12th September 2024
Stewart Goldsmith, Director LC Hampshire
In the realm of technology, few sectors have experienced as meteoric a rise as Software as a Service (SaaS). However, this sector is not without its difficulties and at Leonard Curtis we are starting to see a number of failures coming out of this fairly buoyant industry. We have recently been asked to advise companies that have developed video conferencing software, open banking applications and Artificial Intelligence software.
A SaaS company is a business that delivers software applications over the internet, typically on a subscription basis. Instead of customers installing the software on their own computers or servers, they access the software via the internet, usually through a web browser. SaaS companies host and maintain the software centrally, handling updates, security, and availability for their customers. It is a very attractive proposition, albeit usually over the long term it carries a premium, Microsoft 365 is a perfect example of this.
Examples of SaaS companies include Salesforce (CRM software), Dropbox (file hosting service), Slack (collaboration tool), and Zoom (video conferencing). These companies have allowed businesses to access these essential software solutions without the need for an expensive IT infrastructure or upfront costs associated with traditional software licensing. In the past it was not uncommon to see these software costs be paid via finance, adding an additional overhead to businesses.
The scalable, subscription-based revenue model coupled with the promise of solving business challenges has propelled the SaaS industry into the spotlight in recent years. This sector has been heavily supported by investment companies looking for the next big thing. However, amidst the success stories and unicorns, there lies a less glamorous reality, with some companies failing and becoming insolvent.
The SaaS landscape is both fertile ground and a minefield for startups and established players. While success can bring fantastic growth and valuation spikes, failure is a real possibility. Understanding the dynamics behind why SaaS companies might fail can provide valuable insights into this dynamic sector.
The illusion of endless growth
One of the primary drivers of SaaS company failures is the illusion of endless growth. We see that many startups enter the market with ambitious projections fueled by the success stories of industry giants. However, sustaining rapid growth over the long term is incredibly challenging, especially as competition intensifies as the rest of the market catches up.
Moreover, the subscription based nature of SaaS can create a false sense of security. While recurring revenue streams are desirable and with many startups awash with external investment, this can mask underlying issues such as high churn rates or the product not quite fitting the market. When growth/sale projections fail to materialise, investors may lose confidence, leading to a downward spiral of funding shortages and operational struggles.
Failure to adapt
Flexibility is essential in the fast paced world of SaaS. Companies that fail to adapt to changing market conditions risk being left behind. This inability to course correct can stem from various factors, including a stubborn adherence to an outdated business model, a lack of close control of the finances or a failure to continue to innovate.
The rapid evolution of technology means that what worked yesterday may not work tomorrow. SaaS companies must constantly reassess their plan, products, and market positioning to stay ahead of the curve. Those that are slow to embrace change risk being passed by more nimble competitors.
Poor customer retention and satisfaction
In the subscription based SaaS model, customer retention is paramount. It is not easy to find customers in a competitive market and high churn rates can quickly erode profitability and undermine long term viability. Failure to deliver on value, inadequate customer support, or a subpar user experience can all contribute to customer dissatisfaction and ultimately, a drop in users.
In an increasingly crowded marketplace, customers almost always have alternatives to choose from. Online reviews of software are key to today’s users and SaaS companies that fail to prioritise customer success and satisfaction risk losing to competitors who offer superior service and value.
Market saturation and consolidation
As the SaaS market matures, saturation becomes a growing concern. In crowded niches new entrants face an uphill battle in gaining traction and market share. Established players with deep pockets and extensive resources may employ aggressive tactics such as price undercutting or feature differentiation to maintain their dominance.
Additionally, market consolidation is common. We see larger players, such as Google, acquire smaller competitors to eliminate threats or gain access to complementary technologies. While consolidation can create opportunities for some, it can spell doom for others who find themselves swallowed up by larger entities or find themselves in competition to industry giants who are able to commit vast amounts of money to projects.
Conclusion: Navigating the SaaS minefield
The SaaS industry offers fantastic opportunities for innovation, growth, and profitability – as can be seen by the interest shown by investment firms. However, success is by no means guaranteed, and the path is fraught with challenges and pitfalls. We are seeing that this is a very difficult market to conquer and the ever changing landscape of technology means that these companies need to remain agile and adaptable to survive.
The failures that we have seen in this sector have been for a variety of reasons. The most common being the development of software, often funded by external investment, being released to the market and the sales/customers simply not being available. The ongoing costs of maintaining the software is not able to be covered from the revenue being generated. It is often at this point when the investors decide not to contribute any further funds and the cash reserves begin depleting due to the significant overheads usually being carried in these businesses.
Once we are appointed to assist a company in this position we look to realise the value within the software in the hope that this will bridge some of the gap to the creditors/investors within the business. Some of these assignments require an administration process which enables us to provide the company with breathing space whilst we undertake a marketing campaign to attract external interest in the software. As part of this work, we retain key employees and IT systems to keep the software live to enable demonstrations to take place. Using this strategy we have been successful in achieving sales of over half a dozen software applications in the last 12 months.
In some respects, we are finding that this exciting, high-tech sector is no different to any other, if directors do not pay close attention to the financial information they may find that when the business begins to show signs of distress, it may be too late to make changes.