Meet The Disruptors: How Scott McFarlane and Avalara Are Shaking Up the Tax Compliance Industry
What I’ve learned through this 16-year journey with Avalara is that there is a seemingly endless amount of archaic systems spanning commerce and compliance. While we started with disrupting the world of tax, there are boundless opportunities to apply the same advanced technologies across other areas of business compliance. We will likely see the need for more automation in the middle of highly regulated industries as our society becomes even more reliant on technology to stay connected and conduct business. Avalara will be ready to manage the next generation of compliance and commerce challenges as we move forward.
As a part of our series about business leaders who are shaking things up in their industry, I had the pleasure of interviewing Scott McFarlane.
Scott McFarlane is a co-founder and the CEO of Avalara. For more than 30 years Scott has pursued a specific vision: to blend strategic innovation with a rigorous operational discipline to create companies with unique cultures that shake the status quo. Beginning with his college days at Claremont McKenna, Scott partnered with his roommate to launch what ultimately became Lifecycle, the most popular computerized exercise bike of all time, and since then has led and advanced several companies including AIRCOA, at the time, the nation’s largest private hotel company, MetaInfo, a pioneer in the IP Management realm which was sold to Check Point Software Technologies before starting Avalara.
Thank you so much for doing this with us Scott! Before we dig in, our readers would like to get to know you a bit more. Can you tell us a bit about your “backstory”? What led you to this particular career path?
I was fortunate to have a father who was incredibly entrepreneurial at his core. He was a successful entrepreneur who started a group of more than 500 hotels before the company went public. He truly set the example for me when it came to the business world and becoming an entrepreneur myself. Throughout my childhood and into adulthood my father continuously encouraged me to be well rounded, take risks and pave my own path, which encouraged me to constantly look to have “experiences” in everything I did, take on new challenges, and push myself to reach new heights each day, and no matter what be sure to have fun doing whatever the task at hand was. Ultimately, he always drove home the importance of taking on business challenges with the support of a strong set of partners or people that he referred to as, “front row people” — the small group of people that you can turn to in any situation. This is a practice I’ve carried with me throughout my professional career.
I put the business lessons my father taught me to work while I was a student at Claremont McKenna College. In partnership with my roommate Augie Nieto, I started NAS Fitness Systems, known as Lifecycle, to provide fitness equipment to the then-burgeoning fitness industry. It was through my friendship and partnership with Augie that I was able to break into business ownership. I was extremely fortunate to have Augie as a friend and business partner early on and have benefitted from his friendship and mentorship for more than 40 years.
While my path to CEO of Avalara began with the foundation my father provided me at a young age and my business curiosity during college, a huge turning point for me was when my father sold his hotel business and my plans of taking over the family business faded. The conversation went something like this, “I’ve got some good news and bad news. The good news is that I have sold the company, the bad news is that they don’t want you here anymore.” Devastated, I made my way to Seattle and got my foot in the door in the growing computer software industry. It was during that time of my life that I met my future partner and friend Jared Vogt. With Jared, I helped build MetaInfo — the first commercial DNS/DHCP solution for Microsoft servers — which was later sold to Israel-based Check Point Software when they were a start-up poised to dominate the fledgling Internet security world.
My experiences with selling Lifecycle and MetaInfo taught me early on that taking on the status quo is something that I enjoy and have a knack for. When the concept for Avalara came up, I knew that I would have another opportunity to take on the status quo, but this time in an industry that touches every person and business in the world every day and has been around for thousands of years but never tamed. It’s the last element of what I call the “magic moment of commerce” that hasn’t yet been automated.
Can you tell our readers what it is about the work you’re doing that’s disruptive?
Taxes have been around since the dawn of civilization. The Egyptians came up with the concept over 5,000 years ago and the way that people have managed taxes hasn’t evolved much since the early days. In our digital-first, global society, compliance has become more complicated than ever before as taxes vary by jurisdiction and are constantly changing. Yet, despite the increased complexity and obligation placed on businesses, many are still managing tax compliance with nothing more than a telephone or web browser, and a spreadsheet. Some businesses even ignore tax together and just make up a single rate. We believe the concept of doing a transactional statutory compliance requirement (sales tax) manually in the digital world is absurd and we’re disrupting how the world thinks about tax compliance. In 10–20 years, I believe there will no longer be any businesses doing sales tax manually. Automation is the solution for businesses that want to unload an obligation that creates hassle and liability, and the states will continually demand to have taxes paid faster and in a more efficient manner.
