Not Solving a Problem of Value

A SaaS product needs to fill a need, but not all needs are created equal. When creating a product, you should be sure people will be willing to pay for your solution.

It sounds obvious, but failing to fill a gap in the market or throwing resources at a problem that doesn’t exist is the most significant contributing factor to the number of failed startups.

You need to be positive that customers require your software, and one of the best ways to determine the viability of your offer is to use the MVP (Minimum Viable Product) approach. 

MVP is the most efficient development approach because you are not sinking vast amounts of funding into an untested hypothesis.

What are MVPs?

A Minimum Viable Product or MVP is a version of your software that releases with only the core features necessary to satisfy early adopters. We get to the MVP by first creating a prototype, which is a non-working visual representation of the product that gives clients an idea about the look and feel of their product.

Once a client is happy with the prototype, we start work on developing an MVP we can quickly get to market.

After the MVP has gone live, you start receiving and analysing feedback from the initial users and can start work on a roadmap for fleshing out your product with new features.

You would use the MVP approach when you are:

  • Not sure what features your customers need
  • You need feedback on whether an idea can work
  • You need to know how people will interact with your product

Here are a few more great reasons SaaS startups should adopt the MVP approach.

You Don’t Waste Time Developing Unnecessary Features

Every feature you add takes time to develop and test. Launching a product with just the core 20% of features means you can minimise your costs by starting with a smaller development team, using shorter testing cycles, and having a product that will be a lot more straightforward to use and support in the early stages of growth. 

Rapid Validation of Ideas

A common pain experienced by startups is how to quickly validate an idea while under the strain of a tight budget and deadline.

A MVP is the most cost-effective way to quickly validate your idea and get feedback from your early adopters so you can work out whether to continue with the project or walk away.

You may have heard of a few well-known businesses that used the MVP approach to scale their products. Companies like Amazon, Facebook, Buffer, Uber, Google and Dropbox all began with a core set of functions that were built on over the years.

Not Enough Cash Reserves

Cash flow is critical to your survival, so the faster you can get a product to market and creating cash flow, the less stress there will be on your finances.

It’s tempting to start throwing large amounts of cash at branding, marketing, and a big fancy office before the product proves itself. It’s no surprise that spending big on an unproven product is risky business and most often ends up causing severe cash flow problems. Many companies try to put the polish on too early and before they have managed to get the basics right. ​

For these reasons, cash flow challenges are the second biggest cause for SaaS startups to crash and burn before they have a chance to fly, but careful management of the budget can overcome many of the issues. 

​It’s challenging to accurately market a product that is nowhere near complete. It can also be frustrating for clients who sign up as early adopters and don’t get the features they were expecting because you dropped it partway through development. ​

The budget should mainly focus on road mapping, development, and design during the startup phase. You should start allocating funds to your marketing budget only when you have a viable product.

The point where you begin to market your product isn’t set in stone, but a good rule of thumb is to start getting the word out when you hit the 90% complete milestone.

How to Create Cash Flow for a SaaS Startup 

Work out your cash flow early on and determine how much you will need for each milestone, such as:

  • Seed round valuation
  • Beta testing
  • Pricing for early adopters
  • Product adjustments to fit the market
  • Additional investment for adding features
  • Marketing budget

You should also account for churn rates and use strategies to retain as many of your early customers as possible. Build in a cash reserve buffer for unexpected issues or develop product improvements.

Founders of startups are increasingly attracted to revenue-based financing due to its lower overall cost of acquisition and reduced risk compared to equity-based funding.

This type of financing is well-suited to the average SaaS that creates cash flow through monthly subscriptions. It’s relatively straightforward, as it uses multiples of the monthly revenue to determine the value of an investment.

For startups working through new customer acquisitions versus churn, revenue-based financing creates much less pressure than more traditional finance solutions. For this to work, you have to get up and running with a minimum viable product and get to market as quickly as possible.

Then build on this foundation.

Using the Wrong Pricing Structure

SaaS startups must not overestimate their early sales metrics. Churn rates can rise unexpectedly, as can the cost of supporting a flood of new customers that may not hang around for the long term.

