Main Reasons Why SaaS Startups Fail [And How You Can Avoid It]

These days many entrepreneurs find lucrative the idea of launching their SaaS startups. The software-as-a-service domain is noted for cost-effectiveness and low entry barrier. Besides, the cloud model is appealing to investors because of its predictable revenue.

Apparently, the picture is not as rosy as it seems. According to the statistics, 92% of Saas startups close down even if they got the required funding.

In this article, we will figure out the key reasons why SaaS startups fail and how you can escape their fate.

Reason 1: No market need

Lack of interest in a product or service is the most common reason why SaaS startups fail. 42% of SaaS startups stop operations for this reason. That’s what CBI Insights tells us. 

Therefore, before launching a cloud startup, make sure that customers will be interested in your offering. A sure-fire way to test your hypothesis is to release an MVP first.

Other reasons why startups fail provided by CBI Insights are as follows:

You have probably heard the proverb that timing is everything. And bad timing can result in the decline of market interest.

That’s what happened with Rubica, a company that offered security tools for telecommuting. The company attracted individuals and small businesses. The outbreak of Covid-19 forced these market segments to tighten the purse strings. This mishap led to the failure of this SaaS startup.

To avoid their mistake, consider market targeting carefully. Hubspot defines the specific metrics you should bear in mind when assessing your market size.

• Total Addressable Market (TAM);
• Serviceable Available Market (SAM);
• Serviceable Obtainable Market (SOM).

Reason 2: Getting short of funds

Lack of finances serves as the second most common cause of SaaS startup failures. 29% of cloud startups closed down for this reason. These unlucky companies failed to estimate the cash flow required for their business growth.

To avoid this issue, you need to calculate how much money you will need for the following key milestones:

1. Progress from seed round funding.
2. Beta testing of your cloud product.
3. Release to pioneer users.
4. Addressing product-market fit issues.
5. The business model is approved and starts bringing profit. 
6. Financing required for further SaaS product development.

Below you can see some small tips to avert a SaaS startup failure :

• Take into account a churn rate;
• Plan extra funds to improve your product further;
• Be realistic about your future revenue.

LucidEra is an example of a SaaS startup that failed because of wrong projections and a financing gap. This company offered visibility solutions for business intelligence. In 2017, they got $15.6 million of fundings. 

When creating a business plan, LucidEra relied on favorable terms caused by economic rise specific for that period. As it turned out, the projections were incorrect.

Consequently, they did not have enough money to get another round of funding. 

As we can see, this promising startup failed just because it had run out of money.

Reason 3: Management issues

When launching a SaaS startup, never underestimate the importance of management.  It may be surprising, but for 23% of cloud startups, team issues had disastrous consequences.

So what can we define as management issues? They include insufficient market research, wrong customer acquisition techniques, and growth strategies. The biggest mistake here is the failure to define the right direction for your cloud business.

Besides, let’s not forget about transparent leadership. Regarding custom software development, see to it that all involved parties are on the same page. Also, you should specify the operation areas for each member of the management team. 

Reason 4: Wrong business model

Saas startups often make a big mistake when ignoring the churn rate and other costs associated with customer retention. Traditionally, they are much higher than they seem at first sight.

However, startups tend to ignore them when choosing the SaaS pricing model. This wrong choice leads to SaaS startup failures.

Below you can see two crucial SaaS startup metrics that will help you choose the proper business model.

• CAC (customer acquisition cost);
• LTV (customer lifetime value).

APRU is the average monthly revenue per user/customer. At the same time, we use the term churn rate to define the number of users who gave up your SaaS product in a given month.

You should keep your CAC lower than LTV. In simple terms, spend less money on customer acquisition compared to the revenue you get from users.

Let’s take a look at the most common pricing strategies that will help you boost your business model:

• Per-user pricing;
• Feature-based pricing;
• Tiered pricing;
• Per-storage pricing.

Reason 5: Issues with the product

The last but not least reason why SaaS startups fail is a problem with the product itself. Usually, it means that the solution you offer is far from user-friendly and quickly over-competed by your market rivals.

For this reason, always take care of the design of your SaaS application, especially if you are developing an innovative product.

Never underestimate the importance of onboarding. For example, with introductory videos, customers will learn how to use your product much faster. Also, focus on quick bug fixing, customer support, and straightforward billing. This way, you will be able to increase customers’ loyalty and take the top spot in your market.

Atrium was a SaaS startup that had to stop operations due to poor product idea realization.

This startup was selling the software to arrange fundraising and legal team support. However, regulatory boundaries did not allow their product to become a decent alternative to the traditional law system in the SaaS space.

As a result, the startup closed down in 2020 and had to pay back $75.5 million to its investors.

Final words

Now you know what mistakes you should avoid to keep your SaaS product up and running. With the tips provided in this article, you will be able to escape the unfortunate fate of the startups we have mentioned.

Do you have a SaaS idea in mind? Feel free to contact us. My team has vast experience in building secure and scalable SaaS applications. We will eagerly create the one for you.

For more information about reasons why SaaS startups fail, check my full article: Why SaaS Startups Fail: Most Common Reasons and How to Prevent Them.