Coronavirus Eliminates ScaleFactor from the FinTech Scene
Image courtesy of Austin Business Journal.

Coronavirus Eliminates ScaleFactor from the FinTech Scene

Will other firms face a similar reality?

ScaleFactor, a FinTech startup that amassed almost $100 million in funding last year, is shutting its doors on August 28, 2020. ScaleFactor achieved success in creating an automated SaaS accounting platform, designed to eliminate costs and time sinks for small businesses. Alas, the impact of COVID-19 proved too difficult to overcome.

ScaleFactor Unable to Stay Afloat

It is a delicate thing to try to achieve something novel, tap into a new market, or introduce a new service. In the best of times, when the economy is sound, such an undertaking would be fraught with difficulties. In the wake of coronavirus, however, even if you are a beneficiary of generous funding, failure could be just around the corner.

Picked up by Bessemer Venture Partners, Canaan Partners, and Coatue Management, ScaleFactor raised a substantial sum – nearly $100 million in just under a year. Its core product is similar to Notion, a souring success that reached a $2 billion valuation based on its unmatched design as a mobile productivity app.

Founded in 2014 by Kurt Rathmann, ScaleFactor envisioned a similar product relating to financial management for small businesses. The app, ScaleFactor Insights, purports to be capable of handling and automating all of your finance, from grocery bills to all of your credit cards’ expenditures, invoices, bank accounts, and other expenses.

Misaligned Pricing of the Service

For all that it does, including the clear interface, there is a key distinction from Notion. ScaleFactor released its product as SaaS – Software as a Service – which means that it charged its users a flat fee that ranged from $6,000 to $30,000 annually. And who was hit the hardest by government shutdowns as big corporations prospered? You guessed it — small businesses.

In a time when small business owners panic to cut costs at every corner, would an additional cost such as ScaleFactor’s SaaS accounting be welcomed? On top of that, paying thousands of dollars per year for an automated service is a step too far for many small business owners. The CEO of ScaleFactor, Kurt Rathmann, came to a predictable realization of this fact but framed it in a more nuanced tone.

…technology alone is not enough to make business owners feel financially confident. Customers want a combination of software and human support within an overall solution. Human support wants to be the hero in the customer relationship. Trying to provide both at scale stretched our business in too many directions at once.

Unfortunately, the space to correct the course was cut short by the coronavirus pandemic. Although ScaleFactor managed to reach $7 million in revenue last year, its core business model relied on small businesses that vanished over a month. Meanwhile, they were spending money on hiring customer service representatives, of which 40 were laid off at the height of the pandemic, in February.

When we announced in February our intention to accelerate towards a marketplace model, we believed we could successfully restructure the business based on these learnings. However, that plan and timeline have been significantly impacted by COVID.

This leaves ScaleFactor stranded in the pandemic wind, having to lay off half of the employees this week. Others will slowly be let go until August 28th, with 10 core employees left to finalize the shutdown of the company.

ScaleFactor isn’t the only firm to suffer setbacks from the virus. UK FinTech firms are estimated to have lost $1.7 billion due to the virus. Beyond the UK, FinTech VC funding dropped sharply in Q1 2020.

Many remain hopeful however, as the use of FinTech services have seen a spike in popularity, which could become the new normal. A reported 40% of Americans say they won’t use physical banks — even after the dust settles.

If you were to pay thousands per year on automated accounting, would you feel entitled to rely on human support as part of the default package? Let us know in the comments below.