All for One and One for All
This is the story of an incredible set of innovations from Iowa in a field that impacts nearly all Americans on today’s date. April 15. The day when federal taxes are due and how two Iowa companies with a shared history are so closely intertwined.
It is also a testament to a founding team’s continuous diligence toward their company’s financials, a plan for the future, and mutual trust.
Origins
Parsons Technology of Hiawatha Iowa was a manufacturer of various software utilities such as address books, church software, genealogy databases, personal finance, and personal tax preparation software. In an era of local accountants largely performing all tax preparation for a modest fee, products such as Personal Tax Edge (PTE) were harbingers of a new DIY culture, one dependent upon software for previously manual functions.
Parsons was home to many entrepreneurial minds whose craft and spirit was encouraged by the owner, Bob Parsons (also of GoDaddy fame). Several of them created companies over the years and a small group are the subject of this exploration. The small group of four members were professional developers with a background in finance. They’d been involved at Parsons in the development of PTE, helped the product mature to the point of its eventual sale to the industry behemoth, Intuit, and in 1997 saw it retired in favor of Intuit’s earlier acquisition, TurboTax.
The four developers noticed an industry shift and decided to take a leap to lead change. They abandoned their well-paid jobs, decided to forgo two years of wages from their fledgling company, become equal partners, hold each other accountable, and build a better product.
Fate intervened for two. One of the original four developers had to step away for personal reasons. The second emerged as the prospective new partner and brought a near unicorn mix of skills. She is a CPA, a student and teacher of financial diligence, deeply understands software development, customer success, and marketing, and as a stretch assignment at Parsons, was then leading Parsons’ entrance into the dot-com world.
Cammie Greif took the plunge in February 1998 and joined Lance Dunn, Jerry McConnell and Alan Sperfslage to launch “Second Story Software”. This is the story of their company told from her unique point of view.
The pre-dot-com world of Tax Software
Personal and Small business tax software share an interesting nuance. Although much of tax law remains unchanged from year to year, a pressure valve develops in the fourth quarter. The most successful companies absorb and implement nuanced changes to the code quickly and accurately to ensure the software’s availability in the marketplace within the first two weeks of January, in advance of employees’ receipts of their W2s in January. This pressure valve not only sharply focuses the tax prep software industry on this seasonal window, but it also helps create a moat which keeps general software manufacturers at bay.
The personal tax software industry began in earnest in 1984 at Chipsoft in San Diego, CA with TurboTax. Shortly thereafter, Parsons Technology of Hiawatha, IA created Personal Tax Preparer (later Personal Tax Edge). As the 1980s came to an end, a brief set of acquisitions within the tax prep industry began putting Chipsoft on the map just as Intuit found success with Quicken. Intuit fashioned a personal finance strategy and partnered with the venerable VC firm, Kleiner Perkins, and began an acquisition spree. It acquired TurboTax in 1993 to complement Quicken.
Realizing a broad portfolio of personal finance and tax products at Parsons Technology, Intuit acquired Parsons in 1994. A copy of Parsons’ catalog below shows the variety of products, some of which would soon find new homes. Sadly, for the dedicated users of Personal Tax Edge, Intuit retired it just a couple of years later. (sidebar: As a paid PTE user for multiple years, I felt Intuit acquired PTE for its superior user-interface and actually incorporated its best features into what became TurboTax rather than simply euthanize a competitor).
Microsoft had built its own personal finance software, Microsoft Money, and in 2000 complemented it with its own TaxSaver software. Taxsaver, however, fell victim to the moat of 4-month compressed timelines for development, customization, and around the clock support.
TaxAct
Lance, Cammie, Alan and Jerry had an “All for one and one for all” mentality. With equal ownership, they made a pact to forgo salaries at the launch of their ‘startup’. Having a multi-year knowledge of each other’s capabilities, they knew that each would give the company their all. They trusted each other so much that a part of their pact included a clause that three founders could simply ask a non-performing founder to leave without any economic benefit. (Spoiler: they never needed to.) The quick and effective decision making of the four founders was made possible with constant communication facilitated by strategically placing their offices together, so daily, even hourly communication happened between them.
