Launching a startup as an entrepreneur with an innovative product carries a high risk of failure, especially in the early years. To maximize your chances of success, this article outlines 3 common mistakes that cause startups and SaaS companies to fail.
You’ll then discover how to set up meticulous, relevant reporting to sustain and develop your company.
1- Startups fail for want of cash
The first common mistake made by startups and SaaS companies is to run into cash-flow problems. This is often due to a lack of management, indicators, or foresight. The absence of cash flow jeopardizes the long-term survival of these startups.
1.1 – Poor cash flow management
Startups often make the mistake of launching without worrying about cash. This can quickly compromise the new business. By definition, a startup takes several months to develop its product or service before it has even made a single sale. If the founders use up all the startup capital or the first fundraising without monitoring cash flow, they run the risk of not reaching the marketing phase.
1.2 – Poor forecasting of future financing
Insufficient funding can also lead a startup to failure if there is not enough forward planning. If founder neglects to forecast available cash resources for the coming weeks or months, they run the risk of burning through all their startup cash without realizing it. A lack of foresight into future needs prevents the founder from seeking new financing.
💡 The timing of your search for financing is crucial: if you launch your search too late, you run the risk of running out of cash in the middle of a fundraising campaign. In general, the average time for raising funds ranges from a few weeks for bank debt to several months for equity capital. Whether it’s a short-term bank loan or further fundraising, these methods of financing require time and effort.
1.3 - Poor cash burn management leads to startup failure
As we saw above, one of the mistakes many startups run into is that they simply don’t have the money. The budget for acquiring new business can be poorly controlled and spent too quickly. One common mistake is a lack of reporting, and a failure to track indicators such as the CAC payback period. This KPI measures the number of months of subscription required to cover the cost of acquiring new business. By closely monitoring this indicator, managers can control the cash flow allocated to what is generally the biggest expense item for startups: acquisition.
2 - Classic startup mistake: poor CAC monitoring
The growth period of a SaaS startup involves a time lag between the expenditure invested in acquiring new business and the inflow of sales revenue. The right strategy is therefore to monitor CAC (customer acquisition cost) closely and adjust the acquisition strategy when it is not bearing sufficient fruit.
2.1 – Poor oversight of CAC and performance indicators
Some startups fail because they don’t keep track of their CAC. Since expenses have to be paid before income can be received, failure to monitor CAC expenses can lead to failure.
2.2 - Poor ROI on acquisition expenditure
The founders of a SaaS or startup usually invest in a marketing, advertising, or sales budget to drive sales of their products or services. Calculating ROI (return on investment) enables us to verify the profitability of the money invested. The LTV/CAC ratio measures the total revenue expected from a customer (LTV) compared with its acquisition cost (CAC). A ratio of 3:1 is considered healthy and reflects a sustainable business model. Anything under 3:1 and the company may fail.
2.3 - A poor churn rate making CAC unprofitable
Sometimes, the rate at which users stop subscribing (attrition or churn) proves too high in relation to acquisition costs. And yet we must remember that it costs less to keep a customer than to win a new one. That’s why it’s vital to monitor retention using KPIs:
• Customer churn rate, which measures the rate of customer churn.
• MRR churn rate, which measures loss of revenue due to MRR churn and contraction. These two churn indicators enable you to promptly implement corrective measures (e.g. improving your product or offer).
• Net revenue retention rate, which measures your ability to generate growth on the basis of onboarded customers for a given period (including churn, expansion, and contraction but excluding acquisition). If this indicator is above 100%, you can absorb churn through expansion without needing to acquire new customers.
• LTV (customer lifetime value), which estimates the total average amount of revenue expected from a customer over their entire lifetime (from signature to departure).
• ARPA/ARPU (average revenue per account/user), which measures average sales per customer.
• Find out more about these two indicators and how they help you avoid common startup mistakes: All you need to know about ARPU and ARPA
💡 Article: How to calculate KPIs for SaaS companies?
3 – Startups fail due to the wrong business model
Besides the initial business idea, setting up an innovative company requires in-depth reflection on the envisaged business model. Unfortunately, many startups and SaaS companies fail due to an inadequate or poorly assessed business model. The main cause is sales that are too low in relation to operating costs.
3.1 - Poor fit of rates to market or competition
Financial difficulties can also arise from prices that are too low in relation to operating costs (we’ll come back to this in the next paragraph). Subscription prices that are too high compared with market competitors can also lead to product marketing failure. In this case, a SaaS is unable to attract enough customers to cover its costs. It is also more vulnerable, as competitors can easily take market share by offering more competitive rates.
3.2 - Excessive operating costs
A business model is also unsuitable if costs are too high. These lead to low or even negative profit margins. As we saw earlier, entrepreneurs need to keep a close eye on customer acquisition costs (CAC). However, operating costs should not be neglected. These include software development costs and the cost of recruiting new staff. To monitor the overall profitability of your business model, it’s important to regularly analyze EBITDA (earnings before interest, taxes, depreciation, and amortization). This indicator measures the gross profitability of the company’s operating cycle, irrespective of one-off events and investment and financing strategies.
4 - How detailed reporting can save your startup
Nearly 4 out of 10 traditional businesses (excluding sole proprietorships) disappear within five years of setting up according to Insee statistics published in April 2021. However, 20% of companies still in existence are experiencing difficulties. Startups and SaaS companies alike have every reason to set up appropriate management reporting systems.
4.1 - Prerequisites to launch a startup or SaaS business
Before setting up an innovative startup company, a business plan provides an opportunity to check economic viability and revise them if necessary. It’s also a way of looking beyond the pre-seed phase and outlining the growth stage and associated cash requirements.
4.2 - Immediate reporting based on business needs
All these causes of startup failure point to the importance of key performance indicators (KPIs). Steering an innovative or digital startup without a compass is risky business, all the more so at a time when economy is struggling and sources of funding are becoming increasingly scarce.
4.3 – The easy way to track the right metrics
The founders and managers of these companies often find it difficult to draw up this type of financial or business reporting themselves. This may be because of a lack of time, the complexity of the data sources, or a poor grasp of the KPIs. Fortunately, external solutions are available.
The failure rate of new businesses calls for serious thought about how to run your startup. At Fincome, we help young companies accelerate their growth by enabling them to capitalize on their own data, which is sometimes poorly exploited internally. Book a demo of how automated reporting helps you avoid common startup mistakes.
💡 Complete your reading with the following articles:
- How is a SaaS company valued?
- Top tips for communicating with SaaS investors
- Automated reporting for SaaS: a quick guide
- Investing in management tools: why is it a great idea?
- Why SaaS cohort analysis is essential for your SaaS