Let’s get to the bottom of this. What are the top three traction challenges SaaS startups face when trying to raise money? You probably have a few ideas. And those might be linked to revenue, profitability, and mediums, perhaps. Are there others? Are there more?
According to a study by FinancesOnline on SaaS statistics, SaaS startup projections as a sector hint to “[...] reach a whopping $623 billion by the year 2023 at a compound annual growth rate of 18%.” One would estimate with those figures that it’d be worth paying keen attention to what’s happening with startups of this kind. Notably, in asking oneself: what are the top three traction challenges SaaS startups face?
Let’s go over those top three setbacks for SaaS startups in terms of traction now.
Let’s start with that first, however. For that, let’s work with the image of a tire able to get a grip on a road. We also call that traction. The term is used in the business scenario to speak of a startup’s ability to grow, however.
The growth of which we speak now is paramount. It can come from different metrics, and it need not always refer strictly to financial terms. That’s especially not the case during a startup’s initial days. However, regardless of how a company achieves traction, it’s one of the most vital aspects of starting a company - and keeping it running.
In McKinsey & Company’s words over a research article titled Grow fast or die slow, “in the software and online services industries, with their outsize returns on capital, we found that changes in top-line growth deliver twice the valuation gain that margin improvements make.”
What’s hopeful about it is that the right amount of traction will put a company on wheels to follow the metaphor above. It will allow funding, profitability, and overall success where it’s imaginable.
Traction is of particular importance to investors. A startup’s performance in this sense can be a crucial factor for a VC to decide towards funding a company or staying away from the risk at an early stage.
What matters, however, is some level of continued and projected realistic growth in this area for your business. Consistent growth that can be measurable, in percentiles, for example, can be limiting in securing funding throughout a startup’s rounds of investment.
On the one hand, a SaaS company might need a considerable number of users to start to convince an investor on funding. Other kinds of businesses might, instead, only need a select group of consumers to get a VC on their side. And, in the second scenario, the number of customers might not necessarily refer to people with actually purchased goods. An intent to buy might be enough.
For SaaS, however, conversion becomes vital as a part of valuable traction. But OK, now that our fundamentals are all out in the open, let’s go back to considering the question of what are the top three traction challenges SaaS startups face?
As going into a SaaS startup can be so easy and uncostly to do, many entrepreneurs dive headfirst into developing apps or the required technology for what they value as a perfect business opportunity.
Yet, that might be one of the costliest tolls SaaS can have on a business person. Failing to address a real problem for a specific target consumer base is one of the primary and most common reasons for startup failure.
Having apps or software to address particular needs and having a myriad of options in that sense can be a very comforting luxury in our tech-driven era. But failing to solve a problem that needs addressing can kill any new business right off the bat.
And going out to market to find there’s no real demand or need for the product that you just developed has got to be one of the main challenges SaaS startups are facing.
Don’t fall prey to this. On the contrary, run small tests on a sample group of users to see if there’s a need for your SaaS offer before you move on to anything else. Polish the offer, look for the more significant market need, and grow based on your consumer knowledge, competitor analysis, market research, and more.
As we described in length above, managing to grow is one of the main setbacks for SaaS startups in terms of traction. According to the McKinsey & Company study we cited above, “Of the nearly 3,000 companies that we studied, only 28 percent reached $100 million in annual revenues; 3 percent went on to log $1 billion in annual sales, and just 0.6 percent—17 companies in total—grew beyond $4 billion (Exhibit 3).”
So chances of achieving actual profitable growth are slim for a SaaS startup.
To cure your business of that, start by diligently studying your product-market fit. Take every possible measure to determine what your best offer and business model needs to be to serve a sizeable market.
And, if scaling can be hard, making that success a long-lasting event is also very difficult. That’s why sustaining growth is another significant setback for software as service startups.
For investors, moreover, sustainability is only one of three key considerations in analyzing a business opportunity with a given company. The other two are a sizeable market and a valid business model.
Focus on scaling your defined offer, then. And, once you do, make sure you’re ready to come up with a second offer to generate revenue. While we make these sound like a consecutive and quick follow-up to a first scaled product, it certainly isn’t.
Take your product and company cycles into account. Be aware of your threats, consistently study your opportunities, and let a SWOT analysis template, for instance, guide you in that direction if this is by any means unfamiliar to you or out of your constant range of vision.
If this article presents no concerns to you as a thriving SaaS startup, you might already find it more useful to make the best of your business presentation by following the lead of the best pitch deck examples from successful startups (Airbnb, Uber, Facebook.) Or even enhancing your startup pitch deck through professional slide design services.
Yet, if you’ve already managed to fund your SaaS company and need to give your investors an update, we congratulate you. And recommend what our CEO has written on SaaS investor updates. It’s an article on key metrics to include in your deck. Check it out!
This is a functional model you can use to create your own formulas and project your potential business growth. Instructions on how to use it are on the front page.