Avalara, and how the company is disrupting the age-old industry of tax compliance through SaaS technology
How do you get people excited about something as seemingly mundane as sales tax? For Scott McFarlane, co-founder and CEO of Avalara, a company that handles transaction tax worldwide, it’s been nothing short of an adventure.
Avalara is a leading provider of cloud-based tax compliance automation for businesses of all sizes. In his own words, sales tax is by no means “scintillating or cocktail conversation-worthy.”
However, McFarlane can bring flair to the dreariest of conference rooms and conversations.
As he shares his journey and how he built Avalara into a world-leading SaaS company, one that he took public in 2018, it’s clear he’s an industry disrupter.
There is passion and pure, youthful energy to the way he communicates, and it’s infectious. McFarlane’s enthusiasm gives you the sense that perhaps solving the sales tax issue is somewhat extraordinary and exciting after all.
From its inception in 2004 to date, Avalara has made waves in the SaaS community. McFarlane lives and breathes SaaS. When he started Avalara, it was barely a word on people’s radar.
His involvement in three major business ventures, including Avalara, speaks volumes to his mentality of challenging the status quo.
“Taking on status quo is about finding a better way to do things, and you have to be open to that. If you are, you can really make a difference in your life and the life of the people that you represent.”
Avalara is recognized as one of the fastest-growing technology companies in America and is most known for its flagship product AvaTax. This product integrates seamlessly with market-leading financial applications to provide end-to-end completely automated compliance.
McFarlane is as energetic and charismatic as you’d expect of someone who’s worn orange 5,000 days in a row. Orange is the brand’s signature color. How can someone be this excited about sales tax?
His Senior Manager of PR, Tommy, tells me before our interview, “This conversation is going to be the highlight of your week.” And boy, is he right.
McFarlane’s impressive resume includes founding and growing three different companies – Lifecycle, MetaInfo and of course, Avalara. The common thread in his career is challenging what is – seeing an opportunity and charging ahead.
His greatest challenge it seems is waiting for the rest of us to catch up.
What have been his most significant and valuable lessons learned along the way from his endeavors?
“I’ve been able to take on status quo,” he says.
Status quo, which is Latin for “existing state,” is not a place where McFarlane prefers to remain. He would rather challenge how things are done.
Who says sales tax has to be a labor-intensive drawn-out process? McFarlane has a solution for those willing to venture out of their comfort zone.
In his experience, when people want to maintain the status quo, they are often resistant to progress.
There’s nothing about change that seemingly scares him. Instead, it’s an opportunity for growth. However, it’s not for the faint of heart.
“Taking on status quo is hard. The status quo is a bad-ass competitor. You have to have fortitude when you try to change people’s minds,” McFarlane says.
He’s made some hard decisions over the years. And he’s tackled other people’s resistance to change—even his dad, who was a successful hotel mogul and owner of more than 500 hotels.
With a strong vision for his first company, Lifecycle, McFarlane would approach his dad about investing, pitching him the idea of putting exercise rooms in his hotels. His dad, being of the old-school mentality, a man that had come out of World War II, told young Scott plainly, “Son, nobody wants to work out.”
“I’m like, hey dad; I promise you if we put these bikes in hotels, people will love them. And they’ll work out.” McFarlane tried to convince his old man, but to no avail.
“These guys were smoking and drinking and eating terribly, and my dad’s thinking was that nobody wants to work out,” McFarlane reminisces.
In the first year of their exercise bike business, McFarlane and his business partner sold five bikes. The world wasn’t ready for McFarlane’s vision. To him, it was simple, and their value proposition was clear: If you get on a bike and you ride three to five times a week, you’re going to live longer.
“We could only find five people on earth that wanted to live longer. I mean, that’s what the status quo is. Think about it. You tell somebody you have the elixir to life, and they still don’t buy it,” McFarlane says.
“I think that’s the most difficult aspect of status quo, and that’s what Lifecycle taught me.”
As the age-old saying goes, there are two guarantees in life: death and taxes.
Taxes affect every business, every person, every day.
McFarlane has said, “The concept of doing sales tax manually in a digital world is absurd. It must be fully automated.”
And one should never underestimate the intricacies of sales tax. Simply put, Avalara is a global SaaS platform for compliance, and compliance is the bane of every business’s existence. “We see ourselves as Salesforce for tax,” McFarlane says.
Together with Jared Vogt and Rory Rawlings, McFarlane founded Avalara, bringing tax compliance to the cloud. In June 2018, Avalara was listed on the New York Stock Exchange, raising $180 million through its initial public offering.
