Why SaaS Startups Fail: Most Common Reasons and How to Prevent Them

Why SaaS Startups Fail?

Nowadays, many business owners find profitable the idea of launching their SaaS startups. The software-as-a-service domain is noted for cost-effectiveness and low entry barrier. However, the rate at which start-ups fail has been a concern for the entrepreneurial community. While most new businesses have a 10% chance of success, the rates go lower for Saas start-ups. 

According to an insightful report by McKinsey & Company, 92% of Saas start-ups growing at 20% p.a cease to exist within a few years. Even with growth rates of 60%, their probability of becoming multibillion-dollar businesses are slim.

In this article, we will look at the key reasons why do most saas startups fail and how to avoid mistakes. Of course, the reasons run deep, but here’s what you need to know before starting your own business.

So, why do saas companies fail?

Most Common Reasons Why Your SaaS Will Fail

Marketing Problems

One of the significant reasons why saas startup businesses fail is marketing mistakes.

While a start-up may be confident that its groundbreaking product is revolutionary (which it may be), it might not implement the right marketing strategies to convince the target user of its benefits. Also, these advertising methodologies may not focus on nurturing long-term customer partnerships or understanding the customer journey, setting up the business for failure.  Additionally, many entrepreneurs in the Saas industry fail to conduct product-market fit surveys before they open for business. Thus, the saas startup fails with a product that doesn’t resonate with the target audience.

Team Problems

Inexperience in market penetration is another factor that leads to saas startups’ failure. A budding entrepreneur that doesn’t understand how their innovative services will pique the interest of their target audience may live to see their business close down even before it picks.

Also, if the management cannot communicate the business idea effectively, the development team will experience challenges delivering a quality product that meets business requirements. Such misunderstandings often lead to missed deadlines and wasted time, money, and resources, jeopardizing the company’s success.

Budgeting Mistakes

It is only wise for SaaS companies to develop innovative products that revolutionize business processes. However, cost overruns are inevitable when the design team wastes time developing unnecessary features and takes longer than expected trying to achieve pixel perfection. And considering many start-ups operate on a tight budget, these costing mistakes are ill-timed and part of the reason why most SaaS startups fail.

Instead, SaaS businesses can release an initial product, even though it may not be perfect. They can then use the user feedback to improve it or implement new features.

What Percent of SaaS Software Development Failure

It’s often said that more than half of new startups fail during the first year. But, according to the U.S. Bureau of Labor Statistics (BLS), this isn’t necessarily true. 

Data from the BLS shows that:

• 20% of new startups fail during the first two years of being open;
• 45% fail during the first five years;
• 65% fail during the first ten years;
• 25% of new businesses make it to 15 years or more.

Why do startups fail? Let’s look at eye-opening statistics:

• 34% of startups fail because of product-to-market mismatch;
• 22% of startups fail because of a poorly implemented marketing strategy;
• 18% of startups fail due to problems with the team and human resources;
• 16% of startups fail due to cash flow and other financial issues;
• 6% of startups fail due to technical issues such as poor cybersecurity and outdated solutions.

Interestingly, the technology industry has significantly higher failures than other industries.

Some statistics of technology startups:

• 63% of tech startups fail within the first five years;
• 20 tech start-ups open in the US every year and generate $100 million in revenue;
• 39 is the average age of a tech company founder.

This statistic is shocking and may discourage would-be startup founders. However, these statistics provide valuable information about potential pitfalls. With due effort and proper risk management, startups have a great future. So, let’s look at how to prevent saas startups from failing.

How to Prevent SaaS Companies Fail

Not every SaaS startup is doomed to go under. Now that we have looked at why do saas startup businesses fail, we will highlight surefire strategies to implement for saas business longevity. Let’s delve into the specifics.

Conduct Market Research

Many entrepreneurs are trying to start a business targeting everyone in their demographic. It doesn’t work well. They then try to target everyone in their city. Again, this could also be a mistake. The more narrowly defined the niche, the easier it will be to reach the right audience.

Startup owners also have to know what their customers want. Too many would-be entrepreneurs go into the market thinking they have a great SaaS to offer, but they fail to realize that nobody wants that digital product. They must do their homework and research the market and competitors to know exactly how to meet potential customers’ needs.

Product-Market Fit Identification Before Launch

Identifying the product-market fit is one of the most crucial but challenging tasks. However, it presents an excellent first step to delivering products that offer value to your target market. To do this, you will need to test your startup’s concepts and ensure they align with market demand. Identify the product’s value and collect end-user feedback, which helps you pinpoint which features need to be added or improved.

Even after the product launch, proactively look at how well the service fits the market. Release updates as needed to ensure optimal functionality.

Developing an MVP

Another way to ensure the longevity of saas startups is to create a minimum viable product.

An MVP is the basic version of your Saas product that only boasts critical functionalities but provides the intended end-user value. It presents an excellent opportunity for businesses to test a product idea and assess the validity or invalidity of their business plan.

Even as a low-risk investment, it boosts early adoption. The trick here, however, is to create a community of early users that will offer you invaluable feedback on your platform’s functionality and viability. Then, leverage this information to develop various versions before commencing full development.

Learn more about “Why Should You Build An MVP For Your Startup?“

Choosing the Right Software Development Partner for your startup

Challenges setting up third-party payment integrations, ensuring GDPR compliance, managing subscription lifecycles, and customizing products are other reasons why saas companies fail. However, partnering with expert developers with in-depth knowledge of Saas development is a surefire way to ensure business success. Besides, with many start-ups operating on a shoestring budget and looking for every opportunity to save a coin, outsourcing has become a favourite option. 

Today 60% of US companies outsource all or part of their software application development to software partners outside of the US.

Broscorp is a reliable software development partner that converts your ideas into scalable, reliable, and profitable products. Our talented team of developers understands the Saas market extensively, helping start-ups avoid these common mistakes that might cause the business to close down permanently.

As part of our initiative to help start-ups grow, we offer web app development services, cutting across industries. We will develop a SaaS application from scratch or improve your existing one, resolving even the most complex tasks. Want custom SaaS development that suits your company’s unique requirements? Feel free to contact Broscorp today to get the best possible software development experience.

Final Words 

Many startups fail within the first years. Fortunately, you can thrive for many years. We hope we have answered why do saas startups fail, and shared how to prevent it. To do this, you must follow the advice outlined above, and, most importantly, you have to test your idea before the launch. It is impossible to foresee everything, so it is essential to maintain a team spirit, faith in success and be flexible and ready for change.

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