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ScaleFactor: Fleeting Success Based on Hoax 🙅🏽‍♀️🔥

Country: the US
Total of investment: $104M
Operating period: 2014-2020

This startup can be ranked as one of the biggest and most scandalous failures of 2020. Its founder Kurt Rathmann managed to sell the product as AI-based software while indeed it was run manually by accountants.

What is ScaleFactor?
Accounting is a real pain of any small business. To solve this problem, the company offered AI-powered tools that could replace a traditional accountant. For a small fee, ScaleFactor promised users to take care of their record-keeping, invoicing, and tax payments.

Why did it become popular?
As ex-employees admit, the service quickly gained momentum thanks to its aggressive marketing. At the first session, they convinced customers they cared about reporting through specially developed software. The amount of investments served as a provider of security and integrity.

Since launch 2017, the company’s had several funding rounds. Some of its partners and investors were Techstars Austin, Michael Gilroy, and Byron Deeter.

If such big-name players believed in ScaleFactor, mere entrepreneurs had no reason to doubt. In the meantime, startup’s exaggerated sales metrics attracted new cash flows from investors.

Problems
However, ScaleFactor shut down not because of its hoax. The real cause was the double decrease in income’s level due to the pandemic and natural lack of demand.

Nevertheless, the company could have survived if it hadn’t announced the closure. Ex-users started to leave angry comments about numerous errors in calculations on the net. Before, ScaleFactor’s employees used to part with disgruntled customers quickly and by mutual consent so that any negative reviews didn’t slip through social media.

Failure cause
Crucial errors in calculation, the lack of feedback with entrepreneurs, and unfairness led the startup to massive customer outflow. The only reason why employees held their grudge was the signed NDA. Over the years, managers had to forge a lot of financial documents to fake increased sales of ScaleFactor.

At the same point, real customers massively refused to buy its services any longer. In October 2019, the company estimated that it was risking to lose about $600,000.

Therefore, in January 2020, Kurt decided to pivot and radically change the business model. But the started pandemic didn’t leave any chance — all the customers quitted and the service went broke.

#StartupFailures