Two key metrics are useful for avoiding the churn rate trap: the customer lifetime value (LTV) and Customer Acquisition cost. The lifetime value of a customer can be calculated with the following formula:

LTV = ARPC (Average Monthly Revenue Per Customer) / Churn Rate

Calculating customer acquisition cost is as follows:

CAC = Total monthly sales and marketing expenses / Number of new users for the month

Deciphering the results is pretty simple. If your CAC is higher than your LTV, your startup is on the way to becoming another failed statistic.

Plan for, but don’t stress too much about a high churn rate during the MVP stage. There will always be some churn with a SaaS product, but research shows that transitioning from an MVP to a mature product will quickly minimise its influence.

Growing from a startup operating from a fixed investment pool to a company with a stable income and healthy profit margins takes considerable planning. It’s critical you don’t underestimate your expenses or overestimate your initial revenue potential, as poor planning could quickly evaporate the initial funding source without the means to replace it.

Poor Management and Not the Right Team

The fourth biggest challenge for Saas startups is poor management and not putting the right team together. Almost one-quarter of SaaS startups cite issues with the team as a reason for failure.

Management needs to have a firm hand on the reins when determining the direction of the business and the evolution of the product. Researching the target market,  developing customer acquisition strategies, and executing growth tactics while dealing with the pressures of managing finite resources will be critical to the product’s strength. 

Development teams with some level of success behind them often make the mistake of hiring a management team that doesn’t understand the SaaS environment.

For example, a corporate marketer with experience at the helm of a tech company may be great for brand building, running trade shows, and communicating on social media. However, working well with a SaaS sales team to generate, nurture, and convert leads every month are more essential skills during the early stages.

An experienced co-founder can be a valuable resource when you are new to the business, but you must make sure they possess the same values and vision. Otherwise, there may be too much friction when determining the company’s direction.

When you hire new employees, it can be just as important as who you hire because they will tie up a significant portion of your available capital. Create a clear roadmap of when to bring on new hires to avoid straining your cash reserves too much.

One way to avoid a cash flow catastrophe when team building or if a co-founder is not possible is to take advantage of the resources of a company like Flying Donkey. If you are a funded startup in need of a team of developers, Flying Donkey has you covered with a wide range of development skills. We can also complement your existing team and add to your current skill sets.

Getting Out Competed

Almost one in five startups report getting out-competed as a reason for the company’s collapse.  You will often hear platitudes stating that you should disregard the competition and get on with the work. However, this ignores the fact that once your idea gets validation, it’s open to others who may decide to capitalise on your idea.

It’s not healthy to obsess over the competition, but neither is it a good idea to ignore them completely, especially considering getting out-competed is the reason for 20% of startup failures.

SaaS products are essentially code, so it doesn’t take long for copycats to start eating into your market share. Unfortunately, the nature of the SaaS industry means that it’s not a big deal for customers to switch services.

We only have to look at the ride-sharing service Uber to see an example of copycats in action, and how quickly others can capitalise on someone else’s original idea. Uber was not the first to enter the ride-sharing market, because it was actually a very popular category on Craigslist first.

Uber was not even the first to develop a dedicated app. That honour belongs to Sidecar, a San Francisco-based company. It’s likely that many Craigslist sections are the precursor to a lot of multi-billion SaaS products, including AirBnB, Grubhub, Upwork, and Phlatbed, to name just a few.

The point is, once your idea is out there, it’s very easy for others to quickly deploy their own similar service. So, if you are not meeting your customer’s expectations, you could be in trouble.

Copycats can increase your churn rate, but you can combat customer attrition by focusing on the basics and ensuring your software is intuitive and easy to use. Provide exceptional customer service and resolve complaints quickly. A bad reputation can spread fast and quickly run your SaaS startup into the ground.

Engage with your customers regularly through phone calls, surveys, social media, and emails. This will help you keep on top of flaws and add new features your client base has told you they need.

Getting a new product off the ground is exciting, and the temptation to throw everything you have at developing a fully fleshed-out product at the start can be overwhelming. The above challenges are interconnected, so a holistic approach to your business is the best path to success. Careful management of your resources, hiring only as needed, and looking after your customers are all essential to reaching your goals.