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Over the last decade, software-as-a-service (SaaS) has exploded as companies have flocked to subscription and cloud-based services for their software needs. While the growth of the SaaS market has lowered barriers to entry, it has also created opportunities for entry. This presents a double-edged sword: the SaaS sector provides you the opportunity of founding a lucrative company but it also poses the threat of that company failing. Failures are all too common in the industry and you can’t afford to make mistakes that can sink your company. Here are a few of the most frequent financial fails that SaaS startups commit.

5 SaaS Startup Fails You Can Avoid  

1. Cash Flow

When launching a product, you want to make a splash. But making a splash comes at a cost, which can include overspending on branding, marketing, offices, and other expenses. These types of overspends lead to cash flow problems for SaaS startups. The biggest splash you can make is with a good product. As a result, your money is best spent on product development and design until you have a viable product. 

Beyond this early phase, managing cash flow is important so that you don’t run out of money. This requires sound accounting practices and planning, including adequately forecasting cash flow needs for each stage of growth. Keeping track of costs should be straightforward and accurate. But projecting sales is where companies can be inaccurate and fail to bring in the revenue necessary to keep operations running. Make sure to maintain accurate financial projections.

2. Having More Churn Than Growth

In a subscription-based industry, churn rate is a key metric: it is the attrition rate or the number of customers you are losing. In SaaS, this means customers who either cancel or do not renew their subscription. Churn will be inevitable no matter how good your product is – customer wants and needs change over time and you can’t always respond to them. But when churn is higher than growth, your company is failing. 

Plan for some churn and don’t underestimate it. But focus on keeping your churn rate low by improving your product(s) and services(s) to retain as many customers as you can. You can also assess your pricing model and the competitive market to make sure you’re not overcharging.

3. Your Product Isn’t Market Ready When you Go to Market

Building a successful SaaS company involves having a viable and workable product that has a market. Basically, there must be a market need and your product must address that need. Even if you have a great pricing structure your product can be sunk by poor user experience, technical issues, lack of customer support and documentation if your product has a learning curve, and so on. If you try to book demos or close deals for products that aren’t quite ready, you can expect low adoption rates, high customer acquisition costs, and high churn rates. 

The old adage that you never get a second chance to make a first impression stands. The customers who don’t adopt or are part of the churn may not come back even after you’ve worked out the glitches, given that SaaS is a competitive space and they will have moved on to your competitors. Ultimately, you need to do product testing, fix bugs, and make sure you have an intuitive and user-friendly product before you go to market.

4. Not Having the Right Pricing Structure

Pricing is one of the first things that customers will look at, which means it has a major impact on your viability. Despite this, SaaS companies spend surprisingly little time considering their pricing structure. Pricing is difficult to establish given you need to navigate your customers’ need for an affordable price and your need to generate revenue. Put differently, if you undercharge you’ll have happy customers but won’t turn a profit and will likely go bankrupt; if you overcharge, you’ll have a price structure that would make you profitable but there are no customers willing to pay the price. 

Obviously, there are no set rules to navigate this problem and it will depend on the product you have to offer, competing products, and the existing market. But the point is you need to devote time and effort to develop a reasonable pricing structure; this includes reassessing your pricing as your business grows, achieves new milestones, and moves through various phases.

5. Marketing Spend

Because marketing involves a trial and error process, overspending in initial marketing efforts is a major reason. Marketing involves knowing the market for your product, which can involve trial and error. Before you start spending on marketing efforts, you need to define your target audience, your goals, and your key performance indicators so that you aren’t blowing the budget at the start of your marketing efforts. Be sure to conduct market analysis and have a set marketing strategy before you begin. This will help you to maximize ad spend through targeted efforts, rather than the old spray and pray approach to marketing. Similarly, it is possible to underspend or not assign an adequate marketing budget when first launching. Finally, once you have your marketing up and running, you need to conduct marketing audits to see where your efforts are or are not working to better allocate your money and effort.

