The 4 Biggest Killers of SaaS Companies (Part 1: The Market)
Clearly there are thousands of reasons why start-ups fail but what I’ve tried to do here is abstract away specifics in order to come up with what I believe are the route causes of failure.
I don’t really talk specifically about personnel in these articles. One could argue that the *only* thing that matters is the capability of the team, and that if the founding team are good enough they’ll recognise any issues and have the wherewithal to fix them.
This is one of the reasons why early stage investors focus so heavily on the founding team, because at that stage in the businesses life they are really the only quantifiable and likely constant aspect. Everything else from the product to the market and the vision may well shift in pursuit of creating a viable business.
Finally, these 4 killers are based on my knowledge of working in enterprise SaaS. However, I’m pretty confident they apply to other types of software businesses as well.
So, here they are. My take on the four big killers of SaaS companies.
1. Bad / non-existent market (product discovery)
2. Blind faith in an idea (product discovery)
3. Lack of focus in execution (product delivery)
4. Speed of execution (product delivery)
You’ll see the four areas fit neatly across the two main pillars of strong product management, namely product discovery and product delivery. In each of the articles I’ll give some tips on successfully countering these killers based on good product management practice.
So lets dive in with the most important of all: The Market.
Killer #1 Bad / Non-Existent Market (product discovery)
The discussion on whether the team, product or market is the most important factor for success has raged on for years, but the fact is that it doesn’t matter how great the team is or how delightfully put together the product is, if there aren’t enough people around who want to buy it at a price that will sustain the business, you’re done.
Conversely it *is* possible to have a pretty crappy product and a team that makes every mistake under the sun and still have (some) success if the market pull is strong enough (although granted in these circumstances the company will struggle to capitalising on the opportunity and scale).
To succeed you need a sizeable market. The bigger the better. And I don’t just mean the financial size of the market. In my view you need *lots* of prospects because you’re going to churn through a tonne at the start of your journey. Even once you’ve got to product market fit and have figured out and optimised your sales funnel you are still only going to convert a percentage of prospects. Plus there’s competition etc etc.
If the business is seeking funding and therefor an exit event at some point in the future there will be a minimum market size required for investors to get the kind of returns they expect. For bootstrapped / life-style businesses the economics aren’t anywhere near as aggressive and it’s possible to create a great business around quite a specific niche (and still have a life changing exit at some point down the line).
Either way though, far too often founders fail to go through the rigour of proper product discovery before embarking on their start-up journey. This is usually because they have blind belief that their idea is going to be successful, but more on this later on.
Optimistic founders routinely over estimate both the size of the market (quoting huge figures for a market when in reality they’re going to be targeting a much smaller segment of that market), and the percentage of the market they’ll be able to grab.
It is much more likely that a company will be able to grab a tiny share of a massive market (and then potentially push out into other parts of it), than it will be able to acquire a massive share of a tiny market, especially if they want to / need to do that over a relatively short space of time (10 years).
Running through the total addressable market / total serviceable market / target market exercise helps but there is still scope for bias.
To assess the market, it’s worth doing both a top down and bottom up market analysis. What is the total market size, and how much of that do competitors currently own. How much space is left? Where is the market going and is there an opportunity for you to beat incumbents to that space or disrupt with a new business model.
Then go bottom up. Think about your likely ACV and what a _conservative_ estimate for sales growth might be. What do the best case and worst case scenarios looks like? Do the economics realistically add up?
Remember, your total serviceable market is actually made up of companies for whom the problem you are solving is a genuine pain point and likely a priority purchase. To really understand that, you need to go out and speak to customers. Early adopters can confuse matters here. I believe if you look hard enough for long enough you will always be able to find a small number of people willing to take a punt on your product. The challenge though is to ‘cross the chasm’ as is covered in Geoffrey Moore’s seminal book on the subject.
Proper market analysis is required on the number and profile of competitors (age, size, funding etc), how much of the market has already been captured, is the market growing etc. It’s also worth applying an analysis such as PESTEL (Political, Economic, Socio-cultural, Technological, Environmental, Legal) here. Where is the market going and what aspects of PESTEL might you be able to leverage in order to win.
Whilst your pricing model is likely to change a lot in the early years at least, getting some idea of what you are going to be able to charge from your competitors will again help you to model what the economics of the business are going to look like.
A note on competitors: It’s frustratingly common to hear “oh, we don’t have any competitors.”
This is nonsense. There are always competitors even if your competitor is Excel or a human doing the work. Even if you have a ‘blue ocean’ strategy [https://www.blueoceanstrategy.com/what-is-blue-ocean-strategy/] you’ll be competing against the status quo.
So to sum up, a start-up is doomed from the beginning if there isn’t a strong pull from a big enough market to sustain its growth at a speed all the stakeholders need from it.
Some of the most successful enterprise SaaS companies solved initially for a very specific niche within a massive market and then grew out from there. The business worked even for that niche, so when they were able to transition into the bigger pond they created a company with exceptional value.
Next up, I’ll talk about the second killer; Blind Belief.