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The Two Sides of Annual Upfront Payments and Multi-Year Contracts for SaaS

The Two Sides of Annual Paid Up Front and Multi-Year Deals for SaaS

So, you’ve made it through minimum viable product (MVP) stage and managed to convince a few clients to pay you for your product. Hooray! Your clients have paid you for the full year upfront and you’re excited, as you should be. After all, the time and resources to make an idea come to fruition, in the form of actual cash money, is a huge milestone and worth celebrating.

Now, suddenly, you must shift all that product development energy into building an actual business.

As you start to think through how to take this new-found traction and drive the business, you realize all the money and effort to build the product and find your first few clients are in your rearview mirror. Now you have a whole new set of challenges to address, including how to extend your runway to keep the momentum going.

Light bulb moment!

If you can get your first few clients to pay you for the year upfront, then certainly you can get more to do the same. What a great way to juice your balance sheet. Every time you add a client, it’s a double win; an add to the client roster and a measurable jump in cash on hand.

It makes sense, so you do it. Now you have 20 clients and a great cash position. Or do you?

A New Set of Challenges Emerge

A New Set of Challenges Emerge

Not to imply that taking annual upfront payments early on to capitalize the business is a bad idea, but like most things there’s another side to it. With your new-found cash position and client feedback, you dive back into the product to address all the need-to-have and nice-to-have requests from your clients. You feel compelled to deliver or even over-deliver, because they believed in your vision early, and frankly they expect it for the same reason.

At the same time you're starting to think about how to scale your startup, but you’re also neck-deep in bug fixes and keeping clients happy so they'll renew. It’s the right thing to do, but there’s a problem lurking around the corner…

A New Problem Lurks

A New Problem Lurks

All the focus on addressing your current client needs has taken away from the energy you used to get the first 20 clients.

Your sales pipeline has thinned, which you’re acutely aware of, but you’re struggling to find the time to address it yourself. Simultaneously, all the cash you received from the annual upfront payments is quickly being eaten by development costs and you still haven’t addressed the scale issue, particularly in sales.

You’re headed into your first set of renewals with little sense of the potential outcomes, because your customers wrote a check 12 months ago and the only feedback you’ve received is about what more they want and what doesn’t work.

Well, guess what? You just took your nice recurring revenue SaaS business and turned it into a transactional model with all the accompanying stress. You have little in the way of predictable cash flow, which from a fundraising perspective raises questions.

Multi-Year Contracts

Multi-Year Contracts

For arguments sake, say you navigate this first scenario and successfully renew all your initial clients and raise a fresh tranche of growth capital to scale the business.