Way back in 2010, I started hearing from several of our Battery portfolio companies that they were using a specific type of software to track the collection of sales and use taxes on their products, and to help make those payments to tax authorities.
This software—made by a company I’d never heard of, based in Bainbridge Island, Washington—helped companies navigate the Byzantine world of the 12,000-plus separate sales and use tax jurisdictions in the U.S. Companies with physical presence or other connections within a given state are required to collect sales tax, or pay use tax, on just about every transaction they make within those states.
And as the list of states in which a company is required to collect tax grows, so does the complexity of staying in compliance. The patchwork of thousands of jurisdictions, each with its own rates, rules, and boundaries, adds up to a heavy burden for companies to navigate manually on their own. And there can be a heavy price for getting it wrong when the state auditors call.
The rules governing sales and use tax are extremely complex and changing all the time. New York City, for instance, levies a sales tax on sliced bagels with cream cheese, but not on bagels sold in quantity. Connecticut taxes children’s diapers but not adult ones. In Minneapolis, there’s an 8.025% sales tax on Snickers bars but no sales tax on Whoppers Malted Milk Balls (which to me are no better for you nutritionally!). Finally, during the August sales tax holiday in Texas, consumers can buy cowboy boots tax free, but they have to pony up for sales tax if they buy rubber work boots or waders.
The rise of e-commerce, which has allowed companies to more easily sell to customers anywhere, has compounded the problem, forcing many companies to track a vast number of different state and local tax rates and rules.
It’s confusing stuff. Which is one reason I was initially so interested in talking to the obscure cloud-software provider—called Avalara*—that we heard was helping companies figure all this out. The company also highlighted a broader technology industry trend of financial software, like software in so many other markets, finally moving to the cloud and being accepted by financial executives inside companies and big organizations.
But despite all this, Avalara executives were, at least at first, pretty hard to get a hold of.
We started by trying to call Avalara’s CEO, Scott McFarlane. Scott is a very busy guy. We had a whole team at Battery on the case, but we still couldn’t get through to him. In the meantime, we started doing our due diligence on Avalara and its product, talking to company customers to find out more about their experiences and how they used the software. We also analyzed Avalara’s business—including metrics like how much money they were spending to acquire new customers. Our view was that they should be hiring more salespeople to capitalize on demand for the product.
Over the next two years, we gradually developed a relationship with the company. The real breakthrough came when we discovered Scott was an avid golfer. Coincidentally, around this time, we were also co-hosting a CEO golf event with another one of our portfolio companies in Georgia. The big draw? Playing in the tournament was Colin Montgomerie, the storied Scottish golfer and former Ryder Cup captain.
So, we used Colin as the hook to get Scott to play in the tournament. He did, and at the tournament, Scott also had conversations with several of our other Battery portfolio CEOs about what it was like to work with us.
Shortly after, we pitched the Avalara board on our proposal to invest in the company, and for executives to use the proceeds to invest more in sales and marketing. They agreed with us, and Battery closed its investment in Avalara in June 2012. Today, we’re excited to see Avalara take the next step in its journey by becoming a public company.