By Ian Lavis on behalf of Praxity Global Alliance
Superfast-growing companies require super-responsive accountants. Silicon Valley is leading the way.
Things happen quickly in Silicon Valley, California, home to some of the biggest tech companies in the world. Here, the most exciting startups can become unicorns in the blink of an eye.
The speed with which the most successful Silicon Valley companies like Facebook and Google have transformed from promising digital startups to dominant global organisations has been breath-taking.
Yet, many of the entrepreneurs fronting innovative tech startups have little knowledge of business when they set out, let alone any idea about how to manage finances. If their venture takes off, they need all the help they can get with accounting services and driving operational efficiencies.
Even those with significant business and finance skills need help with ever more complex areas of accounting as their companies expand across international borders.
This poses unique challenges to accounting firms doing business with digital startups and fast-growing tech companies in Silicon Valley and other tech hotspots around the world.
“With startup companies there is frequently not so much to do in the beginning. But as they grow and raise more financing, their tax and accounting needs generally expand quite a bit,” says Andy Mattson, Tax Partner at Moss Adams, a Praxity participant firm with offices in Silicon Valley and throughout Western United States.
The needs of startups and tech companies quickly escalate from basic tax returns to complex financial management including accounting stock options, assistance with multiple rounds of financing, accounting for income tax issues that accompany large Net Operating Losses (NOLs), foreign tax credits, international expansion and IP planning, and research and development credit strategies.
A classic example is the meteoric growth of fintech companies underpinned by demand for huge amounts of capital.
Christine Ballard, International Tax Partner at Moss Adams, explains: “Most fintechs need access to capital markets. What starts out as an innovative way to provide payment services or low-cost loan origination rapidly turns into something that rivals banks in the need for working capital.”
Moss Adams’ Silicon Valley office tends to work with “small companies that grow big”. In the case of clients such as Facebook and Stripe, the innovative payment platform, this can be very big indeed.
Most accounting firms develop their relationships with tech companies at a very early stage of growth. This is as true in Silicon Valley as it is in newly emerging tech hubs such as Dubai in the UAE and Sao Paolo in Brazil.
It all starts with the tax return. “It’s such an important universal requirement and it’s a great way to get your foot in the door,” Andy says.
Next, it’s a question of helping the startup realise its potential, which often involves a series of funding rounds. “So, we are somewhat like venture capitalists ourselves as we are willing to make an investment in a company which we believe will grow and have more needs, particularly after their ‘Series A’ round of funding,” Andy explains.
As well as helping startups grow, much of the accounting work in Silicon Valley revolves around venture capital and helping high net worth individuals involved in technology, specifically handling equity and stock options.
The startups funded by venture capital often have lean headcounts, outsourcing as much as possible to external specialists, including auditors.
A venture capitalist, for example, may agree to fund a startup to the tune of millions of dollars on the condition an audit is carried out every year.
Outside the Valley
An increasing number of tech entrepreneurs start their ventures outside of Silicon Valley because labour and office space are so tight, but draw on ‘Valley’ expertise.
One of the fastest growing startup hubs outside Silicon Valley is Sao Paulo. Not surprisingly, a significant chunk of Moss Adams’ business now derives from Latin America, including fintech clients and companies that raise US-backed venture capital.
“There is great demand for accounting services in these countries which are underbanked,” Andy explains. These services include the creation of holding companies in the UK or the Cayman Islands and in handling complex investor tax issues.
Demand for accounting services in Latin America is also fuelled by investment from quasi-governmental agencies such as the Overseas Private Investment Corporation (OPIC) and the International Finance Corporation (IFC).
“These quasi-governmental agencies cause early-stage fintechs to grow up in a hurry,” Christine explains. “What starts as a couple of smart guys with a great idea needs to deliver on robust corporate governance required by institutional investors. Having good partners in the process is critical for success. Getting things like tax filings and investor reporting packages right is part of the credibility factor necessary to attract big money.”
Moss Adams’ Silicon Valley office also assists European tech startups selling into the US market. One example is a superfast-growing e-learning platform.
“We got involved on a referral from the attorneys assisting with the Series A round. At the time, the company was valued at $30 million and had about $6 million in revenue. Just 15 months later, the company closed a Series B round with a major New York-based private equity firm, with a $100 million valuation on $18 million in turnover,” says Christine.
The founder was able to have partial liquidity events with both financing rounds and is now starting his own venture fund. Moss Adams has been asked to assist with the US tax compliance for the fund. This demonstrates the speed with which things can move and the breadth of accounting expertise required to meet entrepreneurs’ changing needs.
So, what skills do accountants need most in Silicon Valley and other startup hotspots around the world?
“The key thing is developing relationships with the appropriate referral sources such as attorneys that handle private equity funds. We get to know them. We work with firms that know we won’t screw it up,” Andy says. “It’s like anything else. It’s a very relationship-based profession, but more than, that it’s a technical competence-based trade.”
He adds: “What we do is not easy. There are barriers to entry. Your technical competence is as important as the relationship that you develop.” The same could be said for accountants working in Praxity participant firms around the world.
This is where the benefits of being part of Praxity really show. Accounting professionals from participant firms regularly get together to share expertise and refer business as to help clients manage their accounting requirements as they grow from startups to global enterprises.
Typically, participant firms share knowledge to help firms deal with demographic issues, regulation and compliance, all of which vary significantly across international borders. “These relationships are very important,” Andy says. “The level of collaboration depends on what part of the world or what part of the market you are in.”
What’s the best advice for accounting firms working with tech startups? Andy says it’s all about referrals. He concludes: “Focusing on building relationships with referral sources is pretty smart business. An important part of this is focusing on doing a good technical job for your existing clients, and being responsive.”