“When we started Avalara, the word SaaS barely existed. It was just a recurring revenue model to us. But I think it might be one of the most perfect uses of SaaS in the marketplace. When you think about it, sales tax has been around for thousands of years,” he says jokingly.
“It’s not like this is a new concept. The United States was founded on a sales tax dispute. It was in actuality an excise dispute, but it was founded on the suit.”
There’s an incredible amount of intricacies surrounding sales tax. It’s transactional, and it must happen at the right moment. “If it doesn’t happen at that moment, it’s gone, and you’re out of compliance,” McFarlane says. “It has to be super-fast because nobody wants to wait around while the system calculates sales tax. The consumer will abandon their cart if it takes too long.”
When pondering the challenges e-commerce businesses face when dealing with sales tax, McFarlane had his eureka moment of connecting cloud capabilities and applying the SaaS principles we know today to solve this age-old problem.
“Think about that. How often do you come across something that nobody’s even really thought of and something that affects every person, every business every day?”
When raising capital, McFarlane says the key was getting employees and the investment community to connect with the idea and get tied to it emotionally. He wanted them to say, “I understand what you’re doing. If you succeed, it’s going to be big.” In the end, it set them apart. He was able to create enthusiasm around tackling this problem.
What makes Avalara a leader in the industry? It could be the magic of automation, where something so tedious and complicated all of a sudden becomes easy and is calculated within seconds. “We realized that there was this process out there that happens with every transaction,” McFarlane says.
Ultimately, his goal is to be a part of every transaction in the world. And if anyone can achieve that goal, it’s probably Scott McFarlane.
How To Make Your SaaS Business Stand Out – Putting Emotion Into Your SaaS
With his “go big or go home” mentality, it’s not surprising that he sets the bar high. For himself and others. He’s also a huge advocate for getting people to connect with your product emotionally.
“There is so much work in starting, building and growing a company. Just make sure you pick a transformational idea. I know that’s easy to say and hard to do. But the key is to have something disruptive and transformational.”
He goes on to say, “When you start thinking about your business and how it’s all put together. Remember that your product and what you’re doing has to fit into people’s lives. It has to be meaningful and work for them.”
Most SaaS founders will know the concept of a minimally viable product. McFarlane takes it a step further and argues that your product needs to be emotionally viable.
“People will put their minimally viable product into the marketplace. And we did that, man; our product was not that good when it first came out. But it touched the hearts of customers emotionally. It’s not enough to be minimally viable. I think your product must be emotionally viable because that’s what makes people root for you to win.”
Emotion may not be the first thing that comes to mind when scaling a SaaS business. But for McFarlane, it’s the heart of everything. “You want to touch their emotional heart chords about what you’re doing, so they are your cheerleader.”
But don’t mistake him for someone with his head in the cloud(s). In the SaaS world, it takes money to get where you need to go.
“What shocked me immensely for having come from all these other places was how much money a SaaS business takes to develop. It takes a year or two to pay back the cost of acquisition.”
Solving sales tax is also a large undertaking. Most don’t realize just how complex sales tax is.
There are more than 13,000 sales and use tax jurisdictions in the United States, and products can be taxed differently, creating a massive burden on businesses. “If I had listened in school, I would have known what a Federalist government meant and, and that it gives sovereignty to however it wants to tax in any jurisdiction,” McFarlane says.
Avalara’s original tagline was “making sales tax less taxing. Less taxing, more relaxing.” It speaks to the core of what McFarlane’s all about – helping his customers solve a problem and making it easy for them. Borderline fun, even.
“We wanted to create this image that our customers have something better to do with their time and have more work-life balance,” he says.
How Avalara Uses AI and Machine Learning
In a push to drive this vision of “less taxing, more relaxing,” and “making difficult things simple,” Avalara is applying artificial intelligence (AI) and machine learning (ML). Last year, the company launched an AI-enabled tax classification tool to help its customers map their products to the correct tax codes. It’s just another way Avalara is leveraging the technology to streamline tax for their customers. The tool reduces time spent on classifying products and taxability to increase return on investment for users. The process of determining the taxability of products or services is an intricate and time-consuming part of tax compliance. A tremendous amount of detail accurately determines the tax, such as knowing the ingredients of products and how and where they are sold and delivered. Ensuring products are accurately classified is critical to achieving tax compliance and makes certain businesses aren’t over-or undercharging taxes on transactions.
“AI and ML is the future of automation, of automating sales tax and making our process more efficient,” McFarlane says.
