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Competitive ROI

Building and launching a global, always-available cloud service requires significant capital, and we are competing with other SaaS startups for venture funds. The Rule of 40 is a common metric investors use today to determine if a SaaS business is successful. To prevent rent seeking, the Rule of 40 will be considered the target return to investors. If profits exceed the Rule of 40, the interchange will be required to reduce prices to meet the Rule of 40 target. This provides investors asymmetric returns while preventing rent seeking in the distant future.

Dual Shareholder Class Corporation

To provide the governance features of a co-operative, and also provide a competitive ROI to investors, the interchange will be operated by a dual shareholder class corporation. The co-operative will own governance shares and investors will own investment shares that are structured to provide them a competitive ROI. Options to purchase investment shares will be offered to advisors and employees as financial incentives.

This dual-class structure is similar to how Google and Facebook dual-class shares that give their respective founders control over the company, but with Hellō, the co-operative will provide non-financial governance by setting policies that the interchange management will operate within. See the Hellō Guiding Tenets for the initial policies.


1) What is the Rule of 40?

The Rule of 40 was popularized by Brad Feld:

The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.

2) Why choose the Rule of 40?

While there is controversy on how applicable the Rule of 40 is to early stage companies, it is simple to understand and is a popular metric for measuring SaaS companies that enables Hellō to offer returns comparable to other SaaS venture opportunities.

3) How would the Rule of 40 work in practice?

If the Hellō interchange generates revenue of $125M in a quarter, and a year earlier generated revenue of $100M in the same quarter, the annualized growth rate, ($125 - $100M) / $100M, would be 25%. Per the Rule of 40, 15% (40% - 25%) of revenue, $18.75M (15% * $125M) is the target profit. If profits exceed that amount, the interchange will need to reduce prices to align with the Rule of 40.

4) Why is Hellō using the Rule of 40?

We want to provide investors a return competitive with comparable investments. Constraining profits to the Rule of 40 aligns the interests of all stakeholders on growing revenue and prevents rent seeking in the future.

5) What other financing methods did you explore?

We initially explored a revenue-based financing model similar to toll revenue bonds used to finance public projects such as bridges and roads, where investors receive a percentage of revenue over a period of time. This model works well for projects that have predictable capital requirements and predictable revenue where there is one round of financing, and Hellō is not such a project. We then explored using tokens and fixing the return to investors to the Rule of 40. Investors have soured on token investments, and the dual class shares provides a more traditional investment vehicle.

6) What will by the rights of the governance shares?

We have yet to work through the details of the governance shares. Our objective is to protect the interests of the co-op's members, while enabling investors to receive a competitive ROI.