NOVAA’s Fractional CFO Services for SaaS Startups

Poor management is another fail for SaaS startups. Many of the above fails can be avoided simply with an experienced management team, including a CFO who can assess the financial status of your company, offer ways of improving operations, and check to see that everyone follows and tracks these improvements.

NOVAA offers experienced fractional CFO services for SaaS companies to chart out a path to growth and profitability while avoiding the common SaaS startup fails mentioned above. For our fractional CFO clients, we have a 10 step growth strategy that plots out the full development of your company. Using the latest analytics software, we sit down with you to look at Key Performance Indicators (KPIs) and historical data in relation to your business goals and industry standards to see if you’re accomplishing the necessary goals to become a profitable company. We also evaluate the effectiveness of KPIs as your business grows and continuously analyze them to implement necessary changes in your business operations and evaluation metrics. We also conduct cash flow planning for 6 or 9-month periods at a time so that you can keep your company operating or plan financing rounds and loans to fill in the gaps for any shortfalls. Finally, we conduct quarterly audits to see whether your company is meeting its goals, as well as discovering where goals or operations need to be tweaked.

For more information on our CFO services and how we can help your SaaS startup, book a consultation.

One of the first benchmarks for any business is reaching its break-even point. The break-even point is when you’re in a no profit, no loss situation. But you’ll encounter many obstacles on your road to break-even, particularly in competitive industries like software-as-a-service (SaaS). SaaS companies often face a long road to get to break-even. This can be achieved if you focus on three basic factors necessary to get you to SaaS profitability.  

Estimating Costs and Revenue

Finding your break-even point requires estimating your costs and revenues. When making financial estimates, you need to be accurate as underestimating costs or overestimating revenues can lead to shortfalls.

Costs will, of course, depend on the specifics of your business. But here are some basics to start with:

  • Rent
  • Utilities
  • Payroll
  • Infrastructure, including: hosting; website design, development and maintenance; marketing

Figuring out the individual costs for each of these and adding them up gives you your basic costs.

Next, you’ll need to determine your pricing structure. Obviously, the structure will vary depending on industry and you’ll need to consider standards and competitors in your SaaS sector. In doing so, you also need to strike a balance between what will make you money and will not dissuade your potential customers from subscribing.

Finally, estimate your revenue. This will be based on projected monthly recurring revenue, or sometimes annual recurring revenue, and the rate of acquiring new customers. Once again, you need to be accurate and reasonable here. If you project a certain amount of revenue based on an estimated client base, this has to be realistic and you have to have a plan to acquire that many customers – all while also accounting for the costs of doing so.

Keeping an Eye on Churn Rate

When you are starting out, your customer base should experience growth well above your churn rate. But as your customer growth increases, your churn rate will do the same. The problem arises when your customer acquisition and churn rates are equal – that is, when you’re losing as many existing customers as you are acquiring new ones. The good news is that you have time to account for this, as there is a bit of a lag as the churn rate gets closer to the rate of customer acquisition.

The immediate thing to consider is whether you need to re-evaluate your pricing model. If it’s too high, it could be driving clients away. Of course, pricing isn’t the only cause of churn. You need to analyze other elements of customer satisfaction, including customer service, satisfaction with your product, etc. On the flip side, you should consider whether you are being active enough in trying to acquire new customers. This involves putting more revenue into advertising, marketing and sales.   

Understanding Customer Acquisition Cost

The problem with trying to acquire new customers is that it can come at a cost. This is why it’s important to consider your customer acquisition cost (CAC) – the amount of money you put into marketing, advertising, sales, and other avenues to acquire leads and convert them to customers. Calculating this is important. Customer acquisition can look great on its own but if your churn rate and CAC are high, you aren’t getting close to your break-even point let alone making a profit, which can deter investors. Ultimately, you need to calculate your CAC and the lifetime customer value (LTV).

