In researching failure rates for Software as a Service companies, I kept coming across this one startling statistic:
"SaaS startups fail at a rate of 90 percent within the first five years."
"Wow," I thought. "Great stat to illustrate the need to carefully vet prospective SaaS providers using the Vendor Risk Assessments I perform for small businesses looking to select new software."
So, performing my due diligence, I dutifully searched online and prompted AI tools for the source of this statistic I kept seeing on SaaS-related websites. I came up empty. Nor could I find the source for another stat that I found citing SaaS failure rates at 70 percent in the first 5 years.
Google's Gemini AI stated, "The exact origin of the '90% of SaaS startups fail' statistic is difficult to pinpoint. It's a widely repeated figure, but often cited without a direct source."
Then, reading the various references to those statistics -- "studies", "some studies", "reports" -- I remembered something about statistics that leads us to poor decisions ...
Absent an actual study, beware of data that has been extrapolated into fuzzy educated guesses.
Rather than a specific study of SaaS closure rates, the 90 percent number for SaaS firms was a mere guess from a general rule of 90 percent failure within the first 5 years of ALL businesses across ALL industries.
This kind of extrapolation happens a lot when people try to justify a decision or have a product or service to sell and feel the need to come up with a big, scary, hairy number to do it. It reminds us, once again, of the importance of obtaining authoritative information and statistics to base business decisions on.
The question then becomes whether or not SaaS company attrition mirrors that of other industries that make up that 90 percent failure figure. SaaS would share some of the same advantages and disadvantages of other industries such as IT, but they fared much better during the pandemic than other industries due to the massive migration to online software during COVID.
I eventually found a Crunchbase report that tracks SaaS company closings. It showed 3,432 closings among the 34,000 SaaS companies it tracks since February 2023. Again, that's a better number but I still have to extrapolate that maybe 10 percent of SaaS companies have closed in the past two years.
So, my conclusion after this exercise is that SaaS companies do fail and the impact on your business could be devastating. Whether it's 90 percent, 70 percent, some other percentage, or the old standard, the 80-20 rule, before you sign up, you need to check any critical SaaS provider's financial health as best you can (financials for smaller, non-public companies can be a challenge to obtain).
You don't want to sign up with a failing SaaS provider and have to go through the selection process all over again with all of the entanglements, including data conversion, that come with such a migration.
You can download a copy of my e-Book on performing due diligence on SaaS providers or request an online meeting.