Cash is king (but not for the reasons you think)

One of the core tenets of Beyond Work is that building a better product is a better business, but no one builds bad products by choice. Unfortunately, the unit economics of SaaS companies often end up dictating this reality. So far, we have been stuck in a dichotomy between the high revenue growth VC-funded companies and the alternative lean bootstrapped cash-focused companies, but I believe there is a third way. High growth, cash first, revenue second.?

There are a few drivers for this worth exploring, but the most important is how we view revenue and its quality as a business metric. Revenue is significant, but not for the reasons most people think. Today, we often see it as a sign of a healthy business if it has high revenue growth and decent profitability. This creates pressure to capture more revenue faster and faster to show the quality of your business to investors. In this process, there is, unfortunately, also an incentive to create a worse and worse product over time. Consider this:

A salesperson is closing a deal, but the customer wants a few extra features to sign. The salesperson can convince the customer or his product organization to accept these features. The contract is an annual SaaS contract that can be recognized over four years with a ramp of the size of payments from year 1 to 4. The SaaS company can realize this revenue over the contract's lifetime, averaging the total contract value over four years. The result is winning more revenue now and more cash later. Having locked in the revenue, the pressure to build the features has lessened, but the customer is unhappy since their features are either delayed or never delivered.?

To deal with unhappy customers, the company needs to hire more customer success people, manage customers' expectations, more developers to build extra customer features to cover the “sales debt,” and so on. Each sale becomes more unprofitable since cash is traded away in the first year for revenue. The business is growing fast on paper, but the burn is high and not dropping quickly. This, again, has to be covered by more VC money, putting even more pressure on high revenue growth.?

While these are well-known problems with the high-growth revenue model, I would argue there are even more significant problems that are not as visible and an alternative that is much more attractive. The bigger issue is that revenue is no longer a reliable indicator of product quality or market fit.

It is hard to know when customers love your product, the buyer is rarely the user and NPS and other quality ratings are subjective. This is so important because, as a founder, you have very few signals you can trust when you make decisions. What features to prioritize, which customers matter, and what strategic direction to take. It is like flying a fighter jet close to the ground with no altitude gauge. To survive, you, of course, have to scale your business, but if you scale too early before you have a real product market fit, you can cause an even more unsustainable growth cycle as it gets even more expensive per customer, and your unit economics are even worse.?

That means high quality signals are one of the most important things to invest in, a great signal is trustworthy, relatively fast feedback loops and with as little bias as possible. I would always argue that following the money is the only true feedback signal you can trust when it comes to product quality, if customers pay for the actual usage they find the value as a minimum high enough to cover the price. The problem with that is that when revenue becomes locked in for four years at a time, features are not optional, and there is no natural choice in what you are paying for. Most of the things we do to improve revenue growth in SaaS software today ruin the value of revenue as a product quality signal. Which in turn leads to worse software.?

This is why most consumer products that make it are typically really good from a craftsmanship perspective, and most enterprise products are not. Consumer products get high-quality, fast-loop signals, while enterprise software relies on surveys and other inaccurate measures with too many incentives to game the results.?

Secondly, the main reason for forcing accelerated growth is to show more value to investors, but what if that is not necessary? Those who advocate for bootstrapped startups have this as their main point, but I do think investor capital makes for better business over the long run. The focus has to move from revenue to cash, and venture capital has to be used far more strategically to accelerate the right growth levers, not vanity metrics.?

To get out of this dilemma, usage-based pricing is far more healthy. You bill when something is used and don’t when it is not. This means that revenue again becomes a high quality product signal, as a founder you suddenly have your altitude gauge back in your fighter jet. It also means it is almost impossible to play games with product feedback. It reduces the pressure on customer success to act as a bad excuse for promises made that are never delivered since the customer can choose not to pay if they don’t find value.?

Unfortunately, usage-based pricing is not great for scaling a business. You have to wait for your product to achieve scale until you see real revenue. This increases the pressure on capital needed, which is why large companies have typically used usage-based pricing at scale since they have the capital reserves to offer it.?

This is where the third way comes in. Ask the customer for cash, not revenue. Let them pay upfront, buying credits to be consumed as they use your product. You get cash, but they get control of when revenue is recognized. This is fair and creates incentive alignment between customers and businesses.?

Most customers are fine paying for quality or software that solves their problems but hate being ignored. With cash prebuys, customers pay for credits up front for your product or platform, but they are only recognized as revenue as they are consumed. While revenue growth is slower in the beginning, it accelerates as revenue becomes a true product quality signal and usage grows.?

At Beyond Work, we have been lucky that most of our customers agree with us that this is a fair deal. We have already won a large amount of cash from our customers, reducing the need to raise capital but increasing the pressure to build a great product, not the other way around.?

This also means that we can look at customer acquisition costs not just through a revenue lens but through a cash lens. It is far more critical, especially in the early years of a business, to know the cost of acquiring cash than revenue and the cash conversion cycle (how long it takes you). To illustrate this, look at Beyond Works CAC of revenue and cash this year (forecast to the end of the year based on current performance), compared to standard SaaS metrics.

For every dollar spent, we win $0.3 in revenue in the first year (this breaks even in the second year). For every dollar spent, we win $2.2 in cash. Compare this to a standard SaaS business where you typically are just below or at 1:1 for each dollar spent to revenue but below on cash as ramps, discounts, or other levers impact the cash.?

For Beyond Work, it means we can scale our business without worrying about raising more money to pay to get customers. It also means we can be patient and listen to customers and not rush features because we need to attract revenue, finally we know that all that cash will eventually convert to revenue as customers have already prepaid, but not until they decide they get enough value. Whereas with a classic SaaS business, you are constantly behind on cash, and as you scale, you get even more desperate, worsening the product quality and the signals that enable you to improve it.

In Beyond Work, we can trust the product quality signal, and we believe that allows us to achieve product-market fit faster and not scale early unsustainably. We can also use VC capital far more strategically to accelerate the growth levers that work in our business, not to plug capital holes generated by a revenue-first growth model.?

How we are getting such fantastic cash to CAC economics is our little secret for now, but it involves eliminating most of the other incentives to create bad products in our GTM model.?Maybe that is a topic for another article.