“Automation is, when it’s all said and done, really about helping people get their jobs done more efficiently; that’s the way we look at it from a compliance perspective.”
McFarlane believes AI is not something that takes away jobs or replaces the need for humans.
“Sales tax automation helps accountants do a better job because it takes a burden from them. This stuff is a pain in the butt for them, so if we can automate certain processes, it’s simply a way for them to focus on other things, and it hopefully makes their lives better,” he says.
The Challenge of Making the Difficult Things Simple
In his work, “Lettres Provinciales” (1657), French mathematician and philosopher Blaise Pascal once wrote, “I have made this longer than usual because I have not had time to make it shorter.” This is the earliest recorded use of the quote “If I Had More Time, I Would Have Written a Shorter Letter.”
McFarlane’s spin on this thought has become a mantra for Avalara: “We make the difficult things simple. For our customers, ourselves, and each other.”
“Everybody thinks that making something short or straightforward is the easy part of it. But that’s not true. Most people can make complex things difficult. We challenge ourselves on this every day. Simplicity is one of our success traits. Having people take the very complex and boil it down to its essence, that’s what we want to do. “
About Customer Acquisition – Timing is Everything
So, you have an incredible product. Now, how do you get people to jump on board?
“When we talk to people about sales tax automation, there is nobody that says that’s a dumb idea,” McFarlane explains.
What he’s seen over the years is that it takes a series of trigger events for people to “get it” and make the switch to Avalara.
“First of all, the accountant will have to say yes. The person using the accounting system will have to sign off and say, ‘hey, Avalara would be a good partner.’ Secondly, when people need to change their accounting package and get sales tax right, they will be motivated to switch to Avalara. Thirdly, if someone’s been audited, and now they need to make substantial changes, and there is a new accounting person on board, they might turn to Avalara. Fourth, a business may have decided to go into a different state or country.”
These are all trigger events that he says draw people in and get them over “the hump of status quo.”
How He Scaled Avalara – And His Plan to Be Part of Every Transaction in the World
“What I’ve said to everybody is that Avalara has a chance to be part of every transaction in the world. When I say it, everybody says, ‘Oh, Scott, that’s just Scott talk. He’s just exaggerating.’ But I fundamentally believe that the market is set up for that.”
It doesn’t seem to be “just Scott talk.” Avalara is scaling at a rapid pace.
COVID-19 and the way it’s accelerating e-commerce has hugely impacted and driven the company’s growth in the last year. Another tailwind that propels change and has pushed the business along is the move to the cloud.
“We’ve been fortunate to be part of this transition. I also truly believe our message of efficiency resonates as a top cap to all of that.”
Growing Avalara to a billion dollars and then taking the company public has taken people who have seen scale. The company has attracted talent from PayPal, Microsoft and Amazon, to name a few.
There is an intentionality about acquiring talent from other large companies. “We want to hire people throughout the process that have seen the next level so they can pull the company forward,” McFarlane says. His role as CEO has also been integral. As someone who casts the vision for the company, he carries the responsibility of presenting a picture of the future of Avalara. A task he does not take lightly.
For McFarlane, it’s been crucial that he’s convinced people about their vision and model, that you can take something as dull as sales tax and make it exciting.
“And if you can do that with a fantastic culture, which I think is one of the things Avalara has done, we have a culture that is unique; you have a winning formula.”
From the start, he wanted Avalara to stand out. The culture they have built underscores that. It’s a culture that fits the business and the values it portrays.
“One of the things that I would tell everybody is, culture happens. Just make sure that your culture fits your business, and it’s driving you forward,” he says.
According to McFarlane, if you have a dynamic idea that’s disruptive in the marketplace and a culture that fits the business, you’ve got a model that can change things. “If you can get people excited about it and you can find the right people at the right time to grow your business to the next level, that’s a recipe for success.”
What SaaS Founders Need to Know About Tax
As a SaaS founder, if you don’t get taxes right, it can cause a series of issues down the line. It’s also something you should not procrastinate. “I think people take sales tax for granted. It’s one of those things that’s just there, but people don’t really understand it.”
If you want to sell your business, raise money or IPO, taxes must be accurate. “So why not just get it right from the get-go?” McFarlane says.
And that’s the thought that captures what McFarlane is building with Avalara. It’s about the status quo and also his role as a CEO. There is a better way of doing things, and you have to be open to it.
It boils down to what is his most significant responsibility as a leader: helping people.
“Every day, I wake up being the CEO; it’s the most important job I’ve ever had. And, and with that comes the need to change. You have to be curious, and you have to be open to change.”