Over the past seven years, the SaaS industry has grown by a staggering 500%. Despite the industry witnessing this enormous growth, many SaaS startups collapse before entering mature phase. What is it that affects their growth in a segment that is the most important in technology business? Here, we attempt to delve deeper into deciphering the reasons and understanding things SaaS startups should follow for long-term success.
The low barrier to entry is facilitating a boom in the SaaS (Software as a service) industry.
In the recent past, there has been a tremendous increase in the number of entrepreneurs attempting to build their own cloud\SaaS firms.
However, unlike startups in other domains, the rate of failure is quite high in SaaS. In one survey, it was found that 92% of SaaS companies fail within 3 years despite the funding being provided and having growth potential.
What is it that is failing startups in as promising a sector as SaaS? Here, in this article, we try to find an answer to this pressing question and analyze the success and failure parameters for SaaS startups
Understanding key reasons behind failures
The key reasons for the startup failures are listed as below. If SaaS startups can tactically avoid these mistakes, they can emerge profitable successfully.
Lack of Need in the Market
The lack of market interest is one of the primary reasons for SaaS startup failure.
According to recent data, only 20% of first-time customers continue to use a product after two to three years.
Hence, it is necessary to focus on a bigger, mid-market audience while the product is scaling up. Poor timing can also result in an unexpected drop in market interest.
You must seek guidance from the experts in your network. Remember anyone who is interested in your product would serve as your target customer and would be good enough to solve a problem that your audience is looking to address.
There are some special metrics which are widely used and trusted to assess market size, which are:
- Total Addressable Market (TAM)
- Serviceable Available Market (SAM)
- Serviceable Obtainable Market (SOM)
It is critical for a SaaS startup’s success to have a proven product-market fit.
Even a great product idea won’t guarantee success to even an established SaaS firm if wrong customers are targeted.
There are not enough funds
Not having enough funds is the second major reason as to why so many SaaS startup businesses are failing.
This reason accounts for as much as 29% in the failure. So, this translates to entrepreneurs wrongly defining the required cash flow.
In the initial phase, once a good product-market fit is built, funds are mostly spent on some key activities.
These typically include product development, creating roadmaps, with some budget being allocated to marketing and after-sales support. Hence, one can forecast the finances required for critical milestones such as:
- The valuation of the seed round.
- Customer validation and beta testing of the product.
- Checking if you are selling too early to adopters.
- Identification and rectification of the problems with product-market fit.
- Additional funding to continue developing specialized software, which is mandatory.
Whether you’re bootstrapped, sponsored, or funded, it’s essential to keep your financials under control.
You should have a clear understanding of all aspects of your revenue and expenses, key metrics, and how they impact your growth. This will set you on the right path of SaaS survival.
Poor Management of the Group
Surprisingly, poor management is also one of the reasons why SaaS startups fail.
It was found that almost one of five cloud startups shut down its operations due to team issues.
Hence, management plays a critical role in the well-being and profitability of SaaS startups.
To hire people at a right time is also important so your cash flow isn’t tied up and you’re not reliant on raising wide amount of capital to pay salaries.
It’s important that you have a clear understanding of hiring so you don’t end up building a team when your startup isn’t ready for it.
The candidate hiring during the startup period should be thoroughly scrutinized to ensure a team with the necessary talents and desire to help a SaaS company succeed.
Fragile management team fail to plan and make strategy and do not do sufficient work to validate the uses of their product before and during development phase of the product. The teams may carry with poor marketing strategies.
Failed Business Model
A common mistake made by SaaS startup owners is not spending enough time for underestimating the churn rate and related retention costs.
And these financial considerations turn out to be higher in reality. An improper business also plays a role in the failure of the SaaS startups. To overcome this, one can rely on the two key metrics for SaaS startups in project modeling.
- CAC (customer acquisition cost)
- LTV (customer lifetime value).
You need to find ways of how you can raise customer acquisition without spending too much on it.
The average annual churn rate was found to be around 5-7% (0.42-0.58% per month). If the churn is significantly higher than this, it is compulsory to take a close look at what needs fixing in terms of a retention strategy.
Poor market research and a bad selection of market and product resulting from it are some of the most important reasons for the failure of SaaS start-up companies.
The most functional and useful product tends to fail if it doesn’t reach to the right market and the right hands. For your product to be appreciated, it must go into the hands of people who are in actual need of it. For this function it is significant to do proper market research.
Product problem is a common reason why SaaS startups fail.
As per the CB Insights, a startup failure rate due to being out-competed reached 19%. This usually happens when the product is not user-friendly enough compared to other competitors in a similar sector.
It is important that onboarding and supporting processes should be well-tuned.
Prompt bug fixing, client support, and clear billing help to enhance customer loyalty and strengthen the SaaS startup’s market position.
Additionally, one should always keep in touch with the clients constantly.
Regular surveys, phone calls, and interviews will help to define the product’s flaws in time. This is how one can prevent SaaS businesses’ failure.
To sum up
To succeed in SaaS space, SaaS startups must leverage quality market research, ensure responsible capital management, and choose the correct business model.
All these factors play an important role in ensuring the success of your B2B SaaS business.
Most importantly, SaaS startups must resist the temptation to over-finance and hire employees who are not actually needed.
If not, they end up sinking additional money into the product without assessing the project requirement, scope and doing consumer research.
Only with patience, diligence, and a clear plan for scaling up the business, a SaaS startup can avoid making the common mistakes we discussed here.