Sources say ScaleFactor, which raised ~$100M to automate bookkeeping before blaming COVID-19 for its closure, used dozens of human accountants instead of AI
Kurt Rathmann told his big-name investors he had developed groundbreaking AI to do the books for small businesses. In reality, humans did most of the work. Tweets: @davidjeans2 , @dannygroner , @davidjeans2 , @davidjeans2 , @joepwilliams31 , @davidjeans2 , @alexrkonrad , and @davidjeans2 Tweets: David Jeans / @davidjeans2 : Behind the scenes, ScaleFactor was a mess. But even with its struggles the startup was able to get positive press and raise $100M from big-name investors like Bessemer Venture Partners and Coatue. Salespeople bragged about pending (and confidential) funding to prospects. https://twitter.com/... Danny Groner / @dannygroner : “At the end of the month, the sales team was told the target had been met. The company celebrated by throwing them a party at an arts and crafts factory in East Austin, where employees took photos with oversized bonus checks.” https://www.forbes.com/... David Jeans / @davidjeans2 : After offering a “candid conversation w/ CEO” for my initial article, ScaleFactor and CEO Kurt Rathmann refused to answer questions for this story, only to say that my reporting that there were “factual inaccuracies” David Jeans / @davidjeans2 : I spoke with 15 former ScaleFactor employees and executives who described a startup that used aggressive sales tactics and prioritized chasing capital instead of building software that fell far short of what it promised. When customers fled, executives obscured losses. Joseph / @joepwilliams31 : “How hard can this be? We are a coffee shop,” Cornelia recalled telling ScaleFactor when she abandoned her contract this year. “If you can't fix our problem you can't fix anybody's.” https://www.forbes.com/... David Jeans / @davidjeans2 : It turns out that for years Scalefactor charged thousands of dollars for an AI-powered software tool that proclaimed to replace the traditional accountant. But in reality it used human accountants in Austin and the Philippines to do most of the work. Alex Konrad / @alexrkonrad : In June, ScaleFactor told @Forbes the coronavirus had killed its business despite raising $100M. It was a sad story. It wasn't true. @DavidJeans2 spoke to 15 former employees and execs who told the real story: when “fake it til you make it” goes wrong. https://www.forbes.com/... David Jeans / @davidjeans2 : Last month a startup called Scalefactor approached me with an exclusive: its CEO would tell @forbes how Covid-19 had killed its business, despite raising $100M in 12 months. It was a convenient explanation for a company with much bigger issues. https://www.forbes.com/...
Context & Ripple Effects
When ScaleFactor shut down in June, the stated cause was COVID-19 destroying sales at a startup that had raised ~$100M in twelve months from Bessemer Venture Partners and Coatue. This follow-up reporting reframes that arc entirely: sources say CEO Kurt Rathmann pitched investors groundbreaking bookkeeping AI while dozens of accountants in Austin and the Philippines did most of the actual work.
The story lands as part of a recognizable pattern rather than a one-off. It rhymes with the Forbes investigation into exaggerated claims around Stability AI's Emad Mostaque and anticipates Builder.ai's later collapse, where an oversold AI platform, delivery failures, and a drastic revenue restatement ended the company.
First-order effects
- Bessemer Venture Partners and Coatue are left holding stakes in a failed portfolio company whose core technology claim was contradicted by reporting, raising direct diligence questions for both firms.
- Small-business customers who bought 'AI-powered' bookkeeping were served by human accountants and now have neither the service nor the vendor, since ScaleFactor shut down and Rathmann declined to answer Forbes' questions.
Second-order effects
- Investors backing 'AI-native' SMB software face pressure to verify whether automation claims match delivery — the same scrutiny that preceded Builder.ai's revenue restatements from $220M to ~$55M for 2024.
- Competitors in automated accounting gain a marketing wedge: demonstrable, auditable automation becomes a selling point against rivals whose AI claims cannot survive inspection.
Third-order effects
- If the ScaleFactor–Builder.ai–Stability AI pattern holds, venture diligence shifts toward technical verification of AI claims before term sheets, and 'AI-washed' startups find later-stage capital progressively harder to raise.
- Capital migrates toward operators with verifiable unit economics — the Surge AI model of profitability without outside funding — over narrative-driven valuations like the questioned $13.8B attached to Scale AI.
The trend: The recurring exposure of AI-washed startups is pushing venture capital from narrative-based underwriting toward verified claims about what the technology actually does.