How to Properly Insure Your SaaS Startup to Win Deals and Protect Your Company
Learn about primary risks SaaS startups face and how to protect your company with risk management best practices.
SaaS has been, and will continue to be, hot. And as a startup founder, you've pursued this quickly expanding business model for a reason: 99% of companies use at least one SaaS solution and the market has more than doubled since 2017, reaching $94.9 billion. You have a great opportunity ahead of you, but with great reward comes risk. According to a report by McKinsey & Company, the failure rate of SaaS startups is higher compared to other technology sectors, with over 90% failing. But, this is not a message of doom and gloom; rather, it illustrates the reality that the stability of SaaS startups can be precarious.
A SaaS startup may fail due to its business model or marketing mistakes, but oftentimes the startup has neglected to protect against the primary risks it faces. Crises can, and will, happen. Imagine one of these scenarios:
- During a system integration or migration, hundreds of records are lost resulting in substantial costs to your client.
- An outage or service disruption on your startup’s end causes several of your clients to lose hundreds of thousands of dollars in the time it takes to get your service operation again.
- A breach to your system exposes protected personal information in clients’ records.
- Or, a competitor claims that your software contains elements identical to their own and sues for IP infringement. These are all examples where the startup could be decimated without risk management and protection in place.
Yet, an alarming number of SaaS startups lack adequate insurance to protect themselves from exposures. While this may seem surprising, we get it. As a startup founder, you have numerous responsibilities and your technology and funding are probably higher on your priority list. This is likely why an early study of ours at Vouch found very few first-time founders bought insurance at company formation. However, for those who have been around a time or two, and have experience with the imminent contractual obligations requiring insurance, or who have been through litigation themselves, or understand the importance of mitigating risk of unforeseen loss, insurance is a given. And perhaps that’s why that zero increases to 65% of second-time startup founders who purchase insurance at formation.
Experience isn’t the only reason. The rising cost of premiums can dissuade startups from pursuing insurance. And many traditional insurance carriers will not underwrite tech startups—or fail to underwrite them appropriately. But with insurance, it can be difficult to know where to start. And without the right insurance in place, you could be missing out on deals. In this guide, we break down which risks SaaS startups should watch out for, how insurance may change as your startup scales and what to look for in an advisor to help you throughout the process.
Securing insurance to win deals
VCs love SaaS startups. A well-managed SaaS company is scalable, predictable and easily accessible to customers. Thus, SaaS funding has grown seven times over the last 10 years. To win deals, your SaaS startup needs specific insurance so that investors have confidence your startup will be protected from potential losses while minimizing risks. From a competitive standpoint, it can make you look like a more “attractive” investment option because it proves to investors that you recognize the importance of managing risk effectively.
In some cases, insurance is even a requirement to secure external funding. For example, an investor may require a D&O policy to protect his or her personal assets when having a seat on the board of directors. Or a third-party might require a cyber policy in a contract to provide added security.
In short, to set your SaaS startup for success and win deals, insurance is a necessity. But, keep in mind that it’s not just about having insurance, but the right insurance.
Start with risk management
When pursuing insurance, a helpful place to start is pinpointing the risks most likely to impact your business. While insurance is necessary, you shouldn’t have or pay for insurance that’s irrelevant to your business. While all businesses benefit from policies such as general liability, there are some risks unique to SaaS companies to consider protecting against:
- Regulatory compliance – Data security isn’t merely a good business decision, it’s a legal requirement. As more countries adopt stringent data privacy rules, the risk of noncompliance increases. This can result in costly fines, reputational damage and difficulty securing investment.
- Cybercrime – The number one risk for SaaS startups is cyber risk related to data breaches. But SaaS startups also need to watch out for two other forms of cybercrime: funds transfer fraud and social engineering. With funds transfer, the cyberattack redirects seemingly legitimate company payments to cybercriminals. And with social engineering, the scam is carried out by compromising business email accounts and misleading employees into spending money or diverting payment. The first six months of 2022 alone saw a shocking 255 million attacks.
- Cloud misconfigurations – Since you’re operating in a public cloud, there’s the risk of an insecure cloud environment that compromises data security, exposing organizations to cyber threats like cloud leaks, ransomware, malware, phishing and external hackers. Public cloud-based breaches are the most costly threat at an average of $4.8 million according to CODBR.
