SaaS startups become immortal at this inflection point

By Ankur Tiwari | Updated on 21-08-2019

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SaaS (Software-as-a-service) startups have taken the world by storm. They are investors' favorite, media darlings and torch bearers of new age digital economy. Dig deeper and you will find that SaaS startups fail as much as they succeed. However if a SaaS team can reach to this inflection point, it inches closer to immortality!

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Resource: A model to design a high-impact SaaS growth strategy.

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A SaaS founder told me recently, "It was difficult but we enjoyed building it. With Version 1.0, we used product hunt, university contacts and references to find early users. Some of them are even paying. We iterated and improved the product. It seems that we have product-market fit, but where is the money? MRR is not enough to cover expenses and big VC money is still not here, they want more sales. Each one of us are handling multiple things from product to customer service but competitors are sprinting ahead."

SaaS (Software-as-a-service) startups have taken the world by storm. They are investors' favorite, media darlings and torch bearers of new age digital economy. Some of the most celebrated startups of this century are SaaS, from salesforce.com to slack.com. With low barrier to entry, more and more SaaS products are being built all over the world. All you need is a computer, internet connection and a team of coders (or maybe just one, You). Lack of Adam smith's factors of production is no longer a worry.

Sounds perfect! only from a distance. Dig deeper and you will find that SaaS startups fail as much as they succeed. And more often than not, founders can sense the failure from 6 - 8 months away. Key reasons for failure for SaaS startups are:

1. Product-Market misfit : Essentially it should be market-product misfit, as market need and desires come first.
2. Poor Sales: Usually people start SaaS companies because they love to build things. They never really thought about how will it be sold. Really, I mean it!
3. High Churn: This could be due to problems in the products, bad customer service or a new better competitor among many other factors.

A survey conducted by hubspot of SaaS companies revealed that more than 50% of them have ARR less than $2.5M. Consider the averages and a monthly recurring revenue of $100k will not be able to pay for the servers, techies, customer acquisition costs and customer service. Another survey mentions that "If a SaaS company grows at 20% , it has 92% chance of ceasing to exist within 12 months".

Though it takes a lot of efforts and almost all the energy of founding team in taking the company from $0 to $1-$2M in ARR, reality is, even at this stage, SaaS model is not viable. At this stage, a company does not have to commit a mistake to die, just stay there or grow slow, and it will die.

At this stage you are still figuring out product-market fit and paying customers (paying what? $50 per month?) have real problems, sending you mails after mails. Founders who have been jack of all trades till now, suddenly find themselves out of bandwidth. Newly hired sales team is taking time to ramp up. A number of similar products without any clear differentiation are available everywhere. This is so overwhelming that it seems forever before you can have a real company.

No wonder that usually VC money comes only after a SaaS startup reaches $10M or beyond. Time and time again it is seen that those companies which have crossed the magic number of $10M ARR, went on to live longer. This is the inflection point for SaaS startups. Sadly, most die before reaching here.

What happens at $10M and beyond?

If you can sail your ship in right direction and pass through the storm, an immortal company awaits you at $10M. Your product has improved significantly, lead generation and sales process has been setup and working optimally, you have extra hands to take care of problems and VCs suddenly become interested in knowing more about you. Oh yes!

Journey to $10M ARR is filled with challenges and seems impossible when you are working hard to make the ends meet. But it is possible. Not by acts of HOPE marketing, doing random things and hoping for new high quality clients. But by a proven scientific method to predictably grow SaaS business.

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