9 Signs a Startup Isn’t Going to Make It with SaaStr CEO Jason Lemkin

In a recent Workshop Wednesday, SaaStr Founder and CEO, Jason Lemkin sat down to discuss 9 signs a startup isn’t going to make it. We all know, we’re living in strange times.

• Top AI startups are growing 500% a year and exploding
• A lot of public leaders are struggling
• Some unicorns are doing incredibly well, while others have stalled and are growing at zero or close to it

Founders are struggling with how to deal with these changes, and VCs and executives are trying to decide if companies are worth joining, investing in, or sticking it out with. It’s nuanced.

So, let’s look at the nine signs a startup will likely not be a real success. As leaders, if you see yourself doing some of these things, maybe it’s time to stop it.

Sign #1: A Founder’s Understanding of Their Market Doesn’t Get Deeper Over Time

In the early days, people get excited about their market, but if the founder’s understanding of their market doesn’t get deeper over time, they simply won’t make it. A truly great founder understands the market so well that it’s shocking. They respect their competitors and can see where the market will be 3-4 years out.

Whether the founders have clarity on their market on day zero or they find it around a couple of million in revenue, you have to see their understanding improve over time. If you don’t see it, it’s a bad sign.

Sign #2: You’re Too Slow to Hire VPs

If you want to gauge momentum in a startup, see how quickly they hire VPs. The best leaders find a way. Is it easy to hire mercenary VPs when you’re growing 500%, or you’ve raised $100M? Sure. One thousand folks want to join you and think you’re great.

The best leadership finds a way even in slightly tougher times. Maybe it’s not five executive hires in one week, but a good rough rule of thumb is to see if they bring on at least 1-2 great additions to the team within 12 months.

If a year goes by and you haven’t seen one or two great folks join the company, that’s a sign of stress in the system.

Sign #3: You’re Too Slow in General

The best startups really do iterate more quickly. Imagine you have two competitors at a million in revenue. Both have crummy products, but they did something well because they have a million in revenue. They both seem cool, yet only one can push out 50% more software a quarter. Who’s going to win? The one who can iterate faster.

If you can build great software 50% faster than the competition in two years, that compounds. The fastest absolutely wins. Jason’s earliest investment had strong product market fit, but it took them four years to come out with their mobile app.

They eventually got to $100M in revenue but lost it because they were too slow. At the core of slowness is usually a not-truly-great engineering team. It can be hard to judge if you’re not technical and haven’t worked with great CTOs.

If you’re too slow, you’ll be eclipsed by the competition, no matter how well you can sell. How do you determine if you or another company are moving too slowly? Ask them, “What are you excited about on the roadmap in the next 6 months?” If they can’t answer in a nanosecond, they’re too slow.

Sign #4: Making Excuses for Misses Repeatedly

The number four biggest sign of a startup that won’t make it is excuses. Maybe this sounds obvious, but 90% of founders send excuses. Every investor update is the same excuse as the last one. You don’t need excuses.

A root cause analysis is great, and good founders have them. But the truly exceptional founders will have a root cause analysis with a solution. Maybe they made the wrong hire or entered the wrong market. That’s the cause. The solution is hiring the right person or relaunching next quarter.

The best founders own and fix their mistakes. They don’t hide behind excuses. When the excuses come out, confidence goes out the door. Excuses don’t create success.

Sign #5: Surprises

There should be no surprises in SaaS. That’s how CEOs get fired, and investors check out. You don’t have surprises in a recurring revenue model. Why? Because it’s recurring revenue. You may have a rough quarter, but let’s assume you have 80%, 90%, 100%, 110% NRR. That means most revenue in the short-term is in the bag because it’s recurring.

If you’re a CEO talking to customers and in deals, you know six months in advance when a major customer is churning, or a competitor is stealing a deal from you.

The worst is when a VP comes to a board or team meeting, and the quarter or month’s execution is nothing like what they presented. So many folks get caught in the trap of making stuff up or lying to cover up issues.

Do not hide from the news you know is coming. Telegraph it and get ahead of it. You likely won’t lose your job or respect if you do. The best already have a solution.

Sign #6: There’s a Slowdown in Transparency, Especially During Tougher Times

Something Jason sees up and down in the stack, from CEO to SDR, is a slowdown in transparency when things aren’t going so great. People stop sending updates, sharing metrics, or filling in dashboards.

The worst sign of a startup that’s not going to make it is failing to send an investor update on the first of the month. When things are great, the update arrives on the 1st or maybe even the 31st of the previous month because sharing good news is exciting.

But when growth slows and slows again, the emails start arriving on the 7th of the month or stop coming altogether. When a VC sees this, they immediately lose confidence in the founder.

In SaaS, we’re too small with too much change not to have transparency. You should have around 90% transparency with your investors and about 80% with your team. Startup folks can take bad news, but when the news stops coming, you know it’s a terrible sign.

Sign #7: A Lack of Deep Understanding of the Competitive Landscape

This is related to point number one. If you don’t see a deep understanding of the competitive landscape, it’s a bad sign. You can ask some trick questions to determine if you’ve got a good founder on your hands.

If they have a sales tool, say, “I saw Clay raised $50M. What do you think is going on there? Why is Clay blowing up while others are struggling?” They should be more curious than you are if they’re in the same industry.

You can ask other questions like:

*I saw Outreach came out with this feature. What do you think?**I noticed Datadog has 12 core products.*I can’t quite get the numbers right, but I heard Hubspot is doing over $600M in CRM.

These questions and prompts can encourage a thoughtful answer or a mediocre one. If it’s mediocre, they likely aren’t a great startup.

Sign #8: Manipulation and Sociopathic Behavior

If you’re on LinkedIn, you may see a million people saying they got fired because their CEO was a sociopath. The truth is that manipulative sociopaths are the minority. But you can come across them from time to time. When you do, run.

There are CEOs and founders out there who make stuff up and manipulate people. They appear confident and bold in the early days, but eventually, they manipulate everyone and cannot scale.

When the story doesn’t line up, or you catch a founder in an outright lie, that’s a sign that you’re dealing with someone you shouldn’t be.

Sign #9: You’re Unable to Get Burn Rate Under Control

This should be obvious, and there are a few different reasons a startup can’t get their burn rate under control. You might have a founder who once raised money and believes they’ll keep getting it.

Another issue is when a CEO doesn’t know what to do, especially in a high-churn model like SMB. In the early days, they were efficient because it’s self-serve with small deal sizes and sales cycles.

Then, they hire 20 or 50 reps, scale the marketing budget, and churn remains 3-6% per month. CEOs are in a pickle here. Burn goes up literally with the amount that they grow and they can’t solve the problem.

The third reason a CEO might not be able to control burnout is