- Third-party security risk (if integrated with clients) – You can generate third-party risk from vendors in your supply chain, and these third parties pose a risk to information security. After all, your protection is only as strong as the weakest link in your supply chain.
- Zero-day vulnerabilities – A zero-day vulnerability is especially damaging for a SaaS startup. An unpatched software vulnerability can lead to widespread operational disruption. Operational disruption across your client base can lead to a systemic lawsuit from all of your clients, which not only has potential litigation associated, but unquestionably damages your brand long term.
- Supply chain attacks – A supply chain attack happens when a third party supplier is compromised and their privileges are used to steal data and spread malware to partner organizations or customers. Third party business interruption coverage protects for the impact one of your third parties has one your business, such as if you were to be offline for a period of time due to a vendor your business relies on.
- Cloud provider outages – Outages are a reality and not uncommon, and you can’t control when this happens to your provider. But, this is very disruptive for your clients who rely on your SaaS platform. The cost of an outage varies, but is estimated to be anywhere from $5,600 per minute up to $300,000 according to an analysis by Gartner.
- System downtime – SaaS downtime caused by a ransomware attack can create substantial financial losses. Since data is stored in a cloud, the biggest challenge for SaaS data comes from API limitations that may cause huge downtime. According to research by Coveware, the average downtime from ransomware attacks is about 21 days.
What coverage does a SaaS startup really need?
Since SaaS companies do have a unique risk profile, your insurance needs are just as distinctive. Your policies must seamlessly align with both your insurance requirements and the most prevalent threats. You’ll likely need to acquire the following coverages regardless of your industry focus.
- General liability
- Intellectual property
- Crime insurance
In some cases, more specific coverages are necessary that align with your area of focus. For example, if your startup provides software for law firms, lawyers’ errors and omissions (E&O) incorporates coverage against claims of malpractice or negligence stemming from perceived errors. Or, if your business has any exposure to lending as a fintech company, lenders liability is essential. And, if you have any exposure to the sale of real estate or hard assets, you would need real estate E&O.
Scaling a SaaS startup and insurance considerations
When scaling a SaaS startup, the insurance considerations change throughout the company’s milestones since the risks also evolve as your startup transitions into different phases. Think of it this way: When your startup is in the prototype phase and you’re not yet dealing with valuable data, you won’t need a cyber policy—but you will once you reach the product launch phase. Below are the three phases for a SaaS startup that demonstrate how the necessary insurance must change as your startup progresses through the different stages:
- MVP/Prototype – Core business insurance is needed which should include a Business Owner’s policy. If you have employees, you’ll also need employment practices liability insurance. And, if you have raised capital, you’ll need a directors and officers policy (D&O).
- Product Launch – Once your software launches, you’ll need to add errors and omissions (E&O) and a cyber policy.
- Critical Mass/Paid B2B Users – In this stage, you’ll need to scale up your insurance program relative to the exposure presented. Insurance advisors have several ways to quantify loss scenarios to ensure you have the right insurance policies for your specific business in this stage.
It’s important to think ahead to the upcoming stages by securing the insurance for where your business will be in the coming year.
How to choose the right insurance provider and advisor
Having the right insurance for your SaaS startup, its area of focus and its progress throughout the stages isn’t easy. In addition to pinpointing the risks and navigating the right policies or the right stage, traditional insurance providers will sometimes not insure companies that don’t have revenue, even when well-funded. Thus, you need an insurance advisor who can guide and lead you through the unique complexities of insurance for tech startups, and more specifically, a SaaS company. As we discussed in this guide, the nature of your risk landscape poses unique implications and coverage needs.
Vouch has a team of experts that are entirely focused on SaaS startups and understand the distinct risks, stages and negotiation needs of SaaS to ensure your company is protected. Vouch consults its clients throughout the stages and adjusts the policies to align with the stage the company will be entering. Our insurance advisors can even review and address contract insurance requirements to ensure they are relevant and fair.
SaaS startups like yours need to thrive since businesses all over the world rely on SaaS products to meet the demands of the modern workplace. It’s almost unimaginable for any business to operate without the use of project management, logistics, CRM or even bookkeeping software, just to name a few. The bottom line is that SaaS startups are valuable, so setting up your startup for the best shot at success is a priority. And at Vouch, we have the experience and expertise to ensure you have the right insurance not only for risk mitigation, but to attract the best investors and win deals that will propel your startup forward.