While a textbook response might suggest that your LTV to CAC ratio should be higher than 3:1, this isn’t always the case at every stage of your growth process. In fact, your initial CAC costs may be extremely high, but this can be worth it if you are trying to establish your brand by acquiring high value customers so that others will follow. Netting a customer who can directly or indirectly influence others to become customers may be extremely expensive on its own, but the cost of the single customer is worth the extra customers who come along because of name recognition. Likewise, you need to consider other factors, like the total value and duration of the contract. While in some SaaS fields, contracts may be relatively small (e.g. $50 per month for basic software) in others they could be significantly higher value and duration (e.g. $50,000 per year for cybersecurity software). Higher value and duration can often justify a higher CAC.

NOVAA’s Fractional CFO Services for Forecasting SaaS Startup Profitability

SaaS companies often try to reach break-even or hit profitability on their own and only seek professional advice when they struggle. This can involve processes of trial and error around estimating costs and revenues, pricing, and monitoring important analytics such as churn rates and customer acquisition costs. Accurately forecasting your company’s road to break-even, and analyzing your performance along the way, requires experienced professionals in the Chief Financial Officer (CFO) role.

NOVAA offers fractional CFO services for SaaS companies at all levels, from startups to established companies in the field. Our goal is to help you not only break-even but turn into a profitable SaaS company. In this role, we view ourselves as part of your team, taking a hands-on approach in working with you to accurately forecast expected costs and revenue months or years into the future. To do this, we utilize advanced business intelligence software to provide accurate metrics to help you determine what is and isn’t working. This begins with assessing your pricing model, in relation to your margins and industry standards. 

But pricing models aren’t the only thing that can help your company. We also analyze other key performance indicators and projections, including churn rates and CAC, with an emphasis on isolating variances and why they occur, as well as seeing your performance indicators in relation to other companies in the industry. These can help to assess your overall operation to see what other costs can be brought down to aid in your growth to break-even and profitability.

For more information on NOVAA’s fractional CFO services or how to determine the break-even point for your SaaS company, book a consultation.

Early phase SaaS startups face a number of decisions in their drive for growth and profitability. One of the biggest decisions relates to executive hiring. No matter how young the start-up, you need a Chief Financial Officer (CFO). CFOs are key players in the success of a business, overseeing day-to-day financial matters as well as taking on the long-term assessment of key performance indicators and planning related to growth. But companies with less than $5 million in annual revenue often don’t need a full-time CFO. Their CFO needs are limited to signing off on cheques or preparing for a funding round, after which the CFO needs will decrease. Given the limited duties and that a base salary can start at $200,000, hiring a full-time CFO is burning money that could be better spent elsewhere.

It’s because of this that many SaaS startups are turning to fractional CFOs. Fractional CFOs are outsourced, part-time CFOs, whether individuals or firms. They are hired only for the number of hours required to carry out these early phase CFO duties, which may be as little as 10 hours a week or even a month. This helps to cut down on costs, while laying the groundwork for growth until you need to hire a full-time CFO. A fractional CFO obviously helps you to save money. But who should hire a fractional CFO and what benefits will they bring, aside from costs?

Who Should Consider a Fractional CFO and When Should They Hire One?

  • Startups in the seed funding stage
  • Startups going through Series A, B, or C funding rounds

At the Seed and Series A to C fundraising rounds, a fractional CFO is ideal for SaaS startups. At these early phases, the CFO’s job will be limited and hiring a fractional CFO allows you to bring someone on with the expertise to do the job, while avoiding paying them a full-time salary that is unnecessary. The cost- and time-savings can then be better allocated towards other strategic and growth areas. That said, as you progress in funding rounds and your company grows, interactions with your CFO become more regular. As a result, at the D series or higher you will generally need to hire a full-time CFO.

To successfully carry out fundraising rounds, you need to have all of your financials and projections in place. The CFO’s duties include creating a financial plan based on modelling and tracking key performance indicators, as well as building relationships with potential investors. If you’re going to hire a fractional CFO, you should hire them at least three months before a fundraising round. This will give them time to have everything in place so that you can meet your fundraising goals.