The four began working in close proximity above a refurbished mortuary, one that still housed old unused caskets on the lower floor, just as their team began to grow from the four to over a dozen. Hours were long, naturally, and they began developing their product to be a formidable competitor to Intuit, focusing on ease of use and keeping the price of the product under $20 including a free version. They’d worked toward becoming a thorn in Intuit’s side, essentially strategizing to force Intuit into an acquisition. However, they noticed two things nearly simultaneously - Intuit wasn’t interested in giving the young founders a few million to go away AND the competitor they’d produced was increasingly profitable and formidable.
The owners continually invested their sweat equity and TaxAct garnered customer trust and grew organically by listening to their customers and staying true to under promising and overdelivering. With much done on the cheap, including decorating the office with family photos in lieu of art, second-hand desks, and inexpensive advertising, the bottom line remained healthy. Multiple CPAs at the helm ensured a high degree of fiscal discipline. The four knew that they were not building a lifestyle company to pass down to descendants, thus, their eyes remained on the horizon, scanning the market for potential acquirers.
The dot-com boom of the late 1990s ended in an explosive bust in March 2000. Many high-flying startups across the nation faltered and countless went out of business. Companies that had taken in vast amounts of venture capital were written down and only those with healthy balance sheets remained standing. Though it felt like the online era might’ve come to an end, the TaxAct team recognized the opportunity and decided to make their push online. After all, despite the dot com bust, taxes were still due on April 15th. This push, intended partly to grow the target customer base and partly for serving those customers who wanted an online product, the team brought their dedication to add an online experience to their desktop software.
Staying in the acquirer’s field of vision
With an ever-present eye on an exit strategy, the team maintained a focus on the value of their profitable enterprise. They engaged an investment banker in 2002 and began structuring the company toward a future sale. The necessary diligence documents and placement memorandums were readied, and presentations came and went during the “down months” when taxes and tax-prep were not capturing all waking hours.
Growth Acquisition
It would take nearly 3 years of this off and on cycle for the right partner to reveal itself. TA Associates, a Boston-based private equity (PE) firm, emerged as the acquirer in 2004. Realizing the value created by the company and its 40ish employees, they valued the company at nearly $134 million and acquired 2/3 of the company stock, causing not just a windfall for its four owners but also for the employees. The financially astute owners had already set aside 12% of the company for employee benefit.
Another side note is important at this point. Keeping an up-to-date data room available is very helpful as was in this case. Companies don’t always sell in the first year they put the company up for sale. It is more common that companies go through multiple sale processes. So, having an up-to-date data room keeps a company at the ready for acquirers.
An expected by-product of PE acquisitions is a multi-year earnout for the founders and key employees, and an injection of “professional” management by the PE firm. PE, eager to create returns for their investors, also seeks to push the remaining founders to focus on profitability, tying their own profits to growth. This transaction, however, was all cash and TA ensured the founders knew the investment was in the people who made TaxAct a great investment. Naturally, the founders maintained their focus and invested further and differently.
TaxAct had always been different. Under the TA umbrella, it continued to execute on simplified tax return preparation and filing. A 2001 recommendation of a taskforce under President (Bush’s) management agenda, led to the formation of the Free File Alliance, a group of tax software companies who would provide free tax filing preparation and filing services. The Alliance’s strategy and mission aligned with TaxAct’s.
TaxAct was one of the first to sign-up in 2003 and remains an active member of the Alliance. The program is politically contentious despite providing a highly affordable and useful service for nearly 70% of the nation’s annual tax returns.
TaxAct had been offering a free download and online tax preparation which included print capabilities since their inception yet carrying a $7.95 fee for efile. With the addition of the Free File Alliance, there was additional competition for free online tax preparation which stunted the company’s growth in 2004, shortly after the TA investment. As the hockey stick growth flattened, the team made the tough decision to forego the efile fee for their free version. This move jump started their growth dramatically and forever changed the industry.
Recent withdrawals by Intuit and H&R Block have disrupted the Alliance and the IRS is now allowed to develop its own tax filing service. The future of the FFA is murkier in today’s political climate.
The Price of Growth
Growth fueled by PE dollars and hard-driving entrepreneurs creates new opportunities. Merely six years after the acquisition by TA Associates and fresh on the heels of recovery from the 2008 financial crisis, H&R Block (HRB) came knocking. As a competitor, it was keen on expanding its own footprint against the TurboTax juggernaut and offered a $287.5M cash buyout offer. TurboTax, then with nearly 70% market share, and the combination of TaxAct and HRB with ~20% would’ve jointly concentrated 90% of the tax software market into two companies which alarmed the antitrust division of the DOJ.
