SaaS stands for Software as a Service. This software delivery model is an alternative to the traditional software purchase, where you install and manage the software on your servers. In SaaS, the vendor hosts and manages the software and charges you a recurring fee for uses.
The SaaS model has become increasingly popular in recent years, led by companies like Salesforce.com.
Why Start a SaaS Company?
The SaaS business model is more accessible to start than selling packaged software because it’s less capital intensive.
You don’t need to buy or build servers or hire a software development team. Instead, you can focus on building and delivering a great product.
There are no upfront costs to starting a SaaS company, just the recurring monthly charges from your customers.
You only get paid for actual usage, unlike packaged software where the customer pays for the perpetual right to use it forever, even if they never do.
If you start a SaaS company, you are more likely to keep your costs low by outsourcing some of the work.
For example, you could find an offshore team of developers to build your application for far less than hiring a local group would cost.
SaaS is also more forgiving than starting a packaged software business since it doesn’t require capital investment.
The Drawbacks of Starting a SaaS Company:
It’s not all rosy in the SaaS world, however. While SaaS is more straightforward to start than packaged software, it’s also harder to scale.
You can handle a limited amount of customers before you have to hire a full-time team to help you support them. And at some point, you may run into an issue where your customer base has grown so large that it becomes hard to manage efficiently.
Many SaaS companies grow fast and get acquired by larger companies, but this isn’t always the case. There are plenty of examples of companies that grew too slowly or could not deliver a top-notch experience for their customers and went out of business.
SaaS is very competitive, with hundreds of new companies launching every year and most failing soon after the launch. So while you will almost certainly be able to find customers for your product if it solves a real problem for them, getting good enough at marketing and sales so that you can compete with all the other similar products on the market is very hard for most startups in this space.
The Top 5 Challenges for Starting a Successful SaaS Company:
The key to becoming a successful SaaS company is understanding and overcoming the top five challenges, you will face as you start your company.
When you are first getting started, most of your SaaS company’s ideas will come from you or your co-founders.
Your team will be full of people who have a background in the problem space that your product is trying to solve. You will have been thinking about this problem for years and have built prototypes, customer surveys, market research studies, and other tests to validate your idea. You will have much experience solving this problem and know exactly what the customers want.
However, you will also be biased towards your solution. This is why it’s essential to get feedback from outside sources such as customer interviews, A/B tests, focus groups, etc. You need to find out if the market really wants what you are building before spending time building it!
If you don’t spend time validating the problem you are solving by testing real customers in the market, then there’s a good chance that no one will ever buy your product. And if no one buys it, then there is no way for you to make money with it (do not pass go, do not collect $200).
If your solution does not solve a real pain point for your customers and help them make more money or save more time, don’t waste your time or money building it. Move on to the next idea.
Before you start a SaaS company, you need to make sure that you can actually execute on it. If you can’t get your product out the door, don’t even think about starting a company. It’s too risky and too difficult to overcome.
You will need to build a prototype of your SaaS application quickly and get it in front of potential customers as soon as possible (preferably within the first month or two).
You will need to iterate quickly based on customer feedback and continue improving your product based on what they want.
This means that you need a nimble development team and can move fast without getting bogged down by bureaucracy or organizational processes.
It will also mean that you have the skills needed for managing an offshore team of developers if this is what makes sense for your business model (more on this in another article).
You may also have other challenges related to execution than building the product itself, such as:
Building a strong sales funnel for SaaS products is hard, especially for startups with little or no money to spend on marketing.
Customer acquisition is expensive and difficult for SaaS startups without a large budget.
Marketing your SaaS product can be difficult if you are building a new niche category product. This is the case because it’s hard to get in front of customers with your message if they don’t already know who you are or what problem you are solving.
Scaling a SaaS company is difficult because many moving parts are involved in delivering great service to customers and managing the business.
You need to make sure that you have the right team in place to make this happen. Otherwise, things will quickly go off the rails, and your company will fail.
You might need to hire salespeople if your product requires lots of sales support or ongoing customer support.
You will also need people to manage your accounts payable and account receivable workflows to not run into cash flow problems as you scale up rapidly (it happens more often than not).
If you need an experienced CFO, then you should start looking for one before things get out of hand. It would help if you were thinking about scaling your company as soon as you start.
You will also need to make sure that you have the right infrastructure in place to support your SaaS product. This includes things like:
Up-to-date servers and software that can handle a large amount of traffic without costing too much.
A good billing system for managing recurring revenue from customers and collecting money from them regularly.
A good customer support system to handle incoming requests quickly and efficiently.
You should also be able to keep track of each customer’s customer lifetime value so that you know which ones are worth spending more time on and which ones you can ignore (more on this in another article).
Efficiency in your marketing and sales processes so that you can spend as little money as possible while still acquiring customers at a rate that will allow you to grow profitably.
This means minimizing the amount of time it takes your sales team to close deals, keeping expenses low, automating repetitive tasks, etc. You should always try to get the most out of every dollar spent on sales and marketing! If you don’t, then someone else will.
And they’ll probably be spending less than you are! That means that they will be able to acquire more customers than you can.
And if they can acquire more customers, they can scale faster than you and take market share. That will put you out of business.
Spending money on your company as it starts up is always a challenge, especially if you don’t have much in the bank.
It would help if you made sure that every dollar spent adds value to your company and helps it grow fast enough so that it doesn’t fail. If this is not the case, then don’t spend money on anything until you get enough cash in the bank to pay for it!
There are two ways to spend money on your company: the right way and the wrong way.
The wrong way is when someone else spends money on behalf of your company without getting approval from anyone (especially if they are spending someone else’s money).
This could be a co-founder spending their own savings or personal credit card, or an employee who is buying something for the office using their own bank account or credit card without getting approval from management first. This type of spending is OK sometimes, but not all of the time!
If this is happening, then it’s a sign that someone is careless or reckless with the company’s money. This can lead to bankruptcy and ruin your company.
The right way to spend money on your company is to have a budget in place for a specific purpose, and someone spends money by the budget.
If you don’t have a budget, you will waste your money on things that don’t increase your company’s value enough to warrant spending the money. That means you should create a budget as soon as possible and start tracking cash flow to have some oversight over how much is coming into and going out of your bank account (and make sure that expenses are always under budget!).
Forecasting sales is difficult because SaaS companies sell their products over time to customers.
How do you predict how many customers will buy your product based on sales volume from previous months?
It’s easy if sales are growing steadily month-over-month, but what about when they fluctuate? Or if sales are trending down? This can make it nearly impossible to forecast future sales volumes with any certainty.
You need to forecast future sales to make decisions about hiring new employees or outsourcing work to an offshore company.
You need to know how many people you need on your sales team and what skills they will need. It would help if you also forecasted your future cash flow to make sure that you have enough money in the bank to pay for salaries and expenses.
It would help if you spent some time forecasting sales while getting your product ready to launch.
This way, you’ll get a better idea of how potential customers will react when they see your product for the first time.
Once you start getting real customers who are willing to pay for your product, it’ll be easier to forecast future sales volumes. Forecasting is an art form and takes some practice, but with experience, it will get easier.
One final note: don’t let these challenges stop you from starting a company! The key is preparation and knowing what problems you will encounter as a startup founder.
If you go into things with the right mindset and plan, then most of these challenges become easy to overcome!
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces, and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.