​Tax software startup Canopy secures $20m

Tax software startup Canopy has raised $20 million in a Series B round led by Pelion Venture Partners, with existing investors New Enterprise Associates, EPIC Ventures, and Deep Fork Capital also contributing to the round.

The latest round brings the total amount raised by the Lehi, Utah-based startup to $30 million.

"A lot of accountants are still using paper, pencil, PDF, on-premise Windows software, so Canopy is a very stark contrast from that world. We're born in the cloud, we're modern, we're delightful to use," founder Kurt Avarell said.

Calling itself a fintech and regtech hybrid, Avarell told ZDNet that Canopy isn't merely a digitisation of old processes such as filling out forms or exchanging documents. While it enables accountants and clients to stay organised, Avarell said Canopy's strength lies in its ability to resolve tax-related issues.

"Inevitably, some of the accountant's customers will receive some sort of notice or correspondence from the IRS, given 10 million Americans face some sort of tax problem every year," Avarell said.

"In a scenario where the taxpayer is hit with a penalty, Canopy will pre-populate all the IRS forms that are required to get the penalty [waived] or reduced -- it finds all the relevant internal revenue codes and treasury regulations. Canopy can actually recommend which type of penalty abatement to get for the customer whether it's based on reasonable cause or a first-time penalty abatement.

"Without Canopy, you're literally doing that by hand -- it would take about 10 hours to finish a case like that. Whereas with Canopy, it's probably six hours."

Avarell's journey as a startup founder began the day he approached one the partners at his law firm and quit "cold turkey". He added that it was "rare" for a Wall Street tax attorney to walk away and launch a startup.

He moved from New York to Utah, and then to Santiago, Chile to participate in the first Startup Chile seed-stage accelerator program.

Canopy was not Avarell's first startup. Prior to Canopy, he founded a marketplace connecting tax professionals to taxpayers, but soon realised how difficult it was going to be to build a technology company without any programming skills.

"You don't know whether the engineers are building something right or how long it's going to take. We had outsourced a lot of the work at the time. I decided that if I wanted to build a tech company, I really needed to learn how to program," Avarell said.

It was while he was practicing programming in his basement that Avarell came up with the idea for Canopy.

Fast forward to 2017 and Canopy has grown from four to more than 60 staff. Avarell said the company plans to nearly triple that headcount over the next 12 months.

While Avarell remained tight-lipped about Canopy's user base, he said it grew more than 20 times over the course of 2016. He added that the startup is looking to quadruple its user base over the next 12 months.

When asked about President Donald Trump's tax policies, Avarell said Canopy is in favour of his proposal to simplify tax, calling it "obvious, but nothing radical".

"Nothing that [the Trump administration is] proposing is so radical that it would absolutely abolish the tax code. They're talking about simplifying, which is desperately needed. [The tax system] is so complex, it's insane," Avarell said.

Avarell noted that Trump's proposal to cut the seven tax brackets down to three -- 12 percent, 25 percent, and 33 percent rates -- will be beneficial for tax professionals, taxpayers, and Canopy.

The removal of the 47-year-old alternative minimum tax (AMT) should be high priority, according to Avarell. He explained that the AMT was originally designed to prevent the wealthy from evading tax obligations, but ended up affecting 4 million middle-class Americans who have never tapped a trust fund.

Avarell also praised President Trump's repatriation tax reform proposal to reduce the tax imposed on corporations when they transfer money earned overseas to domestic accounts. At the moment, corporations are subject to a US corporate tax rate of 35 percent.

"If these large companies are able to repatriate dollars from these offshore holding accounts into the US tax-free or at a lower tax rate at least, that will be a big boom for the US economy," Avarell said.

"Companies are all incentivised by regulation ... It will create a huge incentive for companies to bring those dollars back into the US economy and put them to work. It's not like taking money from operations that are outside the US -- huge amounts of money are just sitting in holding accounts. Let's make those dollars be more productive."