Avalara is taking age-old requirements and processes and applying advanced technology solutions to take the pain and complexity out of managing tax compliance. Avalara was a software-as-a-service (SaaS) business before there the world had any real concept of what SaaS meant. We built our services in the cloud from day one — well before cloud adoption became widespread — and we’ve built our business to integrate into virtually any software that businesses use to create an invoice.
While others are taking their shot at disrupting tax compliance, Avalara has distinguished itself by establishing a robust partner ecosystem made up of more than 700 technology partners and creating a tax content database that delivers accurate tax calculations to businesses on a global scale. We know that legislative, commerce, and technology-driven changes will continue to change how businesses operate and, ultimately, create change in the world of tax compliance. Avalara is uniquely positioned to stay ahead of the changes in tax compliance to keep businesses compliant and reduce disruptions to our customers’ operations.
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?
It would probably be difficult to nail down just one major mistake I made when I was first getting started that has had a lasting impact on me. However, when we were just getting started at Avalara, my partners and I believed that if we built it, they would just come. We knew from the start that our business could be successful and that we were building a disruptive service. As an entrepreneur you see success, but you never fully grasp exactly what it looks like and how hard it is going to be. We never imagined our business would take a billion dollars to build and thousands of workers across multiple continents to make it happen. We completely missed the magnitude of the success we envisioned.
It turns out that we couldn’t just turn on our tax engine service and sit back and clip coupons. We quickly learned that we would have to evangelize to and educate others on the value of the tax compliance service we had created. Fortunately, our overconfidence prompted us to hit the ground running and begin creating the partner ecosystem that is at the core of our growing business today. Had we known how much money it would take and how hard I would be at the get-go…who knows what would have happened?
We all need a little help along the journey. Who have been some of your mentors? Can you share a story about how they made an impact?
In addition to my father, I’ve been fortunate to have a number of people who have come into my life and taken me under their wing. I often joke that people must think that I need a lot of help because I’m always getting support and mentoring from those around me. From Avalara board members to my college roommate to my father’s business partners, coaches, and friends, I’ve been mentored by people who all have their own unique backstory and experiences. The important thing to remember about mentorship and improvement, in general, is that you must be open to change and improving yourself. I fundamentally believe in not being complacent in who and what you are and having mentors to guide and push me have been a key part of who I am today.
One of my mentors, Gordon Bell was the son of a missionary father and, as a result, he grew up in India while his father was on mission trips in the region. While Gordon didn’t grow up to follow in his father’s footsteps of ministry, the values he kept from his upbringing always shined through in his advice to me and others. He always encouraged me to be authentic, genuinely good to others, and always strive to make a positive impact on others.
In today’s parlance, being disruptive is usually a positive adjective. But is disrupting always good? When do we say the converse, that a system or structure has ‘withstood the test of time’? Can you articulate to our readers when disrupting an industry is positive, and when disrupting an industry is ‘not so positive’? Can you share some examples of what you mean?
I can certainly understand how the use of the word disruption in some situations could appear heavy-handed or negative, especially if it’s being applied to a system of structure that has been around for ages. However, I don’t believe that there is any situation that couldn’t benefit from fresh perspectives and change. There is no one-size-fits-all solution to every scenario, so disruption is almost inevitable. If you take Avalara as an example, businesses face varying sets of challenges and complexity when it comes to tax compliance. While our solutions are designed to help all businesses, we work with our customers to create a solution that best fits those needs. Without disruption in the world of tax compliance, thousands of businesses would be spending countless hours and money trying to manage tax compliance with processes that had “withstood the test of time” for centuries. I personally abhor the concept of “best practices.” Everything around us is in a constant state of change and evolution, so to use best practices is to live in the past. From my perspective, you are either disrupting or you are falling behind. However, it’s important to note that disruption isn’t about blindly moving forward, you have to do it with humility, and with the wisdom of the past in mind.
Can you share 3 of the best words of advice you’ve gotten along your journey? Please give a story or example for each.
Some of the best words of advice I’ve gotten along my journey all point to a similar takeaway — be able to relate to everyone in some way. Some of that advice includes, “Be a jack of all trades,” “Everybody has their own story,” and “Always show up.”
My father always told me that anything I needed to learn for a business could be done in six months. However, what couldn’t be learned on the job is how to communicate with and understand people. He also encouraged me to go to a liberal arts college and study as much as I could from economics to literature.
