As per a September 2024 report from the United States Treasury Department, entrepreneurship has been on the rise in the world’s largest economy. In this year, an average of 430,000 new business applications were submitted every month, marking a 50% rise from 2019.
However, these businesses have a challenging task at their hands: they need to maintain their books, file taxes, and do related accounting work, amid the personnel crunch in the finance and accounting industry. While 75% of CPAs (Certified Public Accountants) are expected to retire in a decade, fewer graduates are choosing the profession because it simply doesn’t pay them as much as their counterparts in fields like technology and finance.
American entrepreneur David Phillips has a solution to the above-mentioned problem: a start-up called Fondo, which since its inception in 2020, has digitised the bookkeeping job for startups and small- and medium-sized businesses. Phillips established the start-up after selling his coding school venture, Hackbright, to Capella University in 2016.
“The four-year-old start-up, which operates on a subscription-based model, has already secured approximately 1,200 customers, reached annual recurring revenue of USD 6 million, and is profitable,” Phillips told TechCrunch, with the venture’s prominent customers being ElevenLabs, Karat, PostHog, Campus, and Limitless AI.
“To date, we have saved our customers over USD 75 million in Delaware Franchise Tax and helped them receive over USD 16 million back from the IRS in tax credits,” Phillips said.
In today’s episode of the “Start-up of the Week,” International Finance will talk about the company in detail.
Putting Tax Credits On Autopilot
Fondo recently raised an oversubscribed USD 7 million seed round led by Money Forward, a Tokyo-based fintech company, with participation from Y Combinator, Motley Fool Ventures, Next Coast Ventures, a16z Scout Fund, Index Ventures Scout Fund, and Twenty Two Ventures. The round valued the company at USD 66 million.
Also, Fondo is not the only company digitising the bookkeeping job. It has rivals in the form of ventures like Pilot, Digits, Finally, and Bench. However, as per Phillips, Fondo differentiates itself by offering an “all-in-one solution” aimed at high-growth start-ups, as he informed the TehCrunch, “Traditionally, founders use separate services for each function, resulting in inefficiencies and a higher risk of errors. Fondo combines these in one platform to simplify financial and tax operations for start-ups.”
As of November 2024, Fondo is using the proceeds earned from the funding round to invest in products and automation. It is also building an AI agent for its internal team and customers, who can use it to extract insights and analysis about their financial statements, accounts, cash flow, and more.
“We’re focused on building a robust product that evolves with the needs of start-ups. This includes expanding our analytics and reporting capabilities, adding integrations with other tools that founders use, and enhancing our tax-saving options. We’re also looking at ways to support startups as they scale internationally, navigating the complexities of global compliance,” Phillips stated.
The “all-in-one accounting platform” for the start-ups is helping these new businesses to get up to USD 500,000 in start-up tax credits. An average Fondo customer gets back USD 21,000 each year, without requiring to meet the strict criteria of having revenue to claim these tax credits.
Among the solutions offered by Fondo, bookkeeping has been the venture’s primary expertise. It is helping the start-ups to identify if they qualify for the R&D Tax Credit and the Employee Retention Tax Credit, before optimising and filing their taxes. In this way, these American businesses are also getting their cash back, with the average amount being USD 21,000 per year.
Fondo takes care of start-ups’ monthly, quarterly, or annual bookkeeping concerns (through packages), with the ventures getting their transactions categorised and reconciled, apart from easily accessing accurate financial reporting. The new entrepreneurs can create customised financial reports effortlessly with Fondo’s “Reporting” feature, to keep stakeholders up to speed. Fondo Reporting ensures the financial data always remains at the fingertips of these business leaders, with intricate details like profit and loss statements and statements of Cash Flows featuring in an organised manner in a balance sheet.
Features Galore
When it comes to taxation and start-ups, Fondo will help such ventures to identify if they qualify for the R&D Tax Credit and the Employee Retention Tax Credit, before helping them to optimise and file their taxes, ensuring cash back for the business leaders. Fondo has become the leading technology platform with experienced accounting, tax, and tax credits expertise. When it comes to R&D Tax Credit, ERC (Earnings Response Coefficient), Corporate Tax Filings and Bookkeeping, Fondo has become “the only place to get it all done.”
Fondo also provides “Global TaxPass,” an annual subscription package, to start-ups with a “Delaware C Corp Parent and Foreign Subsidiary.” Under this service, Fondo takes care of the complexities faced by these start-ups, especially when it comes to filing their US Corporate Taxes (mostly Delaware Franchise Tax, State Corporate Income Tax and Federal Corporate Income Tax) through timely submission of forms 5471, 5472, and FBAR.
Take Fondo’s role in simplifying Delaware Franchise Tax (the annual USD 300.00 tax paid by all domestic and foreign limited liability companies, limited partnerships, and general partnerships formed or registered in the American state of Delaware) submissions for example. The tax bills which the start-ups receive from Delware state authorities get calculated through the “Authorised Shares Method.” There are chances that entrepreneurs will end up overpaying the tax amount, if they don’t use the “Assumed Par Value Capital Method” to calculate the exact ratio. Fondo takes over this crucial function at the exchange of just USD 1 or free of cost.
When it comes to creating customised financial reports effortlessly, “Fondo Reporting” helps entrepreneurs to generate such comprehensive reports with just a few clicks, while tailoring them to accommodate specific details like executive summary, profit and loss statement, runway and balance sheet, which helps the investors, advisors and board members to get a clear-cut picture about a start-up’s financial health.
The Road Ahead
Fondo is helping start-ups to comply with the Corporate Transparency Act and Beneficial Ownership requirements. As we know, the BOI (Beneficial Ownership Information) report is something which start-ups with 20 or fewer full-time employees, along with sales figures less than USD 5 million, need to file mandatorily. If the entrepreneur owns or controls 25% or more of the company, he/she also comes under the tax ambit.
Failing so will result in the person being subject to civil penalties of up to USD 500 for each day that the violation continues. The entrepreneur may also have to face criminal penalties of up to two years imprisonment and a fine of up to USD 10,000. Filing the BOI report also requires correcting and updating previously reported beneficial ownership information. Given the complexity of the procedure, most early-stage start-up owners require expert help to ride through things.
That’s where Fondo steps in by breaking down the complex procedure into three simple stages: asking the start-up owners a few questions and letting them upload the required documents, reviewing the submitted information and notifying the entrepreneurs, in case the person needs to provide anything else and in the final stage, filing the required information with the United States Financial Crimes Enforcement Network (FinCEN) and letting the concerned entrepreneur know whether the details have been accepted.
Since 2020, Fondo has been serving approximately 1,200 customers, apart from achieving an annual recurring revenue of USD 6 million, all while maintaining profitability. The company claims to have saved its clients over USD 75 million in Delaware Franchise Tax and recovered USD 16 million in tax credits from the IRS.
While new businesses continue emerging in the world’s largest economy, Fondo will be mitigating the growing accountant shortage with AI-powered accessible and scalable bookkeeping solutions, thereby helping entrepreneurs to worry less about navigating the complex financial requirements, especially on the compliance front.