TaxAct didn’t follow playbooks of the day. Its Iowa origin, a bootstrapped team of collegial founders, early foray into free online software, a business model focused on improving the end-user taxpayer’s experience, a pricing model to facilitate an affordable online transition, an eye toward serving those who could least afford modern solutions, and so much more would today earn TaxAct the name - unicorn. The DOJ recognized this and named them mavericks; they feared H&R Block’s acquisition would spell an end for free software and lead Intuit to do the same. Like the fictional pilot from the blockbuster Top Gun, TaxAct broke unwritten rules and established new paradigms. TaxAct had become a public good.
Fourteen expensive and exhausting months of fighting this antitrust lawsuit took a financial and mental toll on the team. As the deal fell apart with the court’s decision in November, and another tax season loomed ahead, a different opportunity became viable, and the company was sold to Seattle-based Blucora (f/k/a Infospace).
A founder-exit
Cammie found herself reflecting over the company’s 15-year history she had helped write. With a grandchild on the way and family farm calling her name, she knew the time was right to pivot even as her trusted partners chose to stay. This move, too, would be fortuitous. Though this family time and commitment would be immensely valuable, startups, especially those in the Cedar Rapids region, received a gift of a stellar mentor in Cammie.
I remember sitting at one of the many events at StartupCity Des Moines with Eric Englemann, who was insatiably curious about startup communities and their potential for his city of Cedar Rapids. As a co-CEO of Geonetric and a community builder in more ways than I can ever count, Eric had envisioned a new future for his city. The city, in turn, had chosen to deploy federal funds received after devastating floods toward growth.
The New Bohemian Collaborative was taking shape, and the Iowa Startup Accelerator was one of its many initiatives. This mentor-driven accelerator curated a class of startups and surrounded them with mentors, gave them a bit of seed capital to start, and made inroads to help them find growth capital. Cammie was one of the original mentors in the program, and I was lucky to meet her in my own foray as one of ISA’s mentors in 2015.
The CPA’s guidance, then and now
I joined Cammie in running a workshop on financial modeling in that year, a topic near and dear to my heart. We found ourselves providing parallel advice, much of which has remained consistent over the years:
It is okay to bootstrap a business and about the only way to keep ALL of the profit within the founding team
Founders may outsource the activity BUT must understand their financials - the profit & loss statement, balance sheet, and a cash flow statement are required understanding for any founding team
Transparency within the founding team is invaluable
Know your why and how of the exit and keep an eye on the prize
Show up and work harder than everyone else.
Don’t acquire a lifestyle where you are spending more than you’re earning (her experience where she and her husband never spent more than 1 person’s income closely mirrored my own)
FIRE maybe a new acronym, but the philosophy is age-old.
Don’t ignore the reality in front of you. Don’t explain it away but understand it and act on it
Final Thoughts
This was a different kind of interview and story for me. Much of the history had been captured masterfully at Divestopedia in an episode of Ryan Tansom’s podcast. Our interview session reminisced and discussed elements not in the podcast and studied the industry further.
I came away with an increased appreciation of the Cedar Rapids startup ecosystem. With leaders like Cammie Greif, Eric Englemann, David Tominsky, Amanda Wood, Andy Stoll and so many others, the relatively small community of 100,000 consistently bats above its perceived size and stature. After this study, I am convinced it is a product of the individuals’ dedication and cannot wait to explore the stories of other entrepreneurial diaspora such as Craig Rairdin, Dave Bader, Jeff Texter, Alex and Laura Taylor, and Tim & Susan Schminke to name just a few. Some of the diaspora such as Lynn Jahn are benefiting students at University of Iowa while others such as Bob Parsons run enterprises that are new global brands.
Sources:
Ryan Tansom’s podcast interview with Cammie Greif - Divestopedia
Parsons Technology Software Catalog
Cedar Rapids' TaxACT went from David to Goliath (Apr 2014)
Infospace/ acquires TaxACT (Jan 2012)
Wikipedia - TaxAct, Bob Parsons, TurboTax, Free File Alliance, TA Associates
US Dept of Justice antitrust lawsuit re: H&R Block and TaxACT (May 2011)
Microsoft exits TaxSaver (March 2000)
What a great journey of humble beginnings, success, and learnings. Thanks for sharing!
Love these stories! So fascinating to read about these entrepreneurs right here.