He always said, “If you can relate to people, then you can move mountains.” While he’s been gone for many years now, I still hear that guidance ringing in my ears. All the best advice I’ve ever received points to this concept of doing and learning things to be able to relate to other people no matter how different you may be. Because of this advice, I’ve worked hard to immerse myself in experiences and learning to always have something to relate to in my conversations and relationships with other people. When you stop and listen, you’ll find that people have great stories, so it’s important to take the time to learn from them. And when it comes to your friends, family, and employee it’s critical that you always show up!
Lead generation is one of the most important aspects of any business. Can you share some of the strategies you use to generate good, qualified leads?
Avalara has global marketing and sales teams that work diligently to generate leads and convert them into lifelong Avalara customers. While there are a number of strategies that our teams use to generate these leads, one of the biggest tools in our toolkit is our partner ecosystem As I mentioned before, Avalara has pre-built integrations with more than 700 business systems spanning ecommerce platforms, online marketplaces, point of sale systems, and enterprise resource planning software. I never understood why others fail to see the importance of partners. At Avalara, we can only go to market with the people who create invoices, so there’s no other possible strategy because we exist only when invoices are created. Our partner relationships have enabled us to make automating tax compliance incredibly seamless by integrating our solutions into most of the commonly used billing systems in use today. As a result, we are constantly recruiting new customers through our partners to streamline their tax compliance processes. Through this model, our partners share in ongoing revenue and our business grows, so it’s a win-win.
We are sure you aren’t done. How are you going to shake things up next?
What I’ve learned through this 16-year journey with Avalara is that there is a seemingly endless amount of archaic systems spanning commerce and compliance. While we started with disrupting the world of tax, there are boundless opportunities to apply the same advanced technologies across other areas of business compliance. We will likely see the need for more automation in the middle of highly regulated industries as our society becomes even more reliant on technology to stay connected and conduct business. Avalara will be ready to manage the next generation of compliance and commerce challenges as we move forward.
Do you have a book, podcast, or talk that has had a deep impact on your thinking? Can you share a story with us? Can you explain why it was so resonant with you?
For anybody who has been in the game as long as I have, you would probably agree that Crossing the Chasm is an iconic book for any entrepreneur in the technology business. It has had a profound impact on how I’ve approached running a business in the competitive technology industry.
I would also have to say that The Innovator’s Dilemma has resonated with me on several levels. At its core, the book is about disruption, which is what we set out to do with Avalara from the very beginning. In fact, we based a lot of how we thought about and shaped Avalara on the book and even referred to it in our company’s first mission document.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
I deeply respect the lesson provided by The Code of the West — an unwritten socially agreed set of informal laws that shaped the culture of the wild west of the U.S. in the late 1800s and early 1900s. The handshake agreement created by The Code of the West emphasized hard work, self-reliance, honesty, dauntless courage, and a good work ethic — among other things. This concept has been relevant in my life as I’ve worked to approach every challenge with a strong work ethic, while also keeping the impact my actions have on those around me in mind. The Code of the West and the cattle drives that spurred the lessons is the perfect analogy for a start-up business — when you go out into uncharted territory with a diverse group of people, there are going to be tough moments and you only have your word and the word of those around you to keep each other safe.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)
Far too often, people believe that the most valuable thing you can give to others is money. However, I truly believe that the most important asset we all have in our possession to do good by others is our time. If I could inspire a movement to do the most amount of good, it would be this: Take the time to mentor, foster, or invest in someone who is less fortunate in some capacity than yourself. There is so much good that can come from immersing others in your life and allowing them to learn from you. By taking the time to invest in others, we not only make an impact on their lives but also on the lives that they will touch and our own lives as we continue to grow. My family invested in someone in this way and we learned that it’s not easy, in fact, it’s really hard, but it’s the only way we can make lasting impacts on others.
I’ve also started a practice that I think all parents could benefit from. I started writing a single letter to my children more than 20 years ago and I gave it to them at each seminal moment in their lives. It’s the same letter continually evolving as I grow and learn myself. It shares the lessons I’ve learned that I feel they could benefit from but in the end, it’s about finding their personal definition of success. Through this letter, I’ve been able to personally articulate my own definition of success and to help shape my children and encourage them to pay it forward on their own journey.
How can our readers follow you online?
You can follow me on LinkedIn at https://www.linkedin.com/in/mcfarlanescott/ or Instagram at @scottmmcfarlane.
This was very inspiring. Thank you so much for joining us.
