tries to predict what investors will pay. The 20/20 rule describes what a durable, owner-run business looks like. Those are different jobs.

When the Rule of 40 or Rule of 50 is the better yardstick

The Rules of 40 and 50 fit best when capital is cheap, revenue is highly recurring, or the owner is deliberately trading one lever for the other for a set period.

Situation	Better yardstick	Why
Software or SaaS line inside the MSP (a platform, a productized tool)	Rule of 50	Software-level gross margins and sticky recurring revenue make growth worth roughly 2x margin, which is exactly Bessemer's finding.
PE-backed or investor-funded MSP platform	Rule of 40 or 50	Outside capital is cheaper than owner profit, and the buyer at exit will judge the business on growth-weighted metrics.
A planned land-grab year (new vertical, acquisition integration, big sales hire)	Rule of 40	Temporarily trading profit for growth is fine if the sum holds at 40 and the owner sets an end date.
Two to three years before a sale	Rule of 40	Harvesting margin at 12–15% growth can still score 40 and lift EBITDA, which is what most MSP buyers pay for.
Comparing yourself to public cloud companies or VC-backed peers	Rule of 40 or 50	These are the benchmarks those markets use. Use their scorecard if you are entering their arena.

The one place we would not use the Rule of 50 is a typical owner-funded MSP. Its 2x weighting can make a cash-burning year look strong, and an MSP without outside funding cannot afford that mistake.

The bottom line for MSP owners

Use 20/20 as your default operating standard and the Rule of 40 as your flex rule. If you land at 20/20, you are self-funding, compounding and building a business a buyer will pay up for. If you deliberately fall below one floor for a season, check that growth plus profit still totals 40 and set a date to get back to balance.

Save the Rule of 50 for the parts of your business that act like software, or for the day someone else is funding your growth. Until then, remember what business you are really in. Technology is what you deliver; relationships are what you sell. Balance wins: profit more, work less, exit big.

Sources

David Cummings, Rule of 50: Weighted 2x for Growth (June 8, 2024)
Bessemer Venture Partners, The Rule of X