SaaS Startup Mistakes, Failures, And How To Avoid Them

The popularity of SaaS startups has been increasing for the past decade. There are around 30,800 SaaS startups in the world, according to a study done by Statista.

The growth of SaaS startups had a temporary dip in 2020 due to the pandemic. But it has resumed with new startups appearing in the following years.

And while that’s all good, we don't talk about the other side of the coin nearly as much. How many of those fail and cease to exist?

According to a study by CB Insights reviewing the post-mortem reports of 353 startups, around 50% of Startups fail during the phase of early growth.

Starting a SaaS sounds appealing and is relatively easy to do. The real challenge lies in staying in business through the years.

That's why, in this article, we're going to look at different reasons why SaaS startups have failed in previous years. That way you can be better prepared for the road ahead.

Now, let's get started…

SaaS startups and mistakes of all sizes

Mistakes can come in several sizes, as there are big and small startups. Some mistakes are too big to recover from. And when mistakes are small, they pile up—leading to "death by a thousand paper cuts".

But it doesn't matter if it's a big B2B startup or a consumer-focused micro-SaaS, it can be susceptible to an untimely ending.

We can also group the reasons for failure into categories, depending on whether they are mistakes from the founder, from the team, not adapting fast enough, etc.

Here are the categories we’ll go over:

• Team troubles.
• Market mayhem.
• Funding fiascos.
• Regulatory roadblocks.

Starting with…

Team troubles

Here, there are 2 extremes one can find. Either not having a team and DIY-ing everything. Or growing a team too fast.

And sometimes the expectation is that having a top team will build and get the product to market faster. But getting there faster doesn’t guarantee the desired success.

It is far more common to see troubles arising from a team mismatch than from a solo founder.

For example, looking for a cofounder and partnering with others just because they have some entrepreneurial background. Without first assessing whether they have the necessary skills or aligned intentions.

And then having to hire external people to build the product because everyone's expertise is in one area (that is not coding).

And no, I'm not exaggerating. That's a true story.

Now, suppose the team has all the right talent in the right roles, there's still potential for issues that arise from a lack of communication and collaboration.

That is tricky because, when budding SaaS startups, there's not much room for mistakes and delays due to miscommunication.

Good leadership, people management, and the ability to align efforts are skills that most founders don't have.

Left unchecked, these internal issues can lead to team members quitting and long-term friendships getting sour.

Market mayhem

You need tough skin, as a founder, to put something out on the market and deal with the results.

And doing so can go in many ways.

People may not care or respond as you’d think, they might use the product a few times but may not become regular paying users, they can get overly critical and call out what’s missing while ignoring the existing features, and so on.

The global online market can be wildly unpredictable.

A product launch that did well before might not have any results when done a second time.

The market will become more sophisticated and marketing efforts that provided good results in the past won't work that well and new approaches will be needed.

Another common situation is where SaaS startups try to grow from their initial user base to capture a wider audience. And then they find themselves competing with more established alternatives that are backed by a bigger team with greater resources.

Something else that can disrupt the market (and I alluded to at the start of this post) is unforeseen global events and economic downturns. These are temporary circumstances that can push startups over the edge.

There are many examples of these sudden changes in the market.

We can talk about 2 popular ones.

1. AI-based SaaS products. At one point, there were several "chat with your docs" apps. Then the technology became widely available and existing bigger apps added that feature as part of their plans. Now, the apps that only offered that service had to expand to other use cases or die.

2. Twitter-based SaaS apps. Once there was a thriving ecosystem with many different apps for scheduling tweets, creating better threads, and checking enhanced analytics. Most of those were wiped out when Twitter changed the pricing tiers for the API. Now, you can only find 2 or 3 independent ones.

Funding fiascos

We are well aware of the typical Silicon Valley approach where startups go around raising capital from different VCs.

This becomes a problem when the money that is used to keep the startup afloat is not from customers (or very little of it) but from raised capital instead.

And that's only one of the problems in that scenario.

Venture-backed SaaS startups, however, are not the only ones with that problem, the funding fiascos also happen in other cases.

Going the bootstrapped way is, most of the time, a better alternative (albeit a slower one).

Relying on VC funding is the most popular method. But many others are worth exploring.

Many founders are not well-versed in financial planning or fund management. And not paying too much attention to this area can be a costly (no pun intended) mistake.

The worst part is when this area is not handled with the appropriate care from the start. And then, getting it right later on becomes much harder and another item in the ever-growing to-do list.

However, another issue arises when founders get pressured, either directly or indirectly, by others to raise funding early.

This creates a cycle very similar to what happens with paid ads.

The startup becomes too reliant on external funding without having a proper revenue model. This creates a looming pressure that makes mistakes and oversight issues hard to avoid.

There's always the need to secure additional funding rounds and attract other investors. But, this only brings a temporary amount of funding and the issue remains.

And now, there are more people invested in the company which, as you can tell, is an added pressure to perform...

The success or failure of the startup in a situation like this relies upon the ability of the founding team to manage the situation and steer the startup in the right way before running out of time.

Regulatory roadblocks

This last category is not as common as the previous ones. But mistakes here can wipe out startups faster than you can say "regulations".

The biggest example here is, once again, AI SaaS startups.

Since AI is in such a gray area right now, one can get too creative and land in uncharted legal territory. It's only a matter of time before new restrictions apply and the SaaS can no longer operate as it used to.

Still, without using AI as an example, there are other areas where non-compliance due to ignorance can lead to great consequences.

Online accessibility is one of those.

There have been many cases before in which companies (even popular ones) were subject to costly fines due to their websites not adhering to the WCAG AA standard.

Another example is the area of remote work and digital nomads.

Someone can have the "great" idea to make a competitor to NomadList and build a SaaS in this area without taking into account all the many regulations around it.

The same goes for online taxes all around the world. This is another thorny subject that can make a startup go "kaboom". This is especially true when the SaaS startup is dependent on only one payment processor.

I can go on with more examples but you get the point. Failure to comply with industry regulations can be a heavy anchor that'll sink the SaaS ship.

Sometimes it's because the startup is operating in a gray area, other times is because it grew much faster than anticipated and didn't take into account the "legal stuff".

And even when it’s an honest mistake, getting into penalties and legal battles is the last thing a SaaS startup should have to deal with.

Conclusion

The road to a successful SaaS startup is not as appealing and glamorous as people make it out to be. There are several pitfalls and challenges along the way.

And even though there aren't ways to guarantee success, there are many that will guarantee failure.

Now you know that mistakes can come in all shapes and sizes.

Ranging from mistakes made by founders like building a solution and then looking for a problem, not doing proper marketing, failing to get/use momentum built, and so on.

Internal team issues like poor communication and collaboration, not having the right talent, or working with long-time friends who are not as invested in the product.

Market changes like rising or fading trends, fierce competition, or unforeseen world events.

Financial missteps like poor management of funds, overreliance on external funding, and not enough revenue generated from the product.

And lastly, regulatory troubles due to non-compliance can be the straw that breaks the camel's back.

Hopefully after reading this, you have a better picture of what mistakes to avoid and what areas to focus on.

Most of the time we have to learn from our mistakes, but it is nice when we can learn from those of others so that we can save resources and reach our goals faster.

Thanks for reading.