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Why Do Most SaaS Startups Fail?

why do most SaaS startups fail

The booming SaaS industry is predicted to increase by 21.2% over the next 4 years. With the barrier to entry at its lowest level and the allure of multi-million dollar acquisitions, SaaS seems like a goldmine for any go-getting entrepreneur with a bright idea.

Much like any other startup business however, the failure rate for SaaS startups is high. An estimated 92% of SaaS companies fail within 3 years despite growth and funding.

So why do most SaaS startups fail?

We take a look at some of the main reasons SaaS startups fail, and how you can avoid them in the early days of building a profitable business.

1. They Fail to Establish Product-Market Fit

SaaS Startups Fail When They Fail to Establish Product-Market Fit

If a startup is floundering, one simple question needs to be asked: Are they trying to fix a problem that doesn’t need solving?

A bad or non-existent product-market fit is one of the main reasons why most SaaS startups fail in their early days. Many founders keep their ideas close to their chest in case their groundbreaking idea is stolen, improved on, and launched before they’ve begun development. This is a risk with any business, but it’s important to start asking your potential customers if your idea is something that they would pay for and use in their day to day lives. A flashy interface with all the bells and whistles isn’t going to mean a thing if it’s not solving a fundamental need or problem.

Start small and take the time to do your groundwork. Ask everyone in your network, or anyone that could be a target customer if your product is something that interests them and would solve a real problem for them.

Is your product a must-have, maybe, or a flat out no? Identifying a real world need for your SaaS startup before you sink time and money into building it is crucial to avoid being another statistic in the startup graveyard.

Once product-market fit has been established, it’s important to develop a deep understanding of your customers so you can:

  1. Identify problems

  2. Improve your product

  3. Uncover customer pains to help match your product to their needs

  4. Generate new ideas

  5. Build lasting relationships

  6. Achieve sustainable growth

Keeping in touch with your customers through surveys, interviews, and phone calls can help you develop a product that’s constantly in touch with the market it serves and the problem it solves. Staying as agile as possible is a key factor in avoiding startup failure.

Without establishing product-market fit early, you risk becoming nothing more than another statistic, serving only to further establish this as one of the top reasons why most SaaS startups fail.

2. They Have Cash Flow Problems

SaaS Startups Fail When They Suffer from Cash flow Problems

To get your SaaS to the point of having a minimal viable product for launch, you’re going to need to sink in some cash upfront. For many companies, it’s tempting to let showmanship take over from getting the basics right. Big money is often spent on branding, fancy offices, and marketing before the product has found its feet. This can cause serious cash flow problems, and at an early stage it can spell disaster. Cash flow problems may be one of the main reasons why most SaaS startups fail, but it doesn’t have to be.

In the initial startup phase, money is better spent on development, road mapping, and design, with budget being allocated for marketing once a solid product-market fit has been established.

A good rule of thumb is to start marketing your product when it’s 90% complete. It’s difficult to successfully market a product that isn’t fully built and keeps shifting direction, features, and functionality. It’s also frustrating for customers who sign up to use a product that keeps changing on them. Money shouldn’t be directed into a marketing budget until you have a product that’s solid, compelling, and ready to wow the world.

In order to keep the cash coming in, founders often give away equity or risk everything with personal guarantees in an attempt to keep everything in motion. This can impact their business later on, or cause serious problems with their personal finances if their startup fails.

Savvy founders are increasingly looking towards revenue-based financing which has less risk attached, and typically a lower overall cost of acquiring capital when compared to traditional equity based financing. This method of financing is also perfect for the SaaS business model, as it takes monthly revenue into account.

For startups struggling with balancing new customer acquisition and churn, this can be a sensible option that helps give startups the cash flow they need for growth without the overbearing pressure of traditional finance solutions.

Whether you’re bootstrapped, financed, or funded, it’s essential to keep your financials under control. Having a clear understanding of all aspects of your revenue and expenses, key metrics, and how they impact your growth will set you on the right path to SaaS survival.

3. They Have More Churn Than Growth