R&D tax credits are due July 15th. Neo.tax wants to help startups apply, and raised $3M to do it – ProWellTech
All founders love “free” money, but with the global pandemic in place, the need for free money has taken on a whole new meaning this year. First, there were difficulties in obtaining PPP loans a few weeks ago for startups based in the United States, and then the second wave of PPP loans when Congress offered a second tranche of funding. Two weeks ago, I covered a company called MainStreet, which helps startups apply for local economic development credits that cities offer to businesses moving to their regions.
Likewise, Neo.tax wants to help startups get research and development credits from the federal government – which tend to be fairly easy to acquire for most software-based startups, given the current IRS rules for what you qualifies as “research”.
Free money is good, but what sets this startup apart is its ambitious vision of bringing machine learning to business accounting, making it easier to track expenses and ultimately save costs.
It is a vision that has attracted the best seed investors to the startup. Neo.tax announced today that it has raised $ 3 million in seed funding from Andy McLoughlin to Uncork Capital and Mike Maples to Floodgate, with Michael Ma to Liquid2 and Deena Shakir to Lux Capital. The round ended last week.
Neo.tax was founded by Firas Abuzaid, who has spent a doctorate in computer science in Stanford in recent years, where he has conducted research on machine learning. He is joined by Ahmad Ibrahim, who more recently went to Intuit to launch accounting products for small businesses; Stephen Yarbrough, who was head of taxes at Kruse Consulting, a popular startup consulting firm on accounting and financial matters; and Leonardo De La Rocha, Facebook Ads creative director for nearly five years.
Or in short, a perfect group of people to tackle small business accounting problems.
Neo.tax wants to automate everything related to accounting, and this requires careful application of ML techniques to an absolutely Byzantine problem. Abuzaid explained that AI is somehow perfect for these challenges. “There is a very clearly defined data model, there is a large set of constraints that are also clearly defined. There is an obvious objective function and there is a finite search space,” he said. “But if you wanted to develop a machine learning solution to automate this, you need to make sure that you are collecting the right data and you need to make sure you can handle all the many borderline cases that are about to appear in the 80,000-page US tax code.”
This is where the Neo.tax approach comes into play. The software product is designed to import data on accounting, payroll and other financial functions within an organization and begins to classify and model the corresponding transactions in an attempt to eliminate much of the effort of modern day-to-day accounting.
An intuition is that instead of creating a unique model for all small businesses, Neo.tax tries to combine similar businesses with each other, specializing its artificial intelligence system for the particular customer who uses it. “For example, we form a model that can target startups in the initial phase and therefore another model that can target Shopify companies, another that can target restaurants through Clover or pizzerias or beauty salons or ice cream parlors,” he said. said Abuzaid. “The idea here is that you can specialize in a particular domain and form a cascade of models that manage these different individual subdomains that make it a much more scalable solution.”
While Neo.tax has a great long-term vision for making accounting effortless, he wanted to find a beach manager who would allow him to work with small businesses and start solving their problems for them. In the end, the team opted for the R&D tax credit.
“R&D credit data basically gives us the beginnings of training data for tax automation of buildings,” explained Ibrahim. “Vertical by vertical tax automation basically allows us to be this data layer for small businesses and you can create many truly exceptional products and services on that data layer.”
So it’s a great long-term vision, with a targeted initial product to get there that was launched about two months ago.
For startups that make less than $ 5 million in revenue (i.e. all startups at an early stage), the R&D tax credit offers up to a quarter of a million dollars a year in government reimbursements for startups that apply by July 15 (the new tax date this year due to the coronavirus novel) or requesting an extension.
Neo.tax will take a 5% reduction in the tax value generated by its product, which it will take only when the refund is actually received by the government. In this way, the team believes that it is better aligned with incentives with founders and business owners than traditional accounting firms, which apply fees for professional services in advance and often take a higher percentage of the discount.
Ibrahim said the company made around $ 100,000 in revenue in its first month after launch.
The startup is entering what has become a rapidly crowded field led by the likes of Pilot, which has raised tens of millions of dollars from major investors to use a hybrid human and artificial intelligence approach to accounting. Pilot was last valued at $ 355 million when he announced his round in April 2019, although he has almost certainly raised more funding in the meantime.
Ultimately, Neo.tax is betting that a deeper technical infrastructure and a hyper-focus on artificial intelligence will allow it to reach and compete with the pilot and in charge accounting companies, given the speed and ease of accounting preparation and tax when everything is automated.