Starting a business from nothing is risky, so it’s no surprise that the startup world is littered with failure. Up to 60% of startups fail, according to some reports. In the tech world, when a startup fails, it’s become a tradition of sorts to pen an essay to the rest of the community explaining what went wrong.
These “post-mortems”, as they’re called, can be highly instructive for CEO’s, founders, and others looking to learn from the failures of their predecessors.
We’ve analyzed some data on failed SaaS (Software as a Service) startups to come up with a list of the top five startup failure reasons discovered post-mortem:
1. No market need
The most commonly cited reason for startup failure is “no market need.” According to CBInsights, 42% of startup post-mortems mention this as a contributing factor to their demise. For students of business, this would be the first lesson of Startup 101. Everyone knows you’re supposed to find the problem first, then develop the solution.
The difficulty is: HOW do you find that market need?
When it comes to SaaS businesses, the key is to learn from your early adopters. These customers are going to be crucial for the validation (or failure and subsequent redesign) of your initial idea. Their feedback will be critical for developing the early iterations of your software solution and, if you’re listening, they will educate you on how to successfully deploy your product into the market.
However (and here’s where many SaaS startups fail), you must remember that early adopters are NOT your target customers.
At the early stage when your software is still in beta, it may be riddled with bugs and certainly far from user-friendly. Remember that you’ll be attracting very different customers now, versus when you finally have a polished and refined version that’s ready for the masses.
Early adopters tend to be tech optimists. These are the kind of people who may have even built a rudimentary version of your software themselves, and are now looking to “play around” with a more powerful and professional iteration.
These users are not likely to stick with you over the long-term; as the efficacy of your software solution is proven (thanks to their testing and feedback), you will be ready to shift your focus to mid-market customers.
To early adopters, this refocus will be perceived as a dumbing down of your product, so they will leave. Believe it or not, this early adopter churn is actually a good sign, because what you’re really trying to do is attract much larger mid-market customers with deeper pockets.
Analysis of churn rate studies shows that for SaaS startups moving from MVP (Minimum Viable Product) to mature product, churn rate decreases rapidly.
The point is, don’t worry about a high churn rate in the MVP stage. As long as you’re decreasing churn while your product is being refined, you’re moving in the right direction.
As they fine-tune their products for larger markets, entrepreneurs in a hurry often fail to consider:
- TAM = Total Available Market (everyone you can potentially reach or would like to reach)
- SAM = Serviceable Available Market (the portion of the market you can target)
- SOM = Serviceable Obtainable Market (the portion of the market you can realistically capture given the limits of your business resources)
This is important because building a product for TAM may be a waste of time and money. Which brings us to the following point:
2. Running out of cash
One-third of failed startups mention running out of cash as a reason for going under. This reason seems so self-evident as to be completely lacking instructive value, but what’s essential to understand here is that the problem is rarely not having enough capital, per se.
There are dozens of examples of failed startups who burned through a seemingly endless war-chest, even hundreds of millions of dollars, but never managed to reach profitability.
Headset, fitness tracker, and wireless speaker maker Jawbone—which devoured $930M in funding during its 17-year lifespan—comes to mind. Once valued at $3.2B, the tech startup filed for bankruptcy in 2017 and is now widely considered to have experienced ‘death by overfunding.’
Rather than dependence on sheer availability of cash, moving from a startup to an established company with stable profits requires responsible capital management. Startups must determine what they need to accomplish with the money they have in order to get to the next milestone that will unlock the next level of growth.
An advantage of SaaS is that revenues tend to build up over time. However, when SaaS startups determine their early sales funnel metrics, they often mistakenly assume higher than actualized revenue estimates. This is because the churn rate can easily increase, as can the cost of acquiring new customers and maintaining existing customers.