4 Benefits of Hiring a Fractional CFO

1. Cost Saving

The biggest reason start-ups fail is that they run out of cash. Hiring a fractional CFO is an obvious cost-saver. You’re paying for the hours you need, rather than paying a costly full-time salary. But beyond this, a fractional CFO also helps to save you the costs of an intensive job search. Instead of looking for a single person with vast expertise in numerous roles, which involves a recruitment firm and a lengthy search process, you can bring in a firm or individual with an established record in the early phases that you are in. Likewise, you have the flexibility to increase or decrease the hours you are paying for as your business needs change.

2. Experience

Of course, while you want to avoid unnecessary costs, you also want to have the best, most experienced support possible. Fractional CFOs, particularly when the role is filled by firms, provide you with precisely this sort of support and experience. They have entire teams behind them, with expertise in different areas, including accounting, bookkeeping, and taxes. These are often areas that a single individual, even while working full-time, doesn’t have covered. 

3. Flexibility

Because firms have full-time teams, when you contract out fractional CFO duties, their teams have the flexibility to ramp up or ramp down work in specific areas according to your needs. Basically, you have a team of experts read to meet your needs, based on the required hours, as they arise.

4. Outside Perspective

At the same time, when you hire an experienced fractional CFO, you’re getting someone with a record of helping startups in diverse fields, which can bring different perspectives and new connections to your company. In terms of different perspectives, a fractional CFO brings best practices and diverse-market knowledge to the table, which leads to a solid business model. In terms of connections, it’s often said that tech success is based as much on who you know as what you know. Fractional CFOs can open your company up to new business connections and investors. Moreover, if your fractional CFO has these types of connections and a successful record, it brings greater credibility to your company.

NOVAA: A Full Suite CFO That Is an Extension of Your Team

Given the importance of a CFO, the idea of hiring a fractional CFO may give you pause, as you worry about how much value they are going to bring as an outside consultant who isn’t invested in your company beyond the part-time work they do for you. Likewise, fractional CFO services often focus only on CFO responsibilities and rely on other companies for basic tasks like bookkeeping or tax services. As a result, in addition to the CFO’s part-time salary, you’re also paying for outside services.

At NOVAA, we view ourselves as an extension of your team, not as an external consultant. This means always making time for you and being fully invested in helping you to achieve your business goals. We embrace technology and build skills that best fit your evolving needs and provide full suite support backed by an experienced team of professionals with expertise across the CFO spectrum of needs.

Technology Forward

Our full suite approach begins with a technology forward perspective. We use Fathom’s cutting edge financial reporting tools to fully integrate all of your technology systems. The purpose in doing so is to allow your different software solutions, from billing to accounting to payroll and beyond, to talk to each other and harmonize operations. Because every business’s goals are different, we then customize your dashboards and analytics reports to match your business objectives. One of the great things about Fathom is that, in addition to integrating with virtually any software platform, it’s analytics come in easy to digest graphic representations that better allow you to see how your company is performing.

Experienced Professionals

Additionally, we have a full suite team of experienced professionals to cover all your areas of need. This solves major problems that can arise with a standard fractional CFO. To begin with, contracting out services that are below the CFO’s job description puts data into other people’s hands. We want to control data so that we have the most accurate data possible to measure key performance indicators. For these purposes, we have a team of professionals and strategic partners that cover the full spectrum of financial tasks, including accounting and bookkeeping. Historically, CFOs have limited knowledge in tax and tax planning, which results in them having to hire tax people to complete important tasks. Taxes are one of our specialities, which means that the task remains in our experienced hands without additional costs.

Working With NOVAA

CFOs are integral to the success of any business. SaaS startups need a CFO to help manage day-to-day operations and provide expertise for fundraising, but a full-time CFO isn’t always necessary. For Seed and Series A-C level SaaS startups, a fractional CFO can help to keep costs down, while still providing levels of expertise that a full-time CFO doesn’t have. NOVAA offers full-suite fractional CFO services that operate as an extension of your team and provide the expertise and support that you need to grow your business. For more information on our CFO services, don’t hesitate to contact us.