Five reasons so many SaaS startups fail

The software as a service (SaaS) industry has seen significant fast-paced growth continue over the past few years — despite or because of COVID-19. Indeed, the rapid rise of remote working and online education since the start of the pandemic has given rise to the accelerated growth of new SaaS ventures and billions have been invested in those SaaS startups as a result. 

As reported by The Business Research Company, the global SaaS market grew from $212 billion in 2021 to $241 billion in 2022 alone. In 2026, the market value is expected to reach $374 billion. It’s no wonder that the SaaS industry as a whole is an entrepreneur’s dream. 

Surely there’s a pot of gold for the taking at the end of every SaaS rainbow? Or is there? With all that money, surely everyone is lined up for success!

In reality, 90% of startups fail, and failure is most common for startups between the second and fifth years of operating, with 70% falling into this category, according to McKinsey’s recent research, so the recipe for sustained growth is pretty hard to find and harder to keep – the crux of why so many SaaS startups fail. 

Let’s take a closer look at five reasons why SaaS startups fail, attempt to understand how to identify and avoid disaster, and, instead, pave the way to SaaS success with sustained growth.

SaaS Fail #1: SaaS solutions don’t fit existing problems.

You are understandably excited and completely sold on your new SaaS product or service. But it’s not you that needs convincing. First ask real prospective customers if there is a real need for it, and is it unique? Because if the answer to either of these questions is no, then you’re going to fail.

You need to be able to show strong product-market fit (PMF) and ideal customer profile (ICP) right from the get-go. You must deeply care about how to achieve both PMF and ICP before you launch any SaaS product or service, otherwise you are not addressing your target audience, nor providing a required solution. But, be assured that the competition will. 

SaaS Fail #2: Failure to find funds.

A SaaS startup will fail at the first fence if it cannot raise the required capital, which is exactly what 38% of startups do. Those startups are dead in the water before they have any chance to survive. 

Choose the type of funding that is right for your SaaS startup. Raising funds is not an easy task, but there are a few financing options to consider. 

You simply need to find the right investor and secure enough funds to get your SaaS product to market in a timely and cost-efficient manner. While the SaaS model is not new, there are many success stories. Usually, VC investors are keen to jump on the bandwagon of the next big thing. 

Where should you go for funding?

  • You might be looking for a small amount to get off the ground at the pre-seed stage. Funds will usually start out of your own pocket. Then family and friends, crowdfunding, angel investors or other entrepreneurs are likely investors.
  • Seed funding is the next stage. Corporate investors, loans based on predicted revenue, or VCs.

But, the fundraising landscape is developing just as fast in its own right and must be navigated carefully. Use the services of a reputable fundraising consultancy if it's outside of your comfort zone. This will allow you to create a viable financing strategy. 

Fundraising consultant Julio Ortiz says this on the SaaS fundraising bottom line: “Raising capital can be a slow and frustrating process in the early stages, even for red-hot SaaS companies. Taking the time to understand the startup fundraising landscape and formulate an effective strategy before starting down this path will help you make the right choices. Establishing strong and mutually beneficial investor partnerships early on can put you in a much stronger position for later rounds of funding, ensuring that your company will continue to grow and that you will retain much of your hard-earned stake in it.”

SaaS Fail #3: Spending on your startup in the wrong order.

SaaS startups often accelerate their burndown rates with poor prioritisation. Spend only once your product is almost ready to go. There’s no point in a flashy bells and whistles website, expensive branding, company vehicles and expense accounts or high-rent offices before your SaaS solution has found its feet in a new and competitive market. That’s one way to guarantee cash-flow problems. 

Instead, as we have already established, first get the product-market fit established, and cover the ground work. Planning is everything. Then development and design, and only when your compelling shiny new product is 90% ready then that is the optimum time to put the marketing wheels in action, not before. 

SaaS Fail #4: Weak SaaS sales hiring and coaching.

