Fast-growing sales tax software provider Avalara wasn’t out looking for additional investment cash, after raising a $21 million round just last year. But when Battery Ventures came knocking, the Bainbridge Island, WA, company couldn’t say no.
“They’d researched the market, they’d researched Avalara, they’d really done a lot of homework. And they came to us with a really compelling opportunity from a really good firm,” CEO Scott McFarlane says. “The board just said, `Hey—we’ve got to do this.’”
Fast forward to today: Battery Ventures is the lead investor in a new $20 million round of financing that will help fuel Avalara’s continued growth in providing sales-tax software for domestic and international transactions.
That’s an area that’s ripe for expansion as commerce continues to shift away from bricks-and-mortar stores, opening up virtually any business’s customer base. For your garden-variety retailer, that change can mean traversing thousands of different taxing zones that are prone to shift and change.
Traditionally, even merchants who were using accounting software had to enter the details of a buyer’s sales-tax profile by hand. Avalara’s software-as-a-service offering tracks all that data and automates the process, calculating the exact right sales tax amount for a purchaser at any time and in any location.
Avalara, founded in 2004, has already built a nice business around this opportunity. The company has about 275 people worldwide, including offices in California, Virginia, and India. It was expected to reach sales of about $30 million last year, and is targeting continued revenue growth of more than 50 percent, McFarlane says.
That puts quiet little Avalara in the same ballpark as a company like Zillow, which only had about $30 million in annual revenue when it went public last year. But Avalara is also sitting right at the center of a major national policy shift that could really boost its business.
For all of the sales that take place online, there’s a ton of sales tax that doesn’t get collected. That’s because online retailers and traditional catalog businesses—Amazon chief among them—have clung tightly to federal law that severely restricts local officials’ abilities to force out-of-state businesses to collect sales taxes for them.
That looks like it’s changing. Budget-strapped states and physical retailers like Wal-Mart have pressed the issue in Congress, and Amazon is now hoping that federal lawmakers will pass a national standard that streamlines local taxes and makes collecting them easier for online retailers.
That could mean a huge wave of business heading for providers like Avalara—which, incidentally, didn’t love the way Amazon had historically made collecting sales taxes sound like some big, difficult boogeyman.
“This is something that’s going to be here for a long time,” McFarlane says. “It’s an opportunity that is not only about the here and now, but I would imagine in the coming years that we’ll see a change in the Internet sales tax laws as well.”
The company is also ramping up its international offerings. It already calculates international value-added taxes as part of its calculations on nearly 1 billion transactions per year around the globe. McFarlane says the number of countries that Avalara supports will grow to about 60 as of July, with more investments in the international sector ahead.
McFarlane also says that Avalara is looking to make some acquisitions to grow its footprint. That’s the kind of roll-up strategy that could consolidate Avalara’s standing and make it an enticing buyout target of its own.
McFarlane says everything’s on the table when it comes to Avalara’s future.
“We keep our eyes on all of the acquisitions that take place, and all of the IPOs,” he says. “We try to build our business to be ready for all of those outcomes. We talk a lot about that.”
