On June 23, 2020, Kurt Rathmann, CEO of ScaleFactor, an accounting automation software company, met with his team to break the news that they were letting go half of their team members that day. He then announced that the company was ceasing a majority of its operations on August 28, 2020*.

ScaleFactor ceases operations

Per the CEO’s message posted on the ScaleFactor website, he wrote, “It’s a day that we believed would never come, otherwise why would we dare to challenge the status quo?” He later continued, “We’ve known from the beginning that the finance and accounting problems we were setting out to solve were very big, very complex problems. There is a reason that no competitor in the space has solved them well - it’s difficult, it’s expensive, and solving them will take a long time.”

Less than a month later, an article was published on Forbes claiming that ScaleFactor’s collapse was due to entirely different reasons than those laid out by Rathmann. Before diving into the nitty gritty of the Forbes article claims, let’s learn more about ScaleFactor—what they were setting out to accomplish and how they managed to raise significant funds in such a short amount of time.

The startup's quick rise

ScaleFactor was established in 2014 in Austin, Texas and launched its first product three years later—an accounting automation and bookkeeping software that integrates with Quickbooks and Xero, designed for small businesses to classify transactions and update accounting books on a daily basis, such as updating general ledgers, generating reports, and creating mobile alerts and notifications. They also offer bill pay, payroll, and corporate card support. Most of these features were supposed to be powered by a combination of artificial intelligence (AI) tools and accounting experts.

ScaleFactor was kickstarted in 2017 when it received $2.5 million in funding from Techstars Austin, and then caught the attention of Canaan Partners, who invested another $10 million in 2018. Shortly after this, word spread about this software company that was going to disrupt the accounting world by using AI to solve very big, complex problems for the first time. Bessemer Venture Partners then invested another $30 million, and recently, ScaleFactor raised another $60 million in a Series C round led by Coatue, bringing the total capital raised to over $100 million.

Forbes article claims

Coming back to the Forbes article, the author claimed that customers were not getting what they paid for, and were receiving books “filled with errors, and were forced to re-hire accountants, or clean up the mess themselves.” Instead of using AI to manage companies' books, ScaleFactor was in fact using dozens of accountants in their Austin headquarters as well as outsourcing some of the work to a Philippines-based company aptly named The Outsourced Accountant.

The article reports that the AI tool couldn’t be relied on to accurately sort transactions and produce correct reports, and therefore a team of bookkeepers and accountants were hired to manually complete the tasks. G2’s AI analyst, Matthew Miller, thoroughly discusses AI’s role in analytics in this article, and even states “time and time again we see how companies are employing people to manually analyze and label data.” 

It was then reported that customers started to cancel, while some of them demanded refunds. According to former customers mentioned in the article, ScaleFactor was overpromising and underdelivering, creating erroneous bookkeeping, and being viewed as more of a bookkeeping service business than a software platform. To add insult to injury, according to Rathmann’s interview with Forbes in June 2020, ScaleFactor’s $7 million ARR was cut in half due to the economic impact of the COVID-19 pandemic, forcing the company to lay off about 100 employees at this time as well as returning some cash to investors.

What really happened?

So what really happened with ScaleFactor internally, and how did a startup that seemed to have so much potential, as well as ample funding, shutter so rapidly? Was it due to the impact of the COVID-19 pandemic, the challenge of successfully creating an AI-powered interface to truly perform accounting tasks, or were they merely just chasing more capital while not keeping the customer’s and investor’s best interests in mind?

I’ll let you decide, but the one thing that’s apparent is that the challenge of interweaving accounting and AI functionalities into one platform that accomplishes tasks that are regularly performed by humans is no easy feat.

*At the time of writing this article, ScaleFactor’s website is still live, with a prominent banner at the top linking to the CEO’s letter about the company ceasing operations. On attempting to purchase the product through different links on the website, they all led back to the homepage.