Additionally, SaaS businesses must consider the potential for the rising costs of developing better iterations of their product in order to ward off competition and reduce churn. The challenge is to scale while not increasing customer acquisition costs and per-customer profitability beyond break-even. This leads into our next point:
3. Bad business model
Of course, being unable to scale while running out of cash is very much connected to another top reason startups die: “failed business model.” This issue was mentioned in 17% of failed startup post-mortems. For SaaS businesses, the challenge is to figure out the pricing structure that will enable the business to scale.
A common problem here is being unable to deliver value to customers at scale.
The nature of software means that SaaS businesses can potentially acquire customers faster and easier, but that can be a trap. That’s because getting a paying B2B customer also adds the need for on-boarding, customer success, tech support, and so on.
Consider the example of customers who are already on the highest-tier payment plan. All too often, these customers churn not because the price is too high, but because they are unable to get the service they really need for their own success. When that happens, you have a problem.
If it’s impossible for you to deliver that service value, add to it, and still turn a profit, you know you have a failed business model.
Fortunately, SaaS businesses in particular have a variety of tools at their disposal to help them fine-tune their business model. For instance, having an advanced subscription billing system in place can help to mitigate this problem by enabling SaaS businesses to charge large companies on a per user basis rather than by global site license.
The importance of this problem is supported by evidence from social insights analysis service Brand24, who directed their data analytics software on eight months of “SaaS” mentions across social media, focusing on problems faced by users of various SaaS companies.
The majority of the data came from 700,000 tweets and was used to compile a report titled, “22 Reasons Why Your SaaS Is Losing a Ton of Money (And How to Fix That)”. Instructive in the report’s findings is that several of the reasons for SaaS businesses running sub-optimally relate to lack of billing flexibility.
A comprehensive recurring billing solution would permit a business to leverage various pricing options, including one-time pricing, usage-based pricing, tiered pricing, volume pricing, subscriptions, and a variety of hybrid pricing combinations of these pricing models. This creates a more competitive product, which is important for the next part of our discussion:
4. Got out-competed / user-unfriendly product
With almost one in five failed startups mentioning “getting out-competed” as a reason for closing shop, and almost the same proportion blaming “user-unfriendly product” as a contributing factor, solving these two problems is critical for building a successful business.
This is particularly important for SaaS businesses because at a core level, SaaS is code. For SaaS businesses that have already seen some traction, you can guarantee it won’t be long before competitors are nipping at your heels. By its nature, software makes it easy for your clients to switch to a competitor’s version of your product.
Even when you have an incredible customer list and a great team, if you can’t ship as per market and customer expectations, you’re in trouble. Here are two ways to avoid that:
- Get the basics right.
With most SaaS businesses focusing on the B2B sector, it’s essential to get the basics right. For example, functionalities such as downloading invoices should be intuitive. This simple process has come to be expected by default. If your system makes this process difficult or is not offered at all, chances are you’ll lose out to the competition. - Respond to complaints, and fix problems quickly.
Word spreads fast, especially on public shaming tools like Twitter.
For many SaaS businesses, starting off with a functional but far-from-perfect MVP is what allowed them to get initial funding.
The difficulty is to move from the wobbly code-base of an MVP built “right now!” with almost no resources by a visionary rather than a coder-by-trade, to a bug-free product that works for average users. This is where you’ll need to focus on transitioning your team at the various stages of your venture, which brings us to the final point:
5. Not the Right Team
With nearly one quarter of failed startups mentioning issues with the team as a cause of failure, we also need to address this seemingly obvious factor.
Of course, the management team plays a crucial role in determining the direction of the business. That’s because there’s a real danger in letting the dev team (which appears to be doing all the work) have too much say in how the product evolves.
The success of a SaaS business relies on the ability of the team to research the target market, execute customer acquisition strategies, and implement growth techniques despite the pressures and limitations of available resources. Another critical factor for SaaS business management to consider is having the right sales team in place.
Once they’ve seen some sales success and/or a round of healthy funding, too many SaaS businesses go out and hire the wrong management team for the business. A good example of this is a VP of marketing who has a corporate marketing background—someone with a strong resume who has previously worked at a well-known tech leader.
In the startup stage, this can be a mistake because these corporate marketers usually don’t know how to get their hands dirty. Their experience is in “squishy” marketing like managing your brand’s image. They may have experience running trade shows, marketing communications on social media, and making 5-figure enterprise deals, but that isn’t what you need at this point.
What you really need is a marketer who is an expert at creating, managing, and nurturing leads, working together with your sales team to generate those leads and convert, month after month.
Don’t just learn these lessons; use them.
The above five tips are closely connected. For example, finding the market need and pivoting your business appropriately will require having the right team in place at the right time.
Likewise, a failed business model will always lead to running out of cash if necessary adjustments aren’t made quickly.
Successfully launching a SaaS business requires a special combination of the right team, a killer product, and taking advantage of available tools to minimize development costs and maximize customer satisfaction. Get it right and you’ll see rapid growth; get it wrong and you may end up just another data point on a post-mortem list.
Quick FAQs about SaaS Startup
Q: What percentage of startups, particularly SaaS startups, typically fail?
According to various reports, up to 60% of startups fail. In the tech world, this number can be even higher, with some sources suggesting that over 90% of SaaS startups fail.
Q: What are the top reasons for SaaS startup failure?
The top five reasons for SaaS startup failure identified from post-mortem analysis are: no market need, running out of cash, a flawed business model, inability to compete or offering a user-unfriendly product, and having the wrong team.
Q: Why is understanding the market need crucial for SaaS startups?
The most commonly cited reason for startup failure is “no market need.” For SaaS businesses, understanding the market need is crucial for the validation of the initial idea. Feedback from early adopters can be instrumental in developing the early versions of the software solution and learning how to successfully deploy the product into the market.
Q: Why should SaaS startups not worry about high churn rates during the MVP stage?
High churn rates are quite normal during the MVP (Minimum Viable Product) stage as the product is still being refined. What matters more is whether the churn rate decreases as the product matures. If a SaaS startup is able to reduce churn while refining its product, it is heading in the right direction.
Q: Why is responsible capital management important for SaaS startups?
Many startups fail because of running out of cash, but the problem is usually not about having insufficient capital. The key is responsible capital management, which involves determining what needs to be accomplished with the available funds to reach the next growth stage.
Q: What are the challenges of scaling a SaaS business?
SaaS businesses face challenges in scaling due to potential increases in customer acquisition costs, maintaining existing customers, and the rising costs of developing better product iterations to ward off competition and reduce churn. Furthermore, they need to ensure that customer acquisition costs and per-customer profitability do not go beyond the break-even point.
Q: Why is having the right team essential for SaaS startups?
Nearly one quarter of failed startups mention issues with the team as a cause of failure. It is crucial to have the right team in place at the right time, especially a team that can research the target market, execute customer acquisition strategies, and implement growth techniques despite resource limitations.
Q: What are the common pitfalls in hiring a management team for a SaaS startup?
Once a SaaS business has seen some sales success or secured healthy funding, a common mistake is to hire the wrong management team. A common example is hiring a VP of marketing with a corporate marketing background, who may not be adept at generating and nurturing leads, which is what the startup needs at that point.
Q: How can SaaS startups avoid getting out-competed or offering a user-unfriendly product?
To avoid getting out-competed or offering a user-unfriendly product, SaaS startups need to focus on getting the basics right, such as making common functionalities intuitive. Also, they must be responsive to complaints and fix problems quickly.
Q: What are some of the tools available for SaaS businesses to fine-tune their business model?
SaaS businesses can use tools like advanced subscription billing systems to charge large companies on a per-user basis rather than by global site license. This allows for various pricing options, including one-time pricing, usage-based pricing, tiered pricing, volume pricing, subscriptions, and a variety of hybrid pricing combinations of these pricing models. This creates a more competitive product.
