SaaS Startups Failure & How You Can Avoid It

At a Glance

Thanks to a low barrier to entry, the SaaS industry is booming today and an increasing number of entrepreneurs are attempting to build their cloud firms. However, only a tiny percentage of SaaS firms become successful SaaS businesses. So, why do SaaS startups end up in failure ?

According to VCs like Tomasz Tunguz, 92 percent shut down their activities within a couple of years regardless of attaining funding. In this article, we’ve compiled a list of the most common reasons for SaaS startup failure. We will also offer tips on avoiding common blunders and developing a thriving SaaS business.

Market Insufficiency

It’s a good idea to offer a basic solution first to see whether there is a market for your SaaS startup’s product. Building an MVP will save you money and time by preventing you from wasting precious resources. However, it would help if you did not place too much reliance on your early adopters at the same time. According to recent data, only 20% of first-time customers continue to use a product after two years. As a result, you must focus on a bigger, mid-market audience while your product scales.

You should also be aware that poor timing can result in an unexpected drop in market interest. Rubica, a SaaS software firm that supplied highly sought-after security products for telecommuters, closed in 2020 as a result of this.

The problem was that its intended audience consisted of people and small enterprises. Due to the COVID-19 problem, these segments drastically reduced their spending during the last year. As a result, it was a disheartening reason for the failure of this potential SaaS firm. That is why you must also be cautious in your market targeting. You can use the following metrics to determine the size of your market:

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

Importantly, you should assess the quantity of possible clients by focusing on SOM. Otherwise, you risk becoming just another failed SaaS firm by diffusing too widely.

So, a proven product-market fit is critical for your SaaS startup’s success. Even a great product idea won’t guarantee you a successful SaaS firm if you’re targeting the wrong customers.

Management of a group

Have you found a product-market fit? Therefore you’ll be fine, and that’s the assumption. While you may have nailed your product, your team may be impeding your success.

Knowing who to recruit and when to hire them is crucial when scaling your startup. Employees that understand the fast-paced nature of the industry and are thrilled to be a part of constructing something from the ground up flourish in the SaaS business model. Early on, a single poor hire can jeopardize everything you’ve worked so hard to achieve.

It’s critical to time your hiring correctly so that your cash flow is positive and raising large sums of money to pay salaries doesn’t become a reality. It’s critical to have a clear hiring strategy in place so you don’t get carried away attempting to create a staff when your company isn’t ready. Having a team can be problematic in and of itself. Poor sales teams can stymie acquisitions, while poor customer service can irritate subscribers, prompting them to transfer to a competitor. Marketing strategists tend to miss the mark, squandering critical budget dollars on low-return approaches.

Any hires made during the startup period should be thoroughly scrutinized to ensure that you build a team with the necessary talents and desire to help your SaaS company succeed.

It was a successful SaaS company that offered solutions for business intelligence visibility. LucidEra raised $15.6 million in fundraising in 2007. As a result, its business plan depended on the favorable conditions linked with the period’s economic growth.

The projections, however, proved to be incorrect. As a result, this cloud firm could not raise funds necessary to fund its next round. As a result, this SaaS firm failed due to a lack of funding.

Given the high percentage of businesses that fail due to this element, you should carefully calculate your cash flow volume. During the scaling of your SaaS firm, you should prevent excessive spending.

Lack of Funds

The second most common cause for SaaS firms failing is a lack of funds. As a result, the startup failure rate due to this factor increases by 29%. It usually signifies that the founders miscalculated the required cash flow as the firm grew.

If you don’t want to join the unfortunate list of SaaS startups, you should arrange your cash flow in stages. Forecast the finances required for critical milestones such as:

  • The valuation of the Seed round
  • Customer validation and beta testing of the product.
  • You’re selling to early to early adopters.
  • Problems with product-market fit are yet to be rectified.
  • The business plan has been authorized and is profitable.
  • Additional funding is required to continue developing specialized software.

Similarly, to avoid a SaaS startup failure, I recommend that you keep the following points in mind:

  • Don’t underestimate churn.
  • Budget extra expenditures for product development. 
  • Don’t overestimate future income.

Following this advice will keep your SaaS firm from running out of cash until it reaches the next stage of development.

LucidEra is a well-known example of a SaaS failure and to turn this process around and closed.

Dealing with the issues

Construct a sales funnel

Creating a sales funnel is the first step in rapidly increasing your business. If you don’t have a sales funnel, you’re making a significant mistake. Sales funnels can help you automate your business, and it allows you to quickly and easily create and expand your business. Yes, there is some front-end work to be done. Once such protocols are in place, the rest is straightforward.

Every sales funnel, according to Frasier, should be carefully thought out before it is established. Consider the numerous funnels first and foremost. To quickly develop and grow your business, it’s vital to build your automatic selling engine, whether a free-plus-shipping offer or a high-ticket coaching funnel.

Creating a loyalty program

Loyalty programs are probably the way to increase revenue. It can cost up around three times as much to acquire new customers as it does to sell to an existing customer, and this amount has been estimated to be four to 10 times greater by other sources. Attracting new customers is expensive, no matter how you slice it. According to Frasier, Building a customer loyalty program will aid in the retention of customers, and it could also help you attract new clients. If there is a strong incentive to spend more money with you, it will pay off in the long run. Create a great loyalty program for your current customers and watch your sales skyrocket.

Form strategic alliances

Strategic partnerships with the right firms can make all the difference. You might be able to reach out to a massive number of people right away. Keep an eye out for companies that are complementary to yours, and make touch with them and offer suggestions about how you might work together.


Create a great loyalty program and make it available to your existing customers, and your sales will skyrocket. It may allow you to reach a considerable number of customers quickly. Identifying those collaborations may be easier said than done. Keep an eye out for firms that complement your own, get in touch with them, and provide opportunities for you to work together. If anything that you think is also one of those crucial factors, we would love to know in the comments section below.

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