ScaleFactor
The start-up that raised $100 million on the promise of automating accounting with super intelligence
- Founded
- 2014
- Closed
- 2020
- Lifespan
- 6 years
- Total funding
- $100 million
- Country
- United States
- City
- Austin
- Sector
- Fintech
- Founders
- Kurt Rathmann
- Investors
- Canaan Partners, Bessemer Venture Partners, Citi Ventures, Broadhaven Capital Partners, Firebrand Ventures, Techstars Ventures, NextCoast Ventures, Flyover Capital
- Cause of closure
- Product problems
What did it do?
ScaleFactor was Austin-based cloud software that promised to automate bookkeeping and payroll for small businesses. By integrating with point-of-sale systems, bank accounts, credit cards and invoicing tools, it aimed to bring record-keeping and financial analysis together in one place.
Why did it shut down?
Founded in 2014 by Kurt Rathmann, the company raised $10 million in July 2018 in a round led by Canaan Partners, following a $2.5 million seed round. According to Forbes, ScaleFactor then attracted $100 million of investment within roughly a year. According to a Forbes investigation from July 2020, based on interviews with 15 former employees and executives, the system marketed as SI produced unpredictable errors, and even the accountants the company hired externally could not keep up with the corrections. The same investigation alleged that the company resorted to aggressive sales tactics, chased capital instead of building software, and that executives tried to hide the scale of the damage as customers left. The company shut down in June 2020; CEO Rathmann attributed the closure to financial strain caused by the pandemic.
The story
ScaleFactor was founded in Austin in 2014 by Kurt Rathmann. The company's promise was to automate bookkeeping and payroll, two of the jobs small businesses like least. The software would connect to point-of-sale systems, bank accounts, credit cards and invoicing tools, keep the books by itself and give business owners a complete picture of their financial health. The company also planned to expand into lending and payment services in future.
Investors quickly bought into the promise. After a $2.5 million seed round that included Techstars Ventures and NextCoast Ventures, a $10 million Series A followed in July 2018, led by Canaan Partners with Citi Ventures and Broadhaven Capital taking part. According to Forbes, over roughly the next year the company took the investment it had raised to $100 million; its investors also included Bessemer Venture Partners.
The growth on paper did not match the product in the field. According to a Forbes investigation in July 2020, based on interviews with 15 former employees and executives, the system presented as SI produced unpredictable errors, and even the accountants the company hired externally could not keep up with the corrections. The investigation alleged that the company resorted to aggressive sales tactics, chased capital instead of building good software, and that executives tried to hide the scale of the damage as customers left.
ScaleFactor shut down in June 2020. In an interview with Forbes, CEO Rathmann attributed the closure to financial strain caused by the pandemic, but some former customers and employees disputed that account. ScaleFactor's story became a striking example of how, when human labour is hidden behind a promise of automation, rapid growth magnifies problems rather than solving them.
Lessons for founders
- If a product that promises automation relies on human labour behind the scenes, write that cost explicitly into your unit economics; otherwise losses grow as you grow.
- In fields with low tolerance for error, such as accounting, putting sales speed ahead of product accuracy creates an inevitable wave of customer losses.
- A large investment raised in a short time does not cover unsolved product problems; hiding churn data from investors and the team only postpones the crisis.
Sources
- Taking the pain out of accounting and payroll for small businesses, ScaleFactor raises $10 million (TechCrunch, 2018-07-24)
- ScaleFactor Raised $100 Million In A Year Then Blamed Covid-19 For Its Demise. Employees Say It Had Much Bigger Problems. (Forbes, 2020-07-20)
- 483 Startup Failure Post-Mortems (CB Insights)
- ScaleFactor company profile (CB Insights)
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