SaaS public cloud services are experiencing a tremendous rise. But despite outstanding demand and funding, the rate of SaaS startup failure remains high. According to Failory’s Research, only one out of 100 newborn companies turns into a unicorn. Nine more become modestly profitable, while 90 others fail to return money to the sponsors. How is this possible?
In this article, we analyze statistics on the digital industry, SaaS company examples, founders' recommendations, and our company experience to determine the six main reasons why SaaS startups fail.
We hope that startup founders, heads of marketing, design, and production, CEOs, as well as serial entrepreneurs will learn the lessons of successful SaaS startups and avoid contributing to the SaaS products graveyard.
Why Do SaaS Startups Fail?
You might suppose that the riskiest part of the software as a service product is the technical side of innovation. However, the stories of more than 80 failed startups show that the most challenging issues of tech startups are building precise marketing, robust business model, and an effective team.
Here are the main reasons why startups fail.
When you add innovation risk to the traditional risks of starting a business, such as cash flow, operational, or team risks, it’s no surprise that 9 of 10 startups fail.
6 Top Saas Product Killers
1. Products that nobody really needs
The market fit mistake in SaaS startups has the same nature as in any other business. The lack of market need becomes a verdict for many ventures. Have a look at the case study below to prevent failure.
Failure case study: 101 Studios
101 Studios had an admirable idea to teach students Math and other subjects through games. The founder, a data science professional, says that professors liked the idea, but they didn`t implement it in their classes. The startup shut down in 2020.
Three magic words to prevent the disaster
Three business metrics help to investigate the potential target audience and estimate your market size:
- Total Addressable Market (TAM) is the total market demand for a product or service worldwide;
- Serviceable Available Market (SAM) is the segment of your target market within your geographical reach;
- Serviceable Obtainable Market (SOM) is the number of clients you can really capture.
The SOM and SAM metrics help build the realistic objective and de-risk the investment. On the other hand, TAM allows us to assess the maximal software as a service company's potential.
Winners start with MVP
Minimum Viable Product (MVP) is the simplest version of a new product that allows a team to collect the maximum feedback from customers with the least effort. MVP for software development means an app or a web solution with enough functionality to attract the pioneers. Early adopters point out the weaknesses and help to improve the product.
2. Failed competition
The quick digital industry development dictates the fierce competition between SaaS companies. Therefore, it’s becoming more and more challenging to surpass your rivals and decrease customer churn rates.
Sometimes people launch a SaaS startup simply because they want to earn a fortune while not being experts in the area. The truth is that without management skills, real expertise, or suicide-hard work, ventures lose the struggle. The typical failure of NE Lounge could happen with a SaaS company or any other business.
Crush case study: NE Lounge
A young American financial analyst Jake Lang decided to launch an online business to reach a passive income of $10 k per month. His Amazon FBA store was selling inflatable products for a year with a total loss of $16,000. The startup shut down because Jake chose the wrong product, which people didn`t really need.
Success case study: Metricly
Metricly is a cloud cost management platform that can save users almost 32% of their Amazon Web Services (AWS) bills. The Arounda team has worked on the UX/UI redesign of the SaaS product that won the market.
3. Team Problems
A strong team leads to great achievements exactly as bad partnership brings startups to ruin. Let`s make sure that you avoid typical management mistakes while building a team.
Unclear leadership trap
Thomas Parisot, the leader of the Dijiwan startup, describes the terrible hiring which brought the project to collapse. They had two marketing officers, two business developers, two strategy analysts, two researcher contractors, and two developers within the first six months of operation.
Other Thomas` revelations about the roles in the company come as a quote: `A startup does not need a CEO. A startup does need a steward. A startup does truly need a leader rather than a director. A startup does need champions first.`
Hard or soft skills. Which comes first?
The study of Harvard Business Review sums up that both hard and soft skills contribute to a strong team. But passion and collective vision of the project is more important than a high level of tech experience, management, or other hard skills. Teams with average or low motivation levels perform badly when it comes to innovation in products and services, customer satisfaction, and reaching preset sales growth.
Do you need co-founders?
The main advantage of launching a startup with co-founders is to collect a powerful combination of skills and characters in one team. Another advantage of new venture teams (NVTs) is that two or more people share a financial interest and participate actively in SaaS development. Generally, startups with co-founders have a higher success rate than companies with a single founder.
4. Weak business model
How do you know if your startup is running well or coming near the cash gap? Two key metrics usually signal the problem before you get trapped.
LTV > CAC
- Customer Acquisition Cost (CAC) measures how much a startup spends to acquire new customers;
- Customer Lifetime Value (LTV) estimates how much revenue an account will bring in while the customer is active and purchases a service.
APRU stands for the Average Revenue Per Customer per month.
Сhurn Rate indicates the number of users who stopped using your SaaS product this month.
The rule is very simple: your CAC has to be lower than LTV. It means that you get more money from your clients than you spend to acquire new ones. Otherwise, you are going down and have to do something about it.
In the beginning, the CAC can be higher. However, it’s better to increase LTV sufficiently to overtake it in less than one year.
5. Tech problems and poor product
Considering that all SaaS projects have a technical side, tech problems cause a collapse surprisingly rare. Here are some of them:
- Bugs. Seamless functioning is vital in the early startup stages. If your product is not user-friendly enough, the onboarding is complicated, and the transactions fail, the high churn rate will eventually kill your SaaS in no time.
- Failure to take perspective technologies into account. The Statista report shows that Fintech startups often fail when they don`t take into account the emergence of cryptocurrencies and NFTs’. Gaming startups also depend on the blockchain, while the EdTechs often have the need to implement Artificial Intelligence (AI) and Machine Learning (ML) technology.
6. Bad timing
Bad timing can also cause a dramatic decrease in sales and popularity. This was the case with Rubica, a SaaS software company that provided advanced cybersecurity for remote workers. Individuals and small businesses who were the target customers cut their spending due to the COVID-19 crisis. Perhaps B2B service could keep Rubica afloat, but, unfortunately, the perspective SaaS startup failed.
How many SaaS companies failed in 2021-2022?
Gartner expects further growth of the SaaS end-user spending in 2022 up to $171,9 million. Meanwhile, venture funding dropped significantly in the second quarter of 2022. The inflation, the Russian invasion of Ukraine, and the global economic uncertainty forced investors to hold back and leave startups without their lifeblood - funding.
Five top venture-supported SaaS startups had to shut down from 2021 to 2022. Their total funding amount was $12,8 billion. The most well-known cases are Medudoc and DemandVue.
How To Prevent SaaS Company Fail
Consequently, to avoid a startup failure, you have to:
1. Study the market and start small:
- Take your time for market research to validate the actual demand for the product you are offering before investing any capital or effort into the Saas project.
- Aim for the client`s biggest pain!
- Make the MVP to test the client response to your business idea.
2. Pay attention to team building:
- When two people are accountable for one thing — nobody is accountable for it.
- Experience alone is not enough to make the team work together. Collaboration, openness, shared values, and ambitions form the real credibility of the company.
- Startups with co-founders succeed more often.
- Keep in touch with your clients. Do it through surveys, phone calls, and interviews. Customer feedback is the telescope that shows its disadvantages and ways to correct them. Otherwise, you risk not meeting your customer's expectations and end up with a bad product.
Let’s build a Great SaaS Product Together
There is not much we can do about the global geopolitical changes happening right before your eyes. Nevertheless, we can focus on the internal SaaS issues, which depend on the team, marketing, business planning, skill, and will.
The Arounda team has experience in UX audit, business analysis & research, and product planning. We are practitioners who have designed SaaS products, from brand identity to front-end development. Startups & SME clients among our clients raised more than $750M+.
If you are looking for a strategic partner to work on your Saas app, website, or two-sided platform, just fill in the form and see if we can offer significant improvements to your idea or product.
Let`s turn your idea into successful digital product.
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