Top 2 reasons most #SaaS startups fail

When working right, the SaaS business model is a dream-come-true from a financial perspective.

With recurring revenue, low customer attrition, gross margins that can easily exceed 70% and ability to scale quickly without adding people, it comes as no surprise that even large traditional software companies are adopting the SaaS business model.

So, what’s the problem? Why do so many SaaS startups end up on the R.I.P. report?

While there are a myriad of reasons why SaaS startups fail, below are the two most common ones.

Failure of the Business Model

One of the biggest mistakes SaaS founders make is they do not clearly articulate how they are going to get customers.

On paper, getting users can seem easy especially when you are aping other startups in your industry. However, the success of a particular startup cannot be easily duplicated by another.

Beyond what can be seen, most SaaS founders test various marketing and user acquisition strategies before they finally hit that one homerun that propels their businesses to success. The only problem is that the homerun which worked for one subscription product may not necessary work for your subscription product.

Most SaaS startups assume that just because they have built an interesting product or website, customers will come knocking on their doors. This may happen for the first few customers.

However, beyond these customers that have been actively searching for the solution you have built, attracting and winning new customers is usually a challenge. And in many cases, the cost of acquiring customers (CAC) ends up being higher than the lifetime value (LTV). This means an unprofitable business.

Before starting a SaaS, you should clearly define what matters for your business. Asking these two questions will help you know whether your SaaS business model will work:

• Can you acquire customers in a scalable way?
• Can you monetize the customers acquired at a higher level than the cost of acquisition?

Running Out of Cash

Cash matters is the second most common reason why SaaS startups fail. As a founder, it is your duty to know how much cash is left for operations of your company at any time. The cash should enable the company reach a milestone that can lead to positive cash flow or successful financing.

The SaaS company valuation curve is not linear. Just because you raised some funds 12 months ago does not mean your company is now worth more than it was at that time. Valuation of SaaS companies is mostly based on milestones reached.

Here are typical milestones (not set in black and white) that your company should have reached for increased valuation:

• Beta mode. If you have put out your product in beta, you can have some validation from customers. This will increase your valuation. If you are still building the product, valuation is not likely to increase much.
• Product shipped. The product has shipped and some customers have started buying it. Moreover, customers are happy with the product.
• Eliminate Product/Market Issues. Typical problems that are expected during the initial release (e.g. bugs, missing features, etc.) have mostly been eliminated.
• Proven Business Model. Your customer acquisition tactics have been proven to be working and can scale.
• Positive Scaling. The business may have scaled as expected but additional funding is needed to further accelerate expansion. For instance, your company may be looking to expand internationally.

Here, most SaaS startups fail due to the inability to achieve key milestones before cash runs out. Cash can run out due to poor prioritisation in research and dev, expensive hiring and aggressive growth.

The above are the two main reasons why SaaS startups fail. Why do you think many startups fail?