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By the end of last year, software startup ScaleFactor had emerged as a buzzy financial services company, raising $100 million in 12 months from big-name investors including Bessemer Venture Partners and Coatue Management.
But in March, that upward trajectory was cut short as the Covid-19 pandemic arrived in the United States, wiping out demand for its software from its core customers of small and medium sized businesses. Now, the company is shutting down, its CEO and founder Kurt Rathmann tells Forbes. “It’s not the outcome we wanted,” Rathmann says. “But it’s the fiscally responsible CEO thing to do.”
ScaleFactor’s 100 employees were told during a town hall meeting that half of them would be laid off immediately, and that by the end of August there will be about 10 employees to help wind down the company. Departing employees will receive 12 weeks severance and healthcare until the end of 2020.
The announcement stands in contrast to the company’s position until recent days: just last week ScaleFactor had issued a post on LinkedIn that said it was hiring; one new employee, a senior user experience designer, posted last week on LinkedIn that he was “stoked” to be joining the company.
The Austin, Texas-based company had most recently raised a $60 million series C led by Coatue in August 2019, which had given the company a $360 million post-money valuation. Other investors included Canaan Partners and Bessemer Venture Partners; those investors declined to comment or did not respond to requests for comment. The company said it would redistribute a portion of its capital back to investors, but declined to say how much.
Rathmann says the pandemic wiped out almost half of ScaleFactor’s sales; the startup had reached $7 million in annual recurring revenue at the end of 2019. But the company appears to have been on rocky ground even before the pandemic. After raising capital last year, ScaleFactor hired dozens of customer service representatives to improve customer relations, only to lay off 40 of them in February as the company’s bottom line suffered. Rathmann acknowledges the decision may have affected his business once the pandemic hit, as customers demanded more human relationships, rather than automated services.
Launched in 2014, ScaleFactor offered software that automates back-office tasks including bookkeeping and payroll. The idea was to provide the automated bookkeeping tools available to larger companies to small and medium sized businesses, a tool that complement other products from Shopify and Square that enable small businesses to operate online. It charged its more than 1,000 business customers a flat fee for its software, with packages starting at around $6,000 and reaching as high as about $30,000 a year — a revenue stream that has now dried up as small and medium-sized businesses have had to cut their own costs.
ScaleFactor’s closure is yet another symptom of the pandemic’s varying effect on venture-backed startups. Some technology firms that enable remote workforces to thrive — such as workflow software startup Notion or cloud-based design company Figma — have seen their valuations soar far north of $1 billion.
But those startups that rely on the success of industries like travel and real estate, which have been decimated by the pandemic as consumers have stayed home, have been forced to raise more funding, layoff workers, or close. In the real estate sector, venture backed office-space providers Convene and Knotel have laid off hundreds of workers. In travel, TripActions, a corporate travel management software startup that lost 95% of its business as a result of the pandemic, recently secured $125 million to keep the company afloat.
ScaleFactor’s fate appears sealed by the fact it was unable to convince small and medium sized businesses looking to cut costs that its accounting software was one of necessity. “Business owners went into fight or flight mode,” Rathmann says. “You don’t necessarily need all the planning tools, high end gadgets. You just get back to the simple ‘pen and paper.’”
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