Why SaaS Companies Crash and Burn

Staff Reporter, Tech Times 04 May 2022, 10:05 pm

Man, it's sweet to be a SaaS leader. The tally for global SaaS companies is estimated at 15,500 in 2020, up from 10,000 in 2015- and it's only getting sweeter. Total spend on public SaaS services was $100B in 2020 with an estimated 16% CAGR through 2025 for all public cloud services. Among these services, SaaS makes up 40% of revenue, outperforming IaaS and PaaS by nearly double. But there's a catch. Even with those promising industry numbers, 90% of SaaS companies fail, with 70% of startups failing between the tender years from 2 to 5.

So, let's be real. It's sweet - but only at the top. Most SaaS companies get left in the dust.

The industry is lopsided, favoring juggernauts like Adobe and Salesforce. The top 15 SaaS companies have an absurd $1.4T market cap and a 2020 revenue of $80B. SaaS companies that go public are already dominant, with a median of $180M in revenue prior to an IPO and 50% growth from the previous year. What does that mean for smaller SaaS players? They're left to shrivel up and die, struggling for market share in a cutthroat industry.

Successful SaaS companies benefit from immediate access to a global market and the ability to scale without increasing delivery costs. Standout SaaS products make a customer more money or run a mission-critical business function; they answer a well-defined problem and serve a fast-growing market. But even if a SaaS makes all the right moves early on, the real challenge is achieving sustainable and consistent growth. Here are the major pitfalls that SaaS companies face on that long climb to the top.

Customer Fit: For many entrants, market fit is the real killer; lack of interest in a product or service accounts for 42% of SaaS startup failures. This is often due to an incomplete understanding of target customer opportunities, a lack of focus on a specific product, limited access to ecosystem partners, and a product roadmap that doesn't prioritize maximizing customer value. A market-first approach begins with a deep understanding of customer needs and challenges.
Customization: As new entrants look to rapidly generate revenue, customers may demand custom software - functionality that may be useful for them, but not for the broader market. Layout, configuration, and installation of that custom software gobbles up even more time and resources. Fulfilling these contracts also means developers aren't completely dedicated to improving core software. As a result, rollout can be hell - a lengthy and buggy process that leads to overblown R&D expenses.
C-Level Alignment: As products mature and headcount increases, team member responsibilities can change without a clear direction. After some market success, leadership may spend more time on non-core activities instead of evolving the offering. Take your eye off the ball, and you get hit with flatlining growth and no real strategy. Misalignment can occur between leadership and investor groups, and since 30% of SaaS companies fail due to a lack of funding, that's not a good thing.
Competition: SaaS companies often gain traction by using fewer resources to disrupt the marketplace. Ironically, if a SaaS doesn't evolve fast enough, the disruptors become the disrupted. Competition kills 20% of SaaS companies, often because companies ignore future markets or verticals, keeping the day-to-day focus only on the immediate customer base. Younger SaaS companies often fail to keep track of key metrics including profitability, ARR, R&D spend, and internal versus external headcount.

Benchmarking against these metrics helps avoid some growing pains before they become embedded in the organization. For example, private SaaS companies should aim for an ARR growth of 20% or higher and an R&D-to-revenue measure of 25% or lower. SaaS companies can also look to the Rule of 40, where revenue growth plus EBITDA margin equals 40% or higher.

Benchmarking can mitigate some of these roadblocks on the path to maturity, but improved ways of working truly increase a SaaS's chances at sustainable growth and blowout valuations. Management must determine key priorities early on, align executives and investors on areas that affect profitability, and create a flexible action plan that details a company and product end-state.

Give JLA a shout, and let's kick some SaaS.

Zain Sharif

JLA Advisors is a boutique firm offering our clients a comprehensive end-to-end set of services, from strategy development, technology architecture design and execution, to software operational excellence, with an emphasis on innovation.

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