Why SaaS companies fail?

small I am a passionate believer in SaaS, cloud, virtualization and any other delivery method that can help foster adoption of new applications in a much more cost-efficient ways. However, since my company first launched a SaaS e-learning solution many years ago (to give you a clue we called it ASP back then), I’ve seen many SaaS companies fail. I’ll try to summarize the reasons why they failed and if you are like me and tend to see the glass half full, you can use this guide to make sure your SaaS startup succeeds.

  1. Using buzz words: I’ve seen startups claiming to be cloud solutions and after reviewing their business models they were not leveraging the cloud at all. Not every business model lends itself to be “as a service”. The most successful ones are those that can exist only because of the cloud.
  2. Product vs. Service: many founders focus too much time thinking about the product and how to add new features without realizing customers are generally buying a service. Every touch point you have with your client is more important than a feature they probably don’t even need.
  3. Metrics: SaaS companies should be metric driven organizations. I can understand if projections are not met, but I won’t understand if you can’t figure out what metric should be adjusted or targeted. Recurring revenues, churn, customer acquisition costs and customer lifetime value should be clearly understood, measured and targeted.
  4. Analytics: with installed applications vendors had little first hand information about usage. Now, with a SaaS deployment, you can get detailed information you should use to improve your solution. You can see where people are spending most of their time, what features are being used, where the data-transfer bottlenecks occur and more. You need to monitor this activity and use it to align your solution with what the market needs.
  5. Architecture: it sounds obvious, but I still see many startups implementing single-tenant solutions, eliminating one of the coolest features of SaaS: continuous updates. If you are maintaining multiple platforms then you won’t be able to make them converge ever. The more customized features you develop for individual customers the more you drift away from true SaaS.
  6. Go-to-market: not everyone should be your customer, at least when getting started. I can tell from my own experience it is very different selling to large Fortune 100 customers from selling to SMBs. There’s even a big difference between small businesses and medium businesses. You need to be explicit and clearly plan your go-to-market strategy to make it as efficient as possible. Remember this is a numbers game, and volume is key.
  7. Cash: large amounts of cash are required to build the dominant SaaS player in any industry. It took $126m for NetSuite to go public, $61m for Salesforce, $45m for SuccessFactors and $32m for Mint to get acquired by Intuit for $170m. If you understand the metrics of your business you will be able to estimate how much cash you are going to need. I would take that amount and double it… Remember it’s really bad to run out of cash!
  8. Wrong partners: I’ve seen good business models and talented teams being dragged down by early partnering. Without a clear understanding of SaaS partners such as channel partners or VCs will try to manage a traditional product cycle, which is very different from what SaaS companies should be delivering. Make sure you partner with the right people or plan to spend a lot of time, energy and money educating them.

We are just starting to see the new era of SaaS business models. With a more educated enterprise consumer, large players such as Amazon and Microsoft making huge bets on the Cloud, and new devices such as the iPad the new ecosystem will evolve and new winners will emerge. Exciting times ahead!