Startups thrive on passionate and interested sales teams. Startups die at the hands of weak sales teams, ineffectual marketing, and poor customer support. No matter how brilliant your SaaS product or service is, you need the power of the right people to take it to the world. Don’t be in a hurry to make what may be the wrong choices in SaaS sales hiring. Instead, pause and reflect on the choice of using the services of a sales outsourcing agency.

Sales outsourcing may well be the answer and will allow you to streamline your inbound and outbound processes. One less headache. You will receive rapid onboarding of an international sales team, ready to hit the ground running and sell SaaS all day long to the right customers, neatly avoiding many of the problems associated with new markets and unknown territories. 

Not just sales representatives, but B2B lead generation services, and marketing too. 

It’s especially worth remembering that hiring overseas can trigger all sorts of issues and legal consequences regarding employment laws, personal data, etc. Easily bypass any cultural or linguistic issues with sales outsourcing, and know that you and your business are fully compatible and compliant.

You’re looking for the shortest time to market and the most efficient and cost-effective way to shorten that cycle. Take this Quora question: “What should my expectations be in the first 30-60-90-180 days when hiring a new account exec? This is for a SaaS company with focus on European sales.”

Now for the detailed answer from our CEO Rick Pizzoli: “If you’re bringing on a new, unknown brand to a market or country, for the first 90 days, the first sales exec you hire will be promoting and building the brand: A new company name, new product, new service, a cheaper / better / faster way to do something. He or she will be building the pipeline and the brand. From a management perspective you should see a lot of calls happening, a lot of contacts going into the pipeline, a lot of activity. But, you should not expect a lot of actual deal in the first Qs. For example, for a low-cost product, one that is say, under a couple of thousand dollars a month, you should sign some new clients. For a higher priced product or service, it will be a little longer before sales start coming in. For a larger enterprise, Q2 in a normal timeframe for first deals; they will generally be smaller sales or proof of concept, if what you’re offering is a new concept. People will be more reluctant to spend a lot of money on a new product or brand that is unproven.

Europeans are typically more of a social sell or buy; more people internally are involved in the process, making the decision, it’s not just one person championing a sale. The bigger ticket item, the longer it will take. So typically, it will take about a year for a new brand company to take hold in a market, and companies need to be prepared for that.

With Sales Force Europe’s on-demand sales model, we can shorten that cycle:

  1. If you decide you’re going to Europe today, going through the normal process of working with a recruiting office and hiring a team can take 3-6 months, whereas we can put people in front of you within a couple of days and they will be ready to start within 2-3 weeks of that first call. We can offer a 3-6 month head start on the competition by getting people on your team and engaged in the market quickly. We also don’t charge recruitment fees upfront.
  2. The people we bring to the team are people we know; they have delivered for us before and are known entities, not people we pulled off of LinkedIn.
  3. People we bring are not on their own in the market. We have regional management, an existing database of contacts and a regional support infrastructure to help them be successful in the market. We focus on all aspects, from contacts to strategy to oversight to reporting.

These things all add up to faster time to market and significant savings in infrastructure.”

SaaS Fail #5: High churn down, burn down.

Once your outsourced sales representatives start selling successfully, keep a close eye and ear on your customers. Keep in contact with them, and ask for and work on feedback received. 

It’s a fact that once your churn rate — customer attrition — outstrips your growth, it’s too late. High churn rates are a top reason why so many SaaS startups fail. You’re already losing customers and therefore revenue, fast. Learn how to calculate churn rate and SaaS KPIs. Continually ask customers:

  • How happy are they with your SaaS product or service?
  • How do they rate it for value?
  • Is there any room for improvement?
  • Will they buy from you again, and recommend your SaaS product or service?

What should a churn rate be? In SaaS, around 5%, a 'good' rate is considered to be around 3% or less. 

“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” Otto Von Bismark

Being aware of these five reasons why startups fail, and working to avoid them will help you to avoid the mistakes of those that have tried and failed. 

Do your research, make plans, continually test your product-market fit. Fund wisely, spend carefully and hire well. The sensible